Curtiss-Wright Corp (CW) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first quarter 2006 Curtiss-Wright earnings conference call. I will be your coordinator for today. [OPERATOR INSTRUCTIONS]

I would now like to turn your call over to your host for today's, Mr. Martin Bentante, Chairman and CEO of Curtiss-Wright. Please proceed.

Thank you. Good morning everyone. Welcome to our 2006 first quarter earnings conference call. Joining with me today on today's call is Mr. Glenn E. Tynan, our CFO, who will begin our forum today. Glenn?

Thank you, Marty. If any of you of not have a copy of the earnings release, which was issued yesterday, please call Deborah Tory at 973-597-597-4712, and she will be happy to e-mail or fax a copy to you and add you to the Curtiss-Wright distribution list for all future press releases. Before we begin, please note that 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.

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 provision 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 Act of 1934, as amended for a more thorough discussion of risk and uncertainties, as well as further information relating to our business.

For our agenda today, Marty will open our discussion with an overview of Curtiss-Wright's first quarter 2006 operating performance, and then I will review our segment performance and financial position. And, finally, Marty will conclude our discussion with some closing comments, and after that we will open the call for questions. Marty?

Thank you, Glenn. I am pleased to report sales of $283 million during the first quarter of 2006, an increase of 9% over the first quarter of 2005; and organic sales growth of 7%. Our organic sales growth was driven by strong organic growth in our Flow Control and Metal Treatment segments at 11% and 10%, respectively, in the first quarter. Our operating income of $24.6 million in the first quarter of 2006 decreased 10% from $27.5 million in the first quarter of 2005. The year-over-year comparison includes certain items that require clarification. The first quarter of 2005 included a $2.8 million one-time gain on the sale of nonoperating property. The first quarter of 2006 includes higher non-cash expenses for pension of $900,000 and FAS 123 of $1.1 million. Adjusting for these items, our first quarter 2006 operating income in absolute dollars increased 8% over the prior year, which equates to an adjusted operating margin of 9.4%, which is slightly below the adjusted operating margins of last year of 9.6%. In addition, our operating income was negatively affected by foreign currency translation of $1 million, which was not planned.

While we do not ha -- while we do have some challenges ahead of us in 2006, our markets are robust and we are confident we will meet these challenges. Net earnings of $12 million or $0.28 per diluted share for the first quarter of 2006 decreased 15% from $14.5 million or $0.33 per diluted share in the first quarter of 2005. New orders increased 20% for the first quarter of 2006, and the close of the quarter our backlog was at a new record level of $912 million, up 13% from 2005 year end. In fact, excluding our Metal Treatment segment, these services have a very modest lead time. Over 65% of our sales for the remainder of 2006 are in our March 31 backlog, which provide strong momentum for the balance of the year.

Earlier this month, we announced the acquisition of Enpro Systems. Enpro is a leader in design and manufacturing of engineered pressure vessels, catalytic racking process equipment and critical service valves, primary for the oil and gas market. This acquisition greatly enhances our portfolio of highly engineered valves for the [inaudible] critical flow applications for the oil and gas market. This acquisition is another example of how we increase our market share and improve our market position with select acquisitions with complimentary high performance technology.

I will now turn the call over to Glenn to discuss our segment performance and our current financial position.

Thank you, Marty. In our Flow Control segment, sales in the first quarter of 2006 of $121 million were up 11% over the prior year quarter, which was all organic, primarily due to strong demand in the oil and gas and naval defense markets. Operating income for Flow Control increased 4% over the prior year quarter due, primarily, to the higher sales volume. The higher volume leverage was partially offset by lower margin sales in the Navy business, and additional test and qualification costs in the commercial power market. In addition, this segment invested approximately $1 million in incremental research and development costs in the quarter, primarily for the AP1000 nuclear reactor program, and also experienced higher material and transportation costs. Operating margin was 9% in the first quarter. However, after adjusting for FAS 123 expenses of $300,000 and the R&D investment, the adjusting -- adjusted operating margin would be 10%, 40 basis points higher than the first quarter of 2005.

