Curtiss-Wright Corp (CW) 2009 Q1 法說會逐字稿

Good day and welcome to the Curtiss-Wright first quarter 2009 earnings results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Chairman and Chief Executive Officer, Mr. Martin R. Benante. Please go ahead, sir.

Thank you, Kristin, and good morning, everyone. Welcome to our 2009 first quarter earnings conference call. Joining me today is Mr. Glen Tynan, our CFO, who will begin our forum today. Glen.

Thank you, Marty. If you do not have a copy of the earnings release which was issued yesterday, please call Ms. Deborah Torre at 973-541-3712 and she will be happy to e-mail or fax a copy to you. 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 Private Securities Litigation 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 business of aerospace, defense, electronics, marine and industrial companies.

Please refer to our SEC filings under the Securities 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 2009 operating performance and then Marty will discuss our strategic markets and update Curtiss-Wright's 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 $424 million during the first quarter of 2009, a decrease of 2% over the first quarter of 2008. The most significant impact to our sales was negative foreign currency translation of $15 million without which our organic sales would essentially be flat. In particular, this impacted the performance of our European Shot-Peening and integrated sensor businesses as well as our Canadian operations.

In our Flow Control segment, sales increased 5%, 3% of which was organic. A strong organic increase in naval defense was driven by increased orders for our embedded computing products on the submarine program. Commercial nuclear sales also had a robust increase on higher sales for new construction as well as increased revenues from operating reactor upgrades and maintenance. Oil and gas was down as expected, due primarily to lower capital spending for coker products. However, strong orders for maintenance and repair work internationally cushioned the dramatic impact, credit tightening and reduced demand for energy has had on this market. Finally, general industrial was down significantly due to lower demand for power control equipment, such as HVAC for commercial buildings.

In addition to softening demand, we significantly restructured our industrials business, which should result in a more competitively positioned business going forward. In our Motion Control segment, sales declined 3% overall and 7% organically. Strong sales of embedded computing products and systems for ground defense programs, in particular the FCS manned ground vehicles, Stryker and the Expeditionary Fighting Vehicle drove our increase in defense but it was more than offset by a decline in our commercial aerospace and general industrial markets.

In commercial aerospace, we sold our repair and overhaul facility last April, which was $5 million in sales in the prior year. Additionally, we had lower sales to Boeing primarily due to the inventory rebalancing resulting from last year's strike as well as the slowdown of sales to the business jet and helicopter markets. Finally, we had lower demand for our sensor products to the general industrial market including automotive, off-highway vehicles such as construction and agriculture vehicles, and motor sports as a result of the dismal economic conditions. No one market in dollar terms was material, but the net effect was significant in the first quarter. We believe the inventory corrections are largely behind us but the tempo of the economy over the next several months is still a question mark.

Sales in our Metal Treatment segment declined 22% from the prior year, nearly all of which was organic. As move of you know, our backlog in the segment, which hovers around $2 million, this is an extremely short cycle business. While defense revenues provided stability with essentially flat demand, the combined impact of the near shutdown of the automotive industry reduced customer inventory levels across our markets and the slowdown of building, construction and maintenance work resulted in commercial sales declining 26% in the quarter.

Our consolidated operating income of $31 million in the first quarter of 2009 decreased 24%. Our Flow Control segment had a 6% decline which was driven by sharply lower demand for their oil and gas and general industrial products. Keeping in mind that we generally produce large complex, low volume products, the down side to a rapid decrease in demand is underabsorption of fixed costs. While we began implementing significant business restructuring initiatives during the first quarter, the impact will not be visible until the second half of the year.

In addition, Flow Control benefited from a $2 million gain associated with its acquisition of Nu-Torque and a $1.6 million favorable foreign currency translation. These benefits were partially offset by the costs associated with our business restructuring initiatives, in particular, in the industrials market.

Motion Control had a 4% increase in operating income, which included a $3 million operating loss from our VMETRO acquisition partially due to amortization which was more than offset by $5 million of favorable foreign currency translation. Our base businesses were primarily impacted by lower shipments for commercial aerospace related to the continuing impact of the Boeing strike from last year, continued program delays and reduced demand in the business jet market as well as lower demand for our sensor products for the general industrial market. Metal Treatment had a 50% decline in operating income in the first quarter, the majority of which was due to a significant and rapid decline in volume, resulting in underabsorption of fixed costs. In addition, operating income includes $1.3 million of unfavorable foreign currency translation.

