Curtiss-Wright Corp (CW) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Curtiss-Wright Corporation earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the call over to your host, Mr. Martin Benante, Chief Executive Officer.

Thank you, and good morning everyone. Welcome to our 2007 first quarter earnings conference call. Joining me today is Mr. Glenn E. Tynan, our CFO, who will begin our forum today.

Thank you, Marty. If any of 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 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 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 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, I will provide an overview of Curtiss-Wright's first quarter 2007 operating performance, and then Marty will discuss our strategic markets and full-year outlook. After the formal remarks, Marty will open the call for questions. So let's get started.

Curtiss-Wright had consolidated sales of $333 million during the first quarter of 2007, an increase of 18% over the first quarter of 2006, including organic sales growth of 14%. Our organic sales growth was driven by contributions from all three segments led by our Motion Control segment at 22%, metal treatment at 13%, and Flow Control at 8%. In our Motion Control segment, sales grew 22%, which was all organic. The sales improvement was driven by a 27% increase from our Embedded Computing group to the aerospace and ground defense markets and higher sales of OEM products to the commercial aerospace market. Sales in our metal treatment segment were up 19% from the prior year, including 13% organic growth. Higher sales of global shot and laser peening services to the aerospace and general industrial markets drove double digit increases and our specialty coatings business had higher sales, particularly to the automotive market.

In our Flow Control segment, sales increased 14%, of which 8% was organic. Continued momentum in both the oil and gas and commercial nuclear power markets provided a significant boost to sales, which was partially offset by lower naval defense sales due to the timing of customer contract schedules, primarily on the submarine and aircraft carrier programs. Our consolidated operating income of $35 million in the first quarter of 2007 increased 43% over the prior year, including 45% organic growth. This strong performance was primarily due to the improved operating efficiencies and increased volume in our Motion Control and metal treatment segments, partially offset by lower operating income in our Flow Control segment due primarily to increased lower margin development work and consolidation costs.

Our consolidated operating margin for the first quarter improved 190 basis points over the prior year to 10.6%. This improvement is primarily driven by higher sales volume and its favorable impact on fixed cost absorption and improved operating efficiencies. In our metal treatment segment, operating income was up 35% from the prior year, of which 30% was organic. The higher sales volume, as well as improved operating efficiencies drove the strong performance. Operating margin for the quarter was 20.4%, an impressive 250 basis point margin expansion from last year.

In our Motion Control segment, operating income increased 158%, all of which was organic. In the first quarter of 2006, the Embedded Computing group had significant integration costs, which are not only behind us, but are now starting to generate the associated benefits. In addition, the first quarter of 2006 included the negative impact of the Boeing labor strike. In 2007, the higher sales volume favorably [impact] fixed cost absorption and improved operating efficiencies also contributed to the exceptionally strong performance. As a result, operating margin was at 10% in the first quarter, more than double the first quarter 2006 margin.

Flow Control operating income was down 8% from last year, reflecting a more unfavorable sales mix due to higher development work as well as the impact of the lower naval defense business as a result of order timing specifically on the submarine and aircraft carrier program. In addition, operating income was impacted by ongoing consolidation costs associated with our 2006 acquisition of and also in operating loss from our 2006 acquisition of Enpro Systems, and also an operating loss from our 2006 acquisition of Swantechwhich is a start-up operation whose performance is in line with our expectations.

Consolidated net earnings of $19.5 million or $0.44 per diluted share for the first quarter of 2007 increased 59% from $12.3 million or $0.28 per diluted share in the first quarter of 2006. New orders received in the first quarter of 2007 were $393 million and our backlog reached a new record level of $936 million, up 7% from the 2006 year end. Our Motion Control segment experienced solid growth in new orders and backlog. But our Flow Control segment was significantly impacted by a decline in new defense orders as compared to the first quarter of 2006. This is a timing issue due to a temporary lull in defense procurement on major programs such as the Virginia class submarines and the CVN-21 aircraft carrier as well as new funding awards on developmental programs such as the EM Gun.