In our Motion Control segment, sales of $108 million in the first quarter of 2006 increased 8% over last year, principally due to the contributions from our acquisition of Enpro in 2005. Organic sales growth of 2% resulted from increased sales to the commercial aerospace market, offset by lower military aerospace and ground defense sales. Even though our overall sales of OEM products to the commercial aerospace market is up year-over-year, our first quarter planned sales were negatively affected by the 2005 Boeing strike. We anticipated that the reduction of aircraft, as a result of the strike, would be realized over the entire year and not all in the first quarter, which is, in fact, what occurred. However, we anticipate increased shipments throughout the remainder of the year.

Operating income for our Motion Control segment decreased 21% from the prior-year period. The decline resulted from under absorption of fixed cost due to lower volume in our imbedded computing group, lower sales from higher margin programs, such as the F-22 and our European controller business, higher material costs and the margin associated with the Boeing strike. In addition, this segments operating margin operating income was adversely affected by $900,000 of foreign currency translations, primarily the Canadian dollar. Operating margin in the quarter was 4.7%. However, after adjusting for FAS 123 expenses of approximately $400,000 and the FX impact, the operating margin would be 6%, slightly below last year's first quarter margin of 6.4%.

In our Metal Treatment segment, sales for the first quarter of 2006 of $54 million increased 10% over 2005, all of which was organic. The sales increase was driven by higher global shot peening revenues in the aerospace and industrial markets, as well as increased demands for heat treating services. Operating income increased 22%, all organic over the prior year, as a result of the higher sales volume.

Now we will review our liquidity and financial position. For the first quarter, our free cash flow, defined as cash flow from operations less capital expenditures, was negative $40 million versus negative $25 million last year. The first quarter is historically negative for us, primarily due to it being our lightest quarter from an earnings perspective, as well as when we make significant cash expenditures for annual payments that are accrued throughout the previous year. In addition, in the first quarter we built inventory, due to long lead time material purchases in preparation for higher sales levels for the remainder of the year. Also impacting us in the first quarter of 2006 versus 2005 was a significant increase in tax payments made in March with extension requests. During the first quarter, depreciation and amortization was approximately $12 million and capital expenditures were approximately $8 million. We reaffirm our 2006 free cash flow guidance of between $65 and $70 million, with the largest quarter being the fourth quarter similar to our earnings. Our balance sheet remains strong, with working capital of $305 million and total debt outstanding of $383 million, as of March 31, 2006, for a total debt-to-book capitalization of 38%.

I will now turn the call back over to Marty to provide an update on our expectations for the balance of 2006. Marty?

Thank you, Glenn. While our earnings performance in the first quarter was slightly less than originally expected, our view of the year remains unchanged, as we continue to focus on strong operating fundamentals. I am confident we will be able to achieve our full-year 2006 guidance of $3.60 to $3.80 per share on a pre-split basis or $1.80 to $1.90 per share on a post-split basis.

As many of you know, the defense market remains strong, and ramps up for us later in the year. We also anticipate the additional DoD supplement spending to provide us with additional ground defense orders on the Bradley, Abrams and Stryker programs and our Navy business continues to be solid. While we are seeing some slight decline in F-22 production and F-16 spare sales, we have notably increased our content on other programs. On the Joint Strike Fighter we announced new in 2005 for the Ordnance Hoist and Quick Latch systems, bringing our total content to approximately $400,000 per airplane. We also announced that Boeing's Multi-mission Maritime aircraft for the weapons bay door to our system bringing our content to over $200,000 per ship set. In addition, our participation on the Global Hawk and V-22 Osprey program continues to be strong. In our ground defense business, we just received a significant contract award from General Dynamics. We will provide the solar motor controllers for its future combat systems man-to-ground vehicle program. Curtis-Wright will be the prime contractor and will share the work equally with [Mull]. The initial contract value for the team is approximately $32 million and is expected to generate revenues through 2010. In addition there is the potential for significant future revenue for this particular program on future combat system vehicles.