In summary, our consolidated operating margin was 7.3%, a decline of 210 basis points from the prior year quarter. This decline is primarily due to the lower volumes in all of our commercial businesses with the exception of commercial nuclear power and the resulting underabsorption of our fixed costs. The favorable impact of the foreign currency translation in our operating segments was offset by a negative $2 million transactional hedging loss in our corporate and other line versus a $1 million gain in the first quarter of 2008. Consolidated net earnings of $16 million, or $0.35 per diluted share, for the first quarter of 2009 decreased 27% from $22 million or $0.48 per diluted share in the first quarter of 2008. Lower interest expense in the first quarter as compared to the prior year was somewhat offset by a slightly higher effective tax rate.

New orders received in the first quarter of 2009 were $457 million, up 1% over the prior year quarter, bringing our backlog to $1.7 billion at March 31. Our free cash flow defined as cash flow from operations, less capital expenditures, was a negative $50 million for the first quarter of 2009 as compared to a negative $42 million in the prior year period. Cash from operations was down versus prior year due to a larger reduction in accounts payable and lower earnings. These decreases were partially offset by lower receivables resulting from increased cash collections and a smaller inventory build versus the prior year period.

Capital expenditures were $17 million in the first quarter of 2009, versus $24 million in the comparable prior year period. The AP-1000 program accounted for the majority of the decrease as our facility expansion is nearing completion. Finally, depreciation and amortization was approximately $19 million in the first quarter.

We reaffirm our 2009 free cash flow guidance of between $80 million and $90 million with the largest quarter being the fourth quarter, similar to our earnings. Our balance sheet remains strong with $64 million in cash, working capital of $426 million, and a total debt outstanding of $613 million as of March 31, for a total book debt to capitalization of 39%. I will now turn the call over to Marty to discuss our strategic market performance and our full year guidance. Marty.

Thank you, Glen. As projected, it was a very challenging quarter with a number of unusual disruptions from the economy, lingering effects of customer strikes, customer inventory reductions, the volatile exchange rate, and reduced energy demand. I'm going to start my discussion with our full-year guidance and then can work through our market outlook as the basis for our expectations.

As you read in our press release, we have updated our sales guidance to reflect the global economic softening -- softness that is disrupting most of our commercial markets. We reduced our sales by approximately 1% to $1.87 billion to $1.91 billion, including our acquisition of EST. In Flow Control, that includes a $20 million increase in sales guidance and a slight increase in operating margin expectation to approximately 11%. In Motion Control, we reduced sales approximately $20 million and increased operating margins expectation to 12% primarily as a result of the strengthening dollar.

In Metal Treatment, we reduced sales expectation to approximately $20 million on continued softness in the automotive and general industrial markets and reduced operating margins expectation to 5.5%. As you know, Metal Treatment is extremely volume sensitive. Any drop in sales has a larger incremental impact on profit. The consolidated operating margin proves about 20 basis points, factoring in a 50 basis point reduction to the effective tax rate. We're holding our EPS guidance of $2.48 to $2.58 for the full year.

Now that we have the financial details, let me tell you why I am confident about our outlook for the balance of 2009. Our defense market is on track to have a robust 8% growth for the full year with 6% organic growth in the first quarter, which is typically our lowest quarter due to the government procurement cycle. Leading the demand was naval defense with 18% organic growth, mostly due to higher sales through the submarine and aircraft carrier programs which is partially offset by lower DDG-1000 sales as we near completion of the current contract.

Our ground defense business is a healthy 11% organically, while orders on the Bradley were slightly down after strong growth in the last year, we have higher demand for FCS manned ground vehicles as all the Stryker and EFV. Our aerospace defense market was up 2% organically primarily related to higher sales for the F-16, F-22, and F-35 program offset by slightly lower Global Hawk and helicopter orders which is essentially timing. In March we are pleasantly surprised by Defense Secretary Gates' initial comment on the budget. Due to our diversification, there were certainly some high and low points. Let me walk you through a few key ones.

While we are disappointed in the decision to cancel the F-22 Raptor program, it is something we prepared for but we also welcome the ramp-up of the F-35 Joint Strike Fighter. The F-22 program will wind down for us next year but it will not be until 2011 when there is a decline in revenues while the F-35 ramps up. F-35 will soften the impact of the changeover, but not entirely.