The decline in defense new orders was offset by a $48 million purchase order from Westinghouse for procurement of material for the AP-1000 program. As we mentioned on the February earnings call, the Westinghouse AP-1000 was selected by the Chinese government for its next four commercial power plants. And we are currently in contract negotiations with Westinghouse and the Chinese government to supply the reactor coolant pumps. While the Westinghouse purchase order does not impact our ongoing contract negotiations, it does provide funding for us to begin ordering long lead time materials in advance of production.

Now I will review our liquidity and financial position. For the first quarter 2007, our free cash flow, defined as cash flow from operations less capital expenditures, was a negative 20 million verses a negative 40 million last year. The first quarter is historically negative for us due to significant cash expenditures for annual payments that are accrued throughout the previous year. In addition, in the first quarter, we typically build inventory due to long lead time material purchases in preparation for higher sales levels for the remainder of the year.

During the first quarter, depreciation and amortization was approximately 13.5 million and capital expenditures were approximately 12 million. We reaffirmed our 2007 free cash flow guidance of between 70 and 75 million, with the largest quarter being the fourth quarter, similar to our earnings. Our balance sheet remains strong with over $100 million in cash. Working capital of $349 million and total debt outstanding of 360 million as of March 31, 2007 for a net debt to book capitalization of 25%. Our exceptionally strong cash generation in the fourth quarter of 2006 carried us through the first quarter 2007 as we have cash available heading into the second quarter and continue to have no borrowings under our revolving credit agreement. I now turn the call over to Marty to discuss our strategic market performance and our full-year guidance. Marty?

Thank you, Glenn. I'm extremely pleased with our first quarter performance and expect a strong performance throughout the balance of the year. We are experiencing double digit growth in each of our major markets with the exception of naval defense, which is primarily a result of contract timing.

Our aerospace defense market was up 18% year-over-year, primarily related to higher sales in the F-22, increased helicopter volume, in particular Black Hawk and increased better computing sales. Our ground defense market was up significantly on higher Embedded Computing shipments in the United States and aiming and stabilization equipment on foreign military vehicles. We had a slow start in the naval defense market due to timing of funding in the next Virginia class submarine and the CVN-21 aircraft carrier awards. And most of you know that these are not competitive programs for us. It is a matter of timing of the government's funding schedule. In addition, we continue to compete for additional content with the Navy.

Our Motion Control segment was just awarded a contract to design and development its helicopter landing system for the DDG 1000 destroyers. We anticipate that the total contract value will be approximately $30 million with options for follow-on ships. In aggregate, our defense businesses were up 9% in the first quarter, which is a strong start for the year. But we maintain our conservative outlook of 3 to 4% for the full-year at this time.

In the commercial aerospace market, we had a 17% increase due to higher volume at both Motion Control and metal treatment. Current platforms such as the Boeing 777 and 747 and the AP320 and A340 drove the increase. We will also begin to ship hardware on the 787. Our contract with Tier 1 suppliers are still under negotiation, but we are shipping in accordance with Boeing's delivery schedule. In addition, Curtiss-Wright recently awarded -- was recently awarded a contract by Boeing for lead edge rotary actuators on the new Boeing 747-8 [Intimate] Continental and freighter planes. The 747-8 will require in excess of 70 actuators per aircraft. Curtiss-Wright is in the process of working out the contract details with Boeing. But combined with our smoke detector win in 2006, we are anticipating a ship set value currently in the neighborhood of $200,000.

In the oil and gas market, we achieved another dynamic sales increase of nearly 40% on an organic basis. High prices and tight capacity continue to spur worldwide construction activity and domestic refining expansions to meet demand and mitigate price increases. In addition to construction and expansion activity, advanced technologies are driving increased capital spending to upgrade equipment for efficiency, safety, and environmental regulation. In particular, Curtiss-Wright DeltaValve Coke products are gaining market share as the installed base continues to provide superior performance and provide indispensable in worker safety. Additionally, increase in crude oil has resulted in delayed coking becoming a more profitable refining process. Therefore, refineries are being upgraded and adding delayed coking units, creating heightened demand for our coker products.