In the commercial aerospace market, we are benefitting from a strong ramp-up in the production realize for Boeing and Airbus. In our Motion Control segment, we signed a long-term agreement with Boeing to supply a number of actuated flight controllers position sensors and smoke detection equipment for their fleet of aircraft. In addition, we have increased our content on the 737, Boeing's most popular airplane, for a total of $125,000 per ship set, through a number of competitive wins on products Boeing has decided to outsource. In addition, we continue to renew content on the 787 and, although we are still in contract negotiations, we expect our content to increase to approximately $150,000 per airplane.

In the oil and gas processing market, we had a robust organic growth of over 30% in the first quarter. We experienced strong demands in this market across the board, due to increased capital spending by the major oil companies to increase capacity and approve operational efficiencies, and also on repair and maintenance programs. In particular, our [inaudible] unit continues to generate strong orders, with $53 million in orders in 2005 and an additional $23 million in the first quarter of 2006. Also, I mentioned earlier, we recently made a strategic bolt-on acquisition to enhance our product offering in this market. While our power market was essentially flat during the first quarter, we anticipate a strong year, overall, from plant refurbishments and upgrades, and we continue to be optimistic on our long-term potential for new correction.

China has plans to construct four new nuclear plans in the next few years. Curtiss-Wright is current until negotiation with Westinghouse to supply reactor coolant pumps for their AP1000 reactor design, one of two being considered by China. We expect the negotiation for pump hardware to complete in late 2006, and if successful, product will be delivered over a three-year period beginning with a long-term procurement of [long] moving materials in late 2006. In the United States, the Westinghouse AP plant design has been chosen by ten companies currently applying for construction and operating licenses for new plant construction beginning as early as 2010. Curtiss-Wright has considerable content on the AP1000 reactor design, with sales potentially beginning as early as 2010.

At this time, I would like to reaffirm our full guidance. We anticipate revenues in the range of $1.225 billion to $1.250 billion operating income and a range of $155 million to $162 million before pension expense, and fully year diluted earnings per share of between $1.80 and $1.90 on a post-split basis. Right now we are expecting the second quarter of this year to be similar to last year. This guidance equates to full year sales growth of 8 to 10% operating income growth of 10 to 15% and earnings per share growth of 5to 10%. The lower earnings per share growth is primarily related to an increase in pension expense and FAS 123 expenses. Our guidance should reflect our expectations of double-digit growth in all of our commercial markets, except for automotive, as well as a solid growth in our defense market.

Finally, one last item I would like to mention is that we'll be hosting our Curtiss-Wright investors tour and technology demonstration on May 11 in Pittsburgh. I believe most of you on this call have already signed up for this event. But in case you have not and are interested, please contact our beautiful and brilliant Alexandria Decker at 973-597-4734 for the event details. You can tell who wrote this portion of the script. [LAUGHTER]

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

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Chris Donagney with SunTrust Robinson.

Good morning, guys.

Hi, Chris. How you doing?

Martin, first of all the Enpro acquisition -- obviously in the Oil and Gas sector -- I was wondering, if first, if you can talk about the future acquisition strategy. Do you want to increasingly expand your presence in oil and gas markets, or are you going to stick to more of your typical defense or commercial aerospace acquisitions?

Chris, the last conference call and I believe the one prior to that, we said we were interested in gas and oil, also in electronics. When we look at the presence that we now have with Delta valve, and not only are we selling the coker valve but also, now we're selling some auxiliary products there. We see a very good business for us there. We'd like to expand in that gasoline and oil sector. So we will continue to be inquisitive there, as well as in all of our markets.