Other potential highlights in military aerospace include the resolution of the tanker program and increased production on the Global Hawk as part of the BAMS program and the P-8A Poseidon. Naval defense has a very healthy future. The Virginia class program is a bright spot with the seven ship block five and the ramp-up from one to two ships per year in production. Long-term, Secretary Gates demonstrated his commitment to the submarine program with the initial funding for the development of the Ohio class submarine replacement. We are already participating in engineering studies of the advanced nuclear propulsion system and look forward to participating in the development of this program over the next decade.

On the current carrier program, the Navy confirmed in April that [E-miles] will be the baseline on the CVN-78 and we are moving forward on the hardware production. In addition, we expect the AAG to be fielded on CVN-78 and retrofitted on the Nimitz class long-term. While we now expect a scheduled stretch on the procurement of the next aircraft carrier, CVN-79, we do not expect any revenue impact until 2011. In addition, this should be mitigated by the ramp-up of the submarine program and the additional funding for the third and final DDG-1000 destroyer.

Ground defense was not as clear as some of the negative language would suggest. In particular, Senator Gates said that despite his recommendation to cancel the $87 billion vehicle component of FCS, he supports funding for revamped vehicle modernization program better suited to urban warfare. Our award with Servo motor controller, which is the most significant contributor to our FCS revenue forecast, has a high likelihood of carrying forward into upgraded legacy vehicles. In particular, the non-line of sight [Cannon], the most mature manned ground vehicle and part of the first FCS spinout, has strong Congressional support and solid demand, given it is replacing the platform designed and fielded over 50 years ago.

In addition, the decision to retain and accelerate spinout technology enhancements that occur for us is a solid win for our embedded computing group which is currently contracted on numerous development programs, none of which are likely to have material impact to our forecasted revenue of $20 million this year. When the new programs go forward, our current forces are upgraded, Curtiss-Wright will be well positioned due to our advanced technologies for the FCS network for intelligence, surveilling, and reconnaissance capability.

On balance, we feel that the defense market will continue to provide healthy sales and profitability for Curtiss-Wright and particularly due to our current strategic diversification in all branches of the military as well as our competitive position on current and development programs. In the commercial aerospace market, sales declined 17% organically in the first quarter due to lower volume from Boeing, in particular on the 737 and 787 program. During the first quarter, we had the temporary impact of reduced shipment due to the Boeing strike last fall and the sale of our R&O business which was essentially complete.

While a there's a decline in the business jet and helicopter orders, and customer inventory balances will continue to hamper demand in this market, we will have the offsetting impact of higher shipments in the first -- fourth quarter as compared to the prior year due to non-recurring events such as a strike at Boeing and cancellation of the Eclipse production. We believe we are still operating to plan and, as a result, we are remaining -- maintaining our full year commercial aerospace guidance as essentially flat.

In the gas and oil market, organic sales declined 15% due to lower capital spending for coker products and associated turn-key valve systems. However, strong orders for maintenance and repair work internationally cushioned the dynamic impact of credit tightening and reduced worldwide demand for energy had on this market. Going forward, integrated refining and petrochemical companies are rationalizing planned preventative maintenance spending and discretionary project spending for the balance of the year in an effort to conserve cash flow. We certainly have our work cut out for us, but we feel that the international market will remain strong. In particular, due to spending from national oil companies with less severe credit concerns.

We have just received a $9 million order in March from Petrobras, and we have a solid pipeline of other international orders. Timing of these projects is extremely difficult to predict, but our activity is indicative of a better second half of the year. In our commercial nuclear power market, we achieved 33% organic growth sales due to higher maintenance work and increased production for new plant construction. There are a lot of plants with planned outages this year that will fuel our sales growth and we're beginning to see additional orders for products other than our reactive coolant pumps on new construction products. I know many of you are waiting for an update on our new orders for domestic plants.

I am still optimistic we will see something this year, but this is only my speculation. What I can confirm is that we are nearly complete with the construction of our new facility and look forward to putting our first AP-1000 pump on test toward the end of the summer. If you'd like to check it out personally, I invite you to attend our investor day on June 25 when we will provide an overview of Curtiss-Wright's nuclear technologies at our new facility in Cheswick, Pennsylvania, on the south side of Pittsburgh. At this time, I'd like to open up the conference call for questions.

(Operator Instructions). We'll take our first question from Myles Walton with Oppenheimer.

Thanks. Good morning.

Hey, Myles, Ho are how are you doing?

Good, good. First, a clarification question, Marty. Don't know if I caught it through the call right on margins in Metal Treatment. What did you say were you looking for there?

15.5%.