In our commercial nuclear market, we achieved 9% sales growth. Due to continued investment in existing power plants resulting from higher utilization rates, capacity expansion, and environmental requirements. While our current business reminds solid, the anticipated new construction is beginning to impact the landscape of the nuclear market. Several utilities are putting tremendous energy and capital in preparing for early site permits and construction and operating license for new construction in the United States. We are optimistic on the long-term growth of this market. And we are well-positioned to participate in the new construction market, both domestically and internally. As Glenn mentioned, we have received the first purchase order for Westinghouse for its AP-1000 program and we are currently in contract negotiations with China. We have not included this potential award in our guidance. And therefore remain conservative on our overall guidance for the commercial power market for 2007.

Finally, I'd like to touch on our general industrial markets, which continue to do well as a result of the strong economy. In particular, we achieved 9% organic growth in the automotive market. Metal treatment specialty coatings business continues to increase market share and our Motion Control segment generated strong growth from its integrated sensing products which have numerous general industrial applications. The growth comes from increased demand across several industrial segments, including agriculture and construction machinery, special vehicles, and in particular our motor sport sales, which have increased by 25% over the last year.

To wrap up our discussions today, I'd like to confirm that our defense outlook is very strong and as the government looks to minimize cost with more efficient technologies and more nonproprietary electronic solutions, we continue to gain both content and development opportunities for our advanced technologies. In addition, we are working with new materials such as composites for naval pumps. In the electronic world, we continue to be a leader in cost technology, which provides the government significant cost savings over traditional proprietary systems. This is opening up the available market, but also creating a more competitive pricing environment.

On the commercial side, markets continue to be robust. But getting on board long-term programs such as the 787 or AP-1000 or introducing new products such as a subsea pumping system for offshore oil exploration requires heavy initial investments, which are impacting our margins today. We will continue to make these important investments as they are strategically aligned with our long-term view of our business and will provide tremendous opportunities for future growth in sales and profitability. In addition, the uptick demand in the energy market resulting in increased material and transportation costs in the near term. We expect to see improvements over time, but our existing contracts will have to cycle through these.

While we have some horizons -- some challenges on the horizon, we are very optimistic on the execution of our strategic plan and our future both long -- short-term and long-term prospects and are raising our guidance for the full year. At this time, we expect to achieve 2007 revenues in the range of $1.385 billion to $1.41 billion, operating income in the range of 168 to $175 million before pension expense and fully diluted earnings per share between $2.05 and $2.15. This guidance equates to sales growth of 8 to 10%, operating income growth of 20 to 24%, and earnings per share growth of 12 to 18%. Our guidance reflects our expectation of double digit growth in all of our commercial markets as well as solid growth in our defense market. At this time, I'd like to open up the conference for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Robert Stallard with Banc of America.

Morning.

Good morning.

I'd like to tackle the nuclear issue. On the AP-1000, you've got this lead order from Westinghouse, I know the negotiations are still going on, but proportionally how much do you think Westinghouse has ordered from you at this stage and how much could that step up once negotiations are completed?

The first order was minimal compared to what the future potential of that order can be.

Is minimal sort of 20%?

Bob, we've left that out of our guidance for a reason. And when that -- right now we're in contract negotiations with China, which I do not want to comment on. But obviously once that happens, we're looking at the possibility of having an investors conference and announcements to go through what the extent of that contract is.

Okay. And in terms of the timing of when shipments on this could occur, last time you talked you said this could take some time. You're expecting really this to be more of an '08 affair versus '07?

We'll get some in '07, not enough to move anything, but '08, definitely.

And moving on. Given you've adjusted your guidance for the year, could you run us through what your expectations are on a divisional basis looking at revenues and margins?

Yes, Bob?

Yes.

Start with the margins, and in the margins we were not really changing. We are still expecting Flow Control, Motion Control to be between 11 and 11.5%. And our metal treatment segment to be around 20%. From a sales standpoint, Flow Control right now between 575, 585. Motion Control 560 to 570, metal treatment 250, 255, something in that range.

Given the strong quarter of metal, wouldn't we expect that continue to progress from here as we move through the year?