Okay. Thanks. And operating margin in Metal Treatment now has been hovering around this 17.9% for four quarters. Obviously, the commercial aerospace industry is doing quite well, and I know you've maintained your expectations for that margin to exceed 20%. What type of builds should we expect to see in operating margin, as this construction rate for new aircraft continues to build and should we start to see that this year?

Well, you are going to see -- I believe that the guidance we gave for the year was between 18 and 20%. So, you're going to see some increase there. The biggest are, if you want to see some additional growth in margins there, is automotive. Right now the automotive sector is just stable from last year. If it was to improve, I think we'd see imp -- we will see improved margins there.

Okay. Thanks. And one last question on the AP1000. Do you know what the dollar per vessel -- you know, the equivalent ship set revenue expectations are for that?

We do not give out any numbers. Conservatively we have over $20 million and that's a very conservative number.

Okay. And is that just for the canned reactor cooling pumps, or there are other products in there that you think you can get?

That's the canned reactor cooling pump. There are other products that we will get in AP1000.

Okay. Great. Thanks, guys.

Alright, take care.

Your next question comes from the line of Robert Stallard from Banc of America. Please proceed.

Morning.

Good morning, Robert. How we doing?

Alright, thanks. Glenn, I was wondering if you could just go back to the Boeing explanation. I'm trying to work out why a strike that was back in the third quarter last year should be affecting you this yea?

What's happened Bob is that as you remember when the strike took place and they were going to take out all of the airplanes in the last year. We talked to Boeing and told them that we wanted some of that reduction in ship building -- airplane building to be in 2006. We originally expected that the 16 aircraft that were going to be reduced in 2006 was going to be spread throughout the four quarters. As a matter of fact, at one point in time, Boeing was thinking about increasing their 737 rig production and we didn't think we were going to see anything at. But what happened is they eventually put it all the first quarter. So when you look at our ship set rate -- i think we shipped about 56 in the first quarter. So when you looked at how our ship set rate, I think we've shipped about 56 in the first quarter and we will be going from that to 74 up to 81 airplanes.

Didn't that affect both Motion and also Metal Treatment?

Not so much on the Metal Treatment side, because I think they probably saw more of their reduction last year. We were trying to negotiate more of a level-loaded type of a situation with Boeing.

Okay.

Which did not occur.

Right. And moving over to the imbedded computer business, it looks like you had a couple more issues with the profitability of that area. I was wondering if you could you give us an update on how that's progressing and what you expect for the full year?

I think we are doing well. I think that when you take a look at imbedded computers -- if you remember, last conference call I said we were going to increase sales by 10%. In the first quarter of this year, we actually shipped less than the first quarter of last year. So we were not able to absorb the fixed costs. It's similar to last year. However, this year our operating income will increase over 25%. Half that is due to the increased volume. The other half is cost reduction. So, if you look at -- one of the reasons why the margins were down in Motion Control, the Boeing situation, which we didn't expect, took place in the first quarter and that was about $0.5 million of profit. But we new where imbedded computing was, that it would be down. And that's one of the reasons why we said we'd be at or below our last year -- first quarter's earnings of last year.

What do you think is driving this very extreme seasonality imbedded computers?

What happens is a lot of our imbedded computers are three to seven-month lead times. So, the government doesn't order their imbedded computers. They order them on a yearly basis. And they normally order them at the end of last year and the first quarter of this year. So what happens is you have very little shipments from those orders that go out in the beginning of the year. The other thing here most of these contracts are not subject to a milestone payments or progress payments, where you could also kind of level load the sales and profitability. So we end up having low sales and low profitability and then, what happens is you see most of the [inaudible] you see all of these profits, basically, coming out in the third quarter and fourth quarter, which took place last year.

I see. Okay. And.

And if you take a look at the amount of customers that will be having that space, it's a lot. So we don't get a lot of large orders from one customer that would be subject to milestone payments, which would level that situation out.

Right. Okay. And just finally, Glenn, I was wondering if you could give us an idea of how these operating costs, like pension,s, FX and FAS 123 will spread out for the rest of the year?