15.5%. Okay. And what was the kind of cost of restructuring that may have been flowing through the P&L in the first quarter? And also, can you flesh out some of the color in the press release and also I guess your commentary with respect to the better profitability in the second half and kind of what is the slope of the recovery you see through the course of the year?

That's all in one breath.

That was all in one breath. Wait until my next question.

Very well done. The first quarter we had restructuring costs of over $3 million. Now, as we indicated in our February call, we indicated that sales would be down compared to last year. Obviously, that's going to result in higher overhead rates. Of course we had, as I indicated, our government program orders, which we received especially in embedded computing, in the last quarter of last year and the first quarter of this year that we have costs but we don't have the profit. So the end of the year. Also, the amortization, as I pointed out on the VMETRO metratronics was a $3.3 million amortization loss in the first quarter. We then have another $1 million in the second quarter. We indicated we would have about a $0.5 million gain in the third and then a $3 million gain in the fourth.

So -- we've indicated in the second quarter that our -- as you look going forward, we see an increase, obviously, an increased softness in the automobile and commercial industries, so right now we're looking at the second quarter being down from our original presentation in February that it would be about 5 percentage points lower than we anticipated, but we're going to start to see increased profitability from both cost reductions and from the AP-1000. Third quarter, our sales are up. We have higher shipments, better margins in the AP-1000 due to -- we were going to hit the milestone and liquidate the contract for testing our first pump and we indicated in the fourth quarter that our cost reductions should be coming in, that we have $100 billion more shipments from the first quarter to the last quarter.

Okay. I think I got most of that. The one clarification I guess on that one was when you talked about the second quarter being about 5 percentage points lower than your prior thinking, you were referring to the EPS as a percent of the full year, is that -- ?

That's correct.

So about 20% full year sales or full year earnings in the second quarter?

Yes.

Kind of what you're looking for?

Right.

Okay. And from a standpoint of your shorter cycle businesses, I mean, you have a lot of markets that you're seeing into probably a pretty good read on the world. Is there any -- I guess can you give some commentary on what parts of the market you might see near-term order stabilization in and to where you're looking for the first signs of recovery?

I think some of the area is going to be in the aerospace because we did have the lingering effects of the Boeing strike. Not only did we ship a lot less in the first quarter, but our customers. One of the problems with the first quarter is that we indicated that the inventories readjustment of our customers was going to hamper it besides lowering demand. We feel that a lot of the inventory leveling is over with and we're going to start to see better orders in our sensor and also in our aerospace area. Obviously, because there was the strike in the fourth quarter, that will continue to go on.

We've been seeing some very good maintenance and repair work from gas and oil. We have not seen that many production orders. Our Petrobras order that we announced, obviously that's new. But the one area that I have some concern in is there's very good projects work out there that the customers are national oil companies, so obviously they're not hampered by the credit restraints, is the timing of when we get those orders.

Okay. That's fair enough. And then the last one and I'll get out of the way, on backlog, could you give us some color, Glen, I guess on backlog by segment?

Sure, Myles. Motion Control, $500 million and Flow Control is $1.210 billion.

And was there an adjustment to -- because of the reclassification, is there any adjustment I should make in that backlog for the movement of the business for Motion Control to Flow Control?

It's been moved. Those are good numbers.

Okay.

We'll take our next question from Steve Levenson with Stifel.

Thank you. Good morning, Marty and Glen.

Good morning. How you doing?

Good, thank you. Between F-22 and F-35, I don't know if you can disclose shipset content, but when do you see the crossover when F-35 is really starting to renew growth as F-22 fades out?

Around the 2012 time frame.

2012?

We have about $900,000 on the F-22 and we have, during the low rip production, about $400,000 on the F-35, but that goes down as shipset quantities goes up to about $210,000. What happens is right now, based on what Gates is indicating, there's going to be a ramp-up of the F-35 but we haven't seen any schedules yet. So what we're anticipating is that we're going to see a little better revenue in 2009. 2010 will probably be a little bit down based on the mix between the F -- I'm talking about the mix now between the F-35 and the F-22. In 2011 we will see about a $10 million reduction between that combination and then it will become somewhat equal to what we saw in 2009 on the F-35 alone in 2012. But the other nice thing that's going on, and that's just aircraft to aircraft, is our submarine business goes up quite a bit between 2009 and 2010 and we also get the DDG-1000 which we did not anticipate. We thought the third destroyer was not going to be procured and that's about $30 million order that we expect to receive at the end of 2009.