Optimistic that it can, but we're not projecting that right now.

All right. That's it for me. Thank you.

Okay, Rob, thank you.

Thank you.

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

Hi, good morning, guys. Good quarter.

Thank you.

Thanks, Chris.

Martin, back on the nuclear industry, can -- obviously you're leaving it out of your guidance for this year, but can you provide us with a sense of timing on both the construction of the four reactors for China as well as the technology transfer negotiations again without specific dollars just on the timing of what we can expect to see over the coming year or so?

The -- as far as the contract is concerned, we're expecting second, third quarter to be finished with negotiations.

And that's the technology transfer contract?

That's correct. And as we indicated before, well, not only -- that's for the entire contract. Transfer and also for product. And I'll say the same thing that I said before and we expect to start generating revenues in 2008.

Okay. Great. Thanks. Just at the end of your comments you said you were facing some challenges. Is that just specifically related to the naval defense market? Is that what you're referring to?

I think -- I don't look at the naval defense as being a challenge quite frankly. When you look at the fact that we received multi-year procurements from them and if you look at the strong support by both Congress and the Senate in ship building. Right now we're looking at a multi-year sub procurement in 2008 of 7 boats in 6 years. And there's a movement to start two subs in 2010 which would make it a 9 boat procurement. So we'll receive very high new orders in 2009 because of it. So we're -- it's not the naval defense. When we look at challenges, I don't really see anything out there except for us developing new products and staying on top of our game as being a challenge.

Okay. Great. Thanks.

Okay.

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

Good morning. Good morning, good quarter.

Thank you, Myles.

The performance on Motion Control, I wondered if we could just drill into that a little bit. In the first quarter, in the last couple of years embedded computers has really been a drag. Obviously it looks like you've turned a corner here. Is it that this has changed permanently? Was there anything one time in the quarter? Or have you really kind of pulled out some of the seasonality in that business?

I don't think that we've pulled out the seasonality completely, but the thing is that we indicated that we were going through integration costs, which was a drag on margins, but now that integration costs is over, we're seeing the benefit of it. The other thing is our backlog has gone up 33% quarter to quarter from last year. We are making a lot of inroads as we have indicated. And we did indicate in February that we would see low double digit growth both in new sales and profitability. So we're getting more systems business, which helps make it more linear. We have different contract terms that helps make it more linear. But obviously we still have a high fourth quarter. And Embedded Computing will also be represented in that fourth quarter. But you really have to tip your hat to Tom Quinly and his team there. They've done a very, very good job in embedding computing. And I think that when you look at the growth prospectives and the new technologies that they're generating and the new programs that we're on, we see a very optimistic outlook there.

That's helpful. And could you give me the backlog by segment?

Yes. Motion Control 447?

Yes.

Flow Control 487. And metal treatment 3.

So Flow Control did have a very heavy bookings in the quarter?

Yes, they did. The bookings by quarter, Myles, the break down our new orders in Motion Control was 140.

Yes.

Flow Control was 190. And metal treatment was about 65, whatever the difference is there.

I think the significant importance there is that there is no multi-year procurements in those new orders.

Yes.

We would normally see. And if you take a look at Flow Control and the EM Gun and some of the other programs -- the submarines, the aircraft carriers, those are all multi-year procurements, we have not seen a benefit of that in this year and really not last year. So your book to build ratio could look a little fuzzy, but in reality when you do get those types of new orders, then your book to bill ratio would be dramatically improved.

That's definitely true. Then on the carrier and sub funding, is the carrier still under incremental funding? And then would you expect to get the full funding this calendar year?

The aircraft carrier's always on an increment -- even though it's a multi-year procurement. But that allows you a lot more up front money for [longer means and] materials and things like that. So the way they release their funding is obviously much heavier at the beginning and less in the back end of the contract.

That's fair. And then lastly on the Flow Control, the integration costs that you had there, could you give us some level? Was it higher on the Swantech losses or higher on the integration effort? Also what does this look like for the rest of the year?

Yes. If you take a look at, both of those were planned expenditures, by the way. Scientech, when we purchased the Company, really we're--.