Yes, I think FA -- let's start with the pension's fairly constant. I mean it's fairly even quarter-to-quarter. Our estimates was -- is around $5 million, might be a little bit north of there. We have some lump-sum kind of things that go out and affect quarter-to-quarter. The second quarter, we think, from a pension standpoint will be a little bit higher than the first quarter. But on an annual basis, it'll be a little bit north of the $5 million we originally gave you. The FAS 123, again, is $4.5 million for the year. We expect that to be even. There's no reason to expect that to be uneven, Rob?

Yes.

And the FX we expect -- on the FX -- on the Canadian dollar, when we originally built our year it was on a forecast from late -- you know, beginning of the fourth quarter of last year. Looked at it again in the beginning of this year, and for the year it looks like it's going to come down and not have a material impact on the year, but obviously the first quarter was higher than we thought ,and it's the Canadian dollar. So, I would expect to see that taper down a bit, as this should be our worst quarter from the Canadian dollar FX standpoint, translation wise. But we have two different forecasts now, so we are trying to figure out which one we are going to [inaudible]. A lot of economists out there, and they all have a different opinion, but it still looks like some of it -- it may not come down as fast as we originally anticipated, but -- and certainly the first quarter was not as we -- as originally anticipated. That's for sure.

Okay. Great. Thank you very much.

You're welcome.

Thanks.

Your next question comes from the line of Peter Arment from JSA Research. Please proceed.

Good morning, Marty, Glenn,.

Morning, how you doing?

Very well, thanks. I don't know if I -- if you give this or not, if I missed it, I'm sorry. Did you give the individual segment range in terms of sales and margin range for the year?

No, we didn't.

Can you give us a little more guidance there, I guess? Or maybe an update, I know you've done that before.

What we said is that we expect Motion Control to grow about 8.5% and --

I'm sorry, we said Flow Control would grow about 8.5%, Motion Control, close to 10%, and Metal Treatment about 9%. And we said our margin expectation from Flow Control and Motion Control will be 11.5 to 12% and Metal Treatment between 18 to 20%.

Okay, great. And just to follow up on Rob's question about the imbedded computing, how large of a business -- I know you don't want to be breaking down individual business units, but in order of magnitude, how large of a sales unit is that operation now?

That's over $210 million.

$210 million, and tha't up from -- that's '06 or is that '05?

That's '06.

And that's up year-over-year?

Yes, it is, over 10%.

Over 10%. And margins in that particular -- are you still looking at that business generating reasonable margins? It seems like we've seen a number of different competitors of yours, some unnamed here, that have had quite a bit of difficult and it doesn't seem like you're going to do it either?

I'm not going to say that we are not immune to it. I think our margins are well. Are very good, as a matter of fact. I think that, apparently, without naming any names, I think that, obviously, we've been doing very well in the marketplace. I don't look at the first quarter situation as being any indication of where our embedding computing sales or profitability are going. We've already indicated that we're very confident about where we think that they are going between the third quarter and fourth quarter. It just happens to be a phenomenon of where we are. The fact that we just ran a brand new contract in the system side, our systems are growing very good. And the bigger our systems side, gets you will see a change, because they will be subject more to milestone payments and progress payments. So, hopefully, we're going to start getting a little better blend of how the imbedded computing sales and profitability will start turning itself out over the next few years.

So this is more a timing issue here in this particular quarter?

Basically the same thing that the first quarter lags is timing.

Okay. And you feel that you are picking up share going forward and continuing to expect that?

Without a doubt. Our new orders are up quite a bit in that sector.

And the ability to continually cut costs, is there -- I mean, initially you started this consolidate efforts awhile ago. How far along do you feel you've gotten and how much more do you think there is?

I think that we are basically halfway through, and I still think there are significant savings. We indicated last year that we think -- thought that we would save $3 million. The other thing is that when we say we're going to save $3 million, not all of it will end up on our bottom line, because we use some of it for competition. So we expect at least that much we can take out, but again, we'll use portions of that to remain -- to do very well in the marketplace.