Swantech.

Okay. Swantech.

Something else.

That was a small development company that we purchased and knew we had to add moneys to it. And on the -- and that was about a third of that or 40% of that expenditure. Integration at Enpro was more, but we anticipated that, that we would have labor efficiencies as we consolidated both the Enpro, Tapco. And that will go on until next quarter. Not to the same extent. Basically it got cut in half and then you'll see positive returns in the third and the fourth quarter.

One other thing that you should realize about the Flow Control margins, that the amount of new development that they are participating in. They had a $5 million increase in their development programs. And I've indicated many times that we have paid development programs, but they're at no margin, they're at no profit. And the thing is, this year we'll do over $60 million of paid for development, most of it coming out of Flow Control. That will be 0.5 percentage point differential in our margins at the Corporate level. But it's going to be -- their development is even greater.

So what you're seeing here is a degradation of margin, based on the fact that we have so much new paid for, development for new programs. And those new programs will yield hundreds of millions if not billions of dollars in new programs further on down the road. So sometimes when you take a look at what we would consider to be margin degradation, really the amount of new development programs that they have are actually causing somewhat of a drag. But I would rather have that and having people pay for us for those types of technologies. I think the other thing that you can derive from that is we're one of the few companies that have technologies that people would be willing to pay us to develop products for them.

Thanks.

They may be at no margin, but that's fine.

No, that's helpful. And thanks again and good quarter.

Oh, thanks.

Thanks, Myles.

Your next question comes from the line of Eric Hugel with Stephens.

Hey, guys, good morning.

Hey, Eric, good morning.

Great job, guys. Great quarter. Very pleasantly surprised.

We do that every now and then.

Hey, can we talk--?

What's even more surprising, is we gave guidance in the first quarter.

Yes, that I thought was the most surprising thing here and I guess that shows that your level of confidence going forward. You guys are usually extremely conservative going after Q1 too.

Yes.

Can you talk about your embedded computer system business? Obviously, part of the benefit looks like volume increase. The discussion we've always had about that is just sort of the timing, the volume has always been very weak in the first quarter just from a timing issue. Can you talk about to what extent -- what are the drivers of the much better volume? Has there been any dynamic shift in there? Are you benefiting from reset in any significant way? Or are there other things going on?

What it is, Eric is that we're getting more and more systems development work. And when you have systems development work, that's throughout the year. The single board is more -- our traditional portfolio has been where you get funded on a yearly basis, especially the way the military is funding things right now. We sell them on a as shipped basis, so you're not covering your fixed costs in the beginning. But the area that we do do our systems, that business is now three times its size that we bought five years ago and growing. So that's the one area that tends to linearize your shipments.

Can you maybe quantify -- is there a way to sort of say 20% of your business is systems now? Or is there a way to sort of think about that on the embedded computer side?

You basically hit the nail almost right on the head.

Good guess.

Basically 20% of our business -- and as that grows, that will linearize that situation. And it sounds -- but also we did receive a lot of new programs, new contracts in the fourth quarter, which helped out that situation also.

And Eric, just another comment. Part of the Embedded Computing is due the reset, which is upgrading existing forces and Operation Iraqi Freedom and all that. But another piece is also from -- I think you know we announced that we'd be providing the servo motor controllers on the future combat systems for the contract we received right here, and that's -- we're starting to recognize, ship on that as well.

Right. Might there be an issue with sort of the work flow if this whole sort of supplemental bill delay occurs? And I guess the Army has said that in preparation they're going to severely curtail sort of nonurgent reset work?

I believe that the things that we're on are considered to be critical. And the thing is that that wouldn't do anything this year. That would do something next year.

Right. So the stuff for this year are already sort of pretty much out--?

Already been supplemented and we have the benefits of those contracts.

Okay. I'm looking at your very robust 14% organic growth. It looks like you did about what, 11% in the fourth quarter, 12% in the third quarter of last year, 7% in the second quarter, we're definitely seeing an acceleration there. Would you expect to see continued acceleration? Or sort of high levels here? Sort of remaining sort of plateauing here? How should we think about organically? And was this sort of 14% sort of the moon and stars aligning here? Or would you think more in the typical sort of let's say 9 to 12% range.