Great. Thanks. That's very helpful.

Your next question comes from the line of Eric Hugel from Stephens Incorporated. Please proceed, Hugel.

Good morning, guys.

Hi, Eric, how you doing?

In the Flow Control business, you talked about increased R&D spending and transportation cost, material costs and I guess testing qualification. I guess with regard to the R&D and testing qualifications, are those going to remain throughout the rest of the year or are they sort of this quarter and then they sort of -- you don't see them again ,or for how long are they?

Well, the increase of research and development is on the AP1000 and we're going to see additional R&D.expenditures there, but they're more planned for. What we are trying to indicate in the -- is the difference in the margin. When you take a look at the increased testing, that was for the reactor and then for the control rod drive mechanisms. That was significant. That was about $1.8 million. The reason why we did that is because we announced one when we actually have three contracts for the reactor [inaudible] is that we did additional testing so that we'll able to qualify to all Westinghouse configurations throughout the world. So we thought it was a good idea to -- as we continue to grow in that market space to qualify the reactor had the most stringent requirements that Westinghouse has that it would qualified for every application that they have.

So that $1.8 million of additional cost is sort of transitory, it sort of hits this quarter and you don't really --

You won't see it. In fact, we should be able to reduce our costs on other contracts where the reactor has an application.

And can you talk about your sort of the magnitude of the materials and transportation costs in terms of what kind of increases are you seeing and what kind of size are those costs in relation to I guess, the cost of goods sold. I mean, are they big components?

The thing is that the material side [inaudible]. It's just that we have had increased costs. On the material side there's been a 9% increase in some of the stainless steel that we have and upwards of that. And so a lot of our commercial contracts now have escalated clauses in it. We had it in the military side. We don't see that as being a big deal.

Okay. Switching over to the imbedded computer systems business getting back to something I guess a lot of people have been sort of asking about, I mean I look at some of your competitors like Mercury or SBS. You don't see that sort of first quarter type of really low margin. Is that because they have sort of progress payment type of milestone payments or just sort of a contract structure issue?

Well, I mean Mercury's all military pretty much.

I mean Mercury is all military pretty much.

We are 100%, too. However, they do it it's up to them, but it's not the way we -- that's the way our contracts run.

That's what's imposed. That's what you take in that. Now, I wish we had milestone payments associated with all ou n election that you guys purposely make abecause that's how you want to structure your contracts? Do you have the opportunity or that's just what's imposed on you?

That's what's imposed. I wish we had milestone payments associated with all of our military programs, we wouldn't be having this discussion. [LAUGHTER]

I guess did I hear you right when you talked about there are opportunities in the future, though, to try to smooth that out?

The more systems we get -- like let's take the motor that we just launched. $32 million contract. It's going to be subject to the progress payments or milestone payments so you will see a better level loafed sales and profitability there.

Moving over to laser. In your 10-K you noted that you were in the process now of building three new mobile lasers?

Right.

I'm assuming -- it seems like for the past year you've been in development of lots of potential customers. Now you are talking about building three new lasers. Are there any sort of potential break-throughs that we would expect sort of in the near term or that you could talk about now?

We do have more customers. We actually have -- I guess patience eventually pace off or being patient eventually patients off. We now have orders in from Siemens. We spoke about for jet turbines. We do have a contract with them. We have seen some significant improvement in the implants that we have laser team we are on our second configuration of implants. We've generated at least a two time Life improvement and we talked about -- or I told you last time that you can put smaller implants to larger people, which apparently it's something that they are very, very interest in I talked about last time is the fact that you can put smaller implants to larger people which apparently i is something that they are very, very interested in. Over and above the fact that I think the parenting that they have will last twice as long.So we'er on the second of our third configuration, so that's going well. We had provided parts for competitive race car driving. [NOISE ON LINE] last,but, unfortunately there the nonlaser team portion of the engines act as our so we will be getting more parts to laser teams there so eventually they will come up with an engine that's much better than the one we have right now. So we have been doing quite well in that area. No, our sales are up 17% over the first quarter of last year.

What was the dollar sales this quarter? the laser [inaudible]? What are you looking for for the year 3 million

We said 15.

And I guess before you hit the speed bump last year you were expect to go double revenues every year for at least the next few years. What longer term growth projection would you make or is it still too early to tell.

I think it's too early to tell. One thing we were surprised at was the amount of testing that goes on with us when you talk about increasing engine life it's taking a [expletive] of a lot longer than we had anticipated. The thing is the applications work, that's good. I think it just takes a longer period of time to go through all their testing also before they switch to the process.

Enpro, is that acquisition in your guidance or had you just not included that yet?

Well, it doesn't really move needle. The increase of sales is [obviously -- actually it's going to have a drag on the margins for Flow Control. It will add somewhat something in overall profits. But it's within the guidance.

Fine. Last question is sort of -- I guess somebody else alluded to but the overall acquisition pipe, sort of how robust it is, sort of how you are looking at pricing and all that fun stuff?

We gotten Enpro atI think 6.7 times EBITDA. We have looked at companies that are in that 80% range. There seems to be more financial buyer but they don't seem to hang in there when it comes to strategic acquisition.

So pipeline is not, it would seem like it was much better than the beginning of the first quarter compared to now/

But that always shifts and changes.

Sure. Thanks a lot, guys.

Your next question comes from the line of John Emerich from Iron Works Capital. Please proceed.

Thanks. Just a couple unrelated questions, I will ask them separately. First the reference to Q2 this year looking like last year, was that across the board from top to bottom?

We are talking earnings per share.

Okay. Not revenue.

No.

And as the year progresses obviously to achieve our goals margins are going to improve sequentially through the end of the year. Will most of that-- can you tie to an attribution now on where that margin improvement's going to come from? contribution now on where that margin improvement is going to come, gross margin or SG&A being lower as a percent of sales?

It would be mostly in the third and fourth quarter. We would see larger margin increases.

And where are they going to come from I guess is my question.

Mostly the Motion Control area.

And is that an operating expenses improvement or cost of goods sold improvement?

It's basically a recognition of profitability that you can take on a [inaudibility]

It's cost of goods primarily, improved margins and there's also some cost reductions that Marty I think referred to as well. So it's a combination of both.

Got you. Thank you very much.

Thank you.

Your next question comes from the line of Myles Walton from CIBC World Markets.

Thanks, good morning, guys. If I look at the backlog in bookings, the trends there have been really quite good and actually accelerating. I think book-to-bill steadily increased over the last four years and here in the first quarter obviously very strong. And generally those trends would indicate accelerating organic growth as well. I just wonder is there anything that's changing flex in the complexion of the backlog, for example, the average length of the contract to somewhat offset that assumption of accelerating growth or do you actually anticipate that in '06 and '07?

We are optimistic about what we've seen in the first quarter. I mean the lead times of items that, you know, -- we're seeing increases, large increase in commercial and $18 million of new orders for DeltaValve in December LINE INTERFERENCE] first quarter. And that's like the items. So it looks like optimistically it looks like we are going to have, we could have a stronger organic growth in this year than we had anticipated. As long that continues on. Because we do see future potential there. In all of [inaudible],One of the areas that we haven't seen is an improvement is in the power generation area. Last year we had the good, we had the portion of having outages at some of our nuclear power plant which provided very good sales and made somewhat better than average profitability. You are going to start to see and we expect 18% increase in our power generation sales. Those will come out in the second, third and fourth quarter, also.

Okay. Great. And I did hop on the call lake so apologize if this has been asked but the color on the cash flow in the quarter, you are still on track for the prior guidance? And also if you can -- I'm sorry, I didn't catch that. And in particular if you can go through some of the drivers of working capital in the quarter and how those will trends for the rest of the year?