Why do you always ask those good tough questions? Couldn't you just be nice and ask another question?

Sorry.

We obviously think -- right now we're not projecting that, but optimistically, you have to say that a lot of the growth that we have has been in those traditional markets. And hopefully that continues.

You were, I guess obviously the defense market and the commercial aerospace market to a great extent, you have pretty good visibility. Can you talk about what, I guess more of your short cycle markets and sort of what and sort of where you're seeing trends today? Sort of versus where they were last quarter?

The thing is that when you take a look at the automobile industry, and we're mostly domestic and those sales aren't really that up. (Mail tripping) is just winning a lot new contracts, they're getting market share. When you look at the power generation market, we sell 178 solutions to the nuclear industry. And the thing is it's very hard to go through what the demands are. We know right now that demand's a little bit down because nuclear power plants are trying to right size, I guess, their inventories and they're also spending a lot of money on with their operations [and such]. But we still grew 9%. So it just says that there is demand for the products that we have. And gas and oil we're just doing very well, obviously, not only -- We talk about DeltaValve, but our relief valves with our Farris business is doing very well. The backlog in our Enpro/Tapco consolidated unit is very, very high, Solent & Pratt. We just see good momentum there.

If I look at the nuclear business, that's pretty much all retrofit work, you're not really doing anything new builds to any great extent right now?

That's correct. It's not just retrofit, it's also upgrade.

Well, yes, upgrade/retrofit. I was listening to a call, I believe yesterday from Allegheny, who supplies strategic metals to the nuclear industry. They were talking about seeing a sizable reacceleration of demand in that for their metals really being driven by this retrofit cycle. Are you -- I guess what you're saying here is that you're seeing decent sort of demand right now in terms of that. Would you expect to see that significant an acceleration beyond sort of where you're looking at now? What you can see out in the horizon?

The thing is that all of these upgrades for nuclear power plants because they are of different configurations, it's hard to determine how that takes place. But our installed base in the nuclear power plants that were built later in that cycle, we had a greater, much greater installed base. So--.

That's right, okay.

What we're seeing is that even though we think things could be somewhat down in that industry because of them trying to do something with their inventory level, it's just saying that the plants that are coming up for upgrades, we're starting to see our installed base, which is a greater percentage than it was in the previous ones. We're seeing the benefit of that.

And my last question, which I'm sure you won't like either.

Oh, great.

Last quarter you talked about in terms of first half earnings versus second half earnings. You thought that first half would look very similar, I guess in terms of percentage of the year to first half of last year. I guess if we hold that true with your sort of upwardly revised guidance, let's say midpoint of 2.10 that would imply second quarter being pretty much flat in terms of EPS with what you did in the first quarter. Is that sort of -- I look at sort of the trends and usually you see a healthy step up. Should we -- should we think about sort of a step up there? Or should we think first quarter was very strong and second quarter's probably going to be just in line with that?

I think what -- on our last call I said it would be more like 40/60, that the earnings, the profits will be 40% in the first quarter and 60% in the second quarter. First half/second half. Is the percentage in the first half will go up.

Okay. So you're expecting -- okay, so you're expecting that the second quarter's going to be better than you had previously expected also?

I think it looks like this year's a little bit different. Looks like contrary to where -- the fourth quarter's still our biggest, but the first three kind of look fairly similar. Fairly similar this year.

The first three quarters similar and then the step up?

And the fourth quarter's still our big quarter.

So somewhere in the upper 40s as we go through first three quarters and then a step up?

Yes.

Okay. Great. Thanks a lot, guys. And great quarter.

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

Hi, Tyler, how are you doing?

Good, how are you guys?

Good, Tyler.

I guess real quick, what's driving that kind of fourth quarter step-up that you guys were just speaking to? Is that still coming from motion? What's kind of the dynamic?