Sure, Myles. First off we did I did reaffirm our full year cash flow guidance between $65 and $70 million. Again with the fourth quarter being our strongest as tracks our sales. In the first quarter traditionally we are negative in the first quarter. We are always negative in the first quarter both due to -- it's our lowest earnings quarter and we make all our annual payments that are items that are accrued the most previous year. In this particular quarter ,as Marty said with DeltaValve and our increase in orders in the first quarter and strong backlog we did build inventory.

We did that consciously.

We did that consciously. Demands for that product. We want to make sure that we have -- that we're able to fulfill our customers needs. The other thing is -- to some degree, the sales in the first quarter were all skewed towards the -- were skewed heavily I should say, not all skewed but skewed towards the ends of the quarter which drove up our current receivables, which is a timing item. And probably the last thing that affected us year quarter-over-quarter was -- as compared to last year was income tax payments made with extension across the margin that we didn't have to make last year. So that's a timing thing. Last year being in 2005 we had already been paid in at the end of the 2004, this year we made payments of the extension request of it's about $9 million item for this quarter. But we are reaffirming our guidance for the full year.

Also if you take a look at Delta valve one of the reasons we did what we did if you look at December, $18 million, and first quarter, $23 million, in four months you are looking at $41 million worth of sales for new orders. So those have to translate into sales seven months from those -- that period of time. So we want to make sure that we are able to meet our customers needs.

All right. Great. Thank you.

Your next question is a follow up from the line of John Emerich with Iron Works Capital. Please proceed.

Thanks, I just forgot one. You made the comment that 75% of the -- I forget how you put it, the rest of the years revenue -- the years revenue is in backlog or you have orders or visibility.

In backlog.

In backlog. And how is that number compare to the same time last year or any other year?

I think we are up ten percentage points.

Okay. Great. Thank you.

We have --

That's meaningful, [inaudible], in context, appreciate it. Thanks.

Thanks.

Your next question is a follow up from the line of Eric Hugel from Stephens Incorporated. Please proceed.

Yes, Eric. Hello?

Can you hear me?

Go ahead.

I had my mute button pressed, sorry. [LAUGHTER] Sort of wanted to follow up maybe --.

I think I'll put mine on. [LAUGHTER]

Maybe a big picture, India in terms of nuclear power. Who are -- I mean is -- are you both -- I mean, it looks like you might have a little more ability to compete there whereas they are really not in the China market? Obviously Westinghouse is going to be going after that the market, too. Can you sort of describe for us what the opportunity is there, the timing? I mean I know there's still some hurdles that have to be passed through Congress stuff -- but both G.E. and Westinghouse are interested in that market, can you talk about some of the opportunities there and the time frames?

Right now I think you're correct who has the advantage there. Obviously we have more content on the Westinghouse side, but we do have very good content also on the G.E. side. The last plant that G.E. put up in Taiwan we had about $20 million worth of install base with all of our products there. So as far as the timing is concerned, it kind of fluctuates itself but I think -- I think that something will take place at the end of this year, the beginning of next year as far as who will be the eventual winner. And then it would take another six months from there so you would see something in the 2007 time frame.

Could you repeat, you've heard it, I didn't quite -- you said it but I didn't quite get it if China places orders sort of by the end of this year, when would you actually start shifting content to Westinghouse? When would you actually start seeing the revenue impact, the margin impact?

You are going to start seeing the revenue impact in 2007.

2007. Okay. Great. Thanks.

At this time there are no further questions.

I would like to thank everybody for joining us today. I look forward to talking to you on our second quarter conference call. Also, if you haven't signed up yet for our C. W. investors touring and technology demonstration please do. We expect to have a great day. Thank you very much.

Thank you.

Take care.

Thank you for your participation in today's conference. This concludes your presentation of the you may now disconnect and have a good day.