Actually, it's coming from Flow Control too. Because a lot of their naval sales are going to be in that fourth quarter. And the thing comes down to Motion Control will be there too with the Embedded Computing also. So that's the reason why this year, you would have thought that it would have been a little bit more linear with our first quarter being what it was. But Flow Control now has a greater percentage of shipment in that fourth quarter than they ever had before.

Okay. And then going back to some of your commentary, I guess in your prepared remarks. I guess you said pricing is more competitive on the Embedded Computing side.

Yes, it is.

I was wondering if you could just spend maybe a couple of moments talking about some of the detail there. Where's the competition stemming from? Certainly it seems like you guys are taking shares from guys like Mercury. Just your comments, your thoughts would be helpful.

I didn't truly understand the question. I'm sorry.

Yes, I'm just -- you said that pricing's more competitive in the Embedded Computing market.

Right.

I'm looking to try and understand better where that competition is stemming from in terms of pricing. And that's about it.

We may have something to do with that.

Okay. That's fair enough. That's fair.

Yes, okay.

And you continue to expect your share to go up in that market?

Well, we see an expanded market in those areas. We do expect to see good growth there. Whether it's coming from somebody else's business or new business. I think that the Embedded Computing, if you were to have some of these advanced technologies that the government's looking for come out, you'd really see some real big pickup in the Embedded Computing side across the board.

Okay. That's fair. And I guess, just to go back to the last questioner's comments a little bit. I guess defense business growth was 9% in the quarter. You guys were looking for 3 to 4%, I guess full-year growth in defense, in aggregate defense. It just seems like everything you're saying is pretty optimistic. And I guess is that just sheer conservativism? Or is there something else you guys are seeing that you just are holding off until you get a little bit more optimistic in terms of the back half of the year?

More of the former than the latter.

Thanks so much. Have a nice day.

All right, Tyler, take care.

Your next question is a follow-up from the line of Myles Walton with CIBC World Markets.

Thanks again for taking this. Glenn, you mentioned the strength of the balance sheet. And Marty, I was just wondering if you could comment on the M&A pipeline, what you're looking at in terms of properties,. It's been about a year since kind of the last material acquisitions took place. And just wondering kind of what the status is there? And also as a follow-up, as you look out maybe four or five years, where would you like the portfolio of the Company to be with respect to the end markets versus where it is today?

Okay. We definitely see an improvement in the M&A area. We've always been bullish on nuclear power and gas and oil is the areas we want to expand in. So that's areas that we're looking at to grow. And what was the second part of the question about the--?

Yes, as you look out--?

-- the portfolio of the Company?

Yes, with respect to end markets in particular.

We're going -- we're going to grow in the power side organically. We're going to do well there. I like a balance of almost 50/50. When you take a look at the defense to commercial ratio, now obviously the commercial's taking over. And you're starting to see as we've always indicated we have better margins on the commercial side. And that's starting to prove through.

When we look at where we like to expand, we always look at high performance platforms where it requires a tremendous amount of engineering. And we think we're in pretty good markets right now. I'd like to go into medical, the medical field, get some insulation from recessions and things like that.

Okay. That's helpful. Thanks again for the commentary.

(OPERATOR INSTRUCTIONS) Your next question is a follow-up from the line of Eric Hugel with Stephens.

Hey, Glenn, you talked about the $48 million Westinghouse order.

Yes.

Was that a cash lump for you guys? Was that helping your free cash flow in the quarter?

Not in this quarter, no, but we are expecting some funding. We had a little bit in the fourth quarter last year, it was very small. But we're expecting to impact the second quarter, yes.

Okay, so that's going to be nice. And what was your pension expense in the quarter?

About a million 250.

And you expect that to be flat over the rest of the year?

Yes, it's pretty much a straight line.

I think our guidance includes about 6 million for the year.

And what was your CapEx expectation for the year?

CapEx and D&A are all about 55, 56 million each, approximately.

Great. Thanks.

Okay, Eric.

There are no further questions in the queue. I'd now like to turn the call back over to management for closing remarks.

Well, I'd like to thank everybody for their participation today and look forward for you joining us on our second quarter conference call in July. Thank you and take care.

Take care, everybody.

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