That sounds great. Thank you. And if they revert back to building DDG-51 hulls, are there things that you didn't have there that you do have on DDG-1000 where you might get a pickup?

When they go back to DDG-51, we have less content. However, they're going to increase the power requirement on the DDG-51. That will put us in competition on several new orders. So our content should increase on the DDG-51.

Okay. Thank you. Do you guys project an oil price, a price that oil has to reach for there to be a turnaround on that part of the business?

The thing is that because the type of equipment that we supply, we don't really look at the price of oil. We made good money when price of oil was where it is right now. The thing is that right now you have a phenomenon where the light sweet crude and the heavy crude, there's very little differentiation between them which is a phenomenon that will probably exist between now and the end of the year. That's not a natural thing. So I think what happens is it's not so much the price of oil, it's going to be the loosening of the credit market that will help us because our product, when you go to change over a coker, you would want to put our product in there. No doubt about that.

Okay. Thank you. And last, with your balance sheet in pretty good shape, are you still looking for acquisitions and what do you see in the pipeline? What do you hear on prices?

Well, yes, we're going to still be inquisitive. We did acquire some companies that actually have been accretive for us. It's a buyer's market and I indicated that in the last call that we're -- in the prices that we're looking at are the best pricing we've seen in a long time, so yes, we're inquisitive. There's more companies. Obviously, there's a demand for cash and a lot of companies that were overleverred and there's good companies that are coming out on the street.

Great. Thanks again.

Thank you, Steve.

We'll take our next question from Chris Donaghey with SunTrust Robinson Humphrey.

Hi, good morning, Marty.

Hey, Chris.

First of all, can you just kind of walk us through what your expectations are in terms of the ramp for the AP-1000 reactor coolant pump, particularly as you finish off the facility in Pittsburgh.

What's going to happen is that first of all, we're going to get a better mix come the second quarter. If you look at last year, we were in the procurement and sub manufacturing cycle for the AP-1000 and we had just received our United States order and now we're obviously in good production on China and we're going to start production on the AP-1000. So that will start ramping up where we would be doing manufacturing, then just more material input which we don't think high margins on. And then, as I indicated, we'll start testing in late July of the AP-1000 and that will get us to liquidate that particular milestone and then the fourth quarter we should be in testing and full production.

Okay. So Q4, do you expect to be in full rate production for the new facility?

Yes.

Okay. Great. And I apologize if I missed this, but did you walk through the segment revenue guidance and operating margin guidance for the year?

No. I'll give you that right now, Chris. New guidance -- we'll do revenues. Flow Control, $1.10 billion to $1.25 billion. Motion Control, $630 million to $645 million. Metal Treatment, $230 million to $240 million. Flow Control, on the margin side, 10.85% to 11.1%. Motion Control 12% and Metal Treatment 15.5%.

Okay. Great. Thanks, Glen.

You're welcome.

We'll take our next question from Eric Hugel with Stephens, Inc.

Hey, good morning, guys.

Hey, Eric.

To follow up on Chris' question with regards to the AP-1000, you talked mostly on the margin side. I think I got some pretty good understanding of what's going on there. From the revenue side, should we expect sort of volumes to increase sequentially or are we going to sort of stay at the current level?

What we indicated was that we would do about $100 million of the $300-some million we have in that on nuclear power, about $100 million would be on new programs. So, yes, you're going to get an increase in revenue too as you go forward.

Are you talking -- we're talking sort of second quarter is going to be better than first quarter, third quarter is going to be better, are we talking sort of sequentially it's going to continue to ramp?

Yes. It's definitely. By the end of the quarter, our input will be quite a bit higher than in the first quarter.

Great.

So sequentially, up, yes.

Marty, your debt-to-cap right now is 39%. I know you guys have some pretty good track record of generating cash flow. But given sort of the current market conditions, and you're talking about your appetite to acquire, I mean, where do you feel comfortable now bringing your debt-to-cap up to?

Well, Eric, we have -- I think we've said before, we're pretty much staying the same course. Our internal limit we place on ourselves, actually, is 45% net debt-to-cap and that's versus our covenants on our debt is at 60%. Internally, we're at 45%. We've never in the last eight or nine years have gone over that and so we still think that's good.

And the thing is that right now you're seeing our first quarter had very, very obviously negative cash flow and we expect that to pick up. So we're going to stay in that same thing. We're a conservative Company. That's why when there is enough acquisitions out there that have good strategic capabilities for us, we're going to pick the best one.

So you're looking at smaller companies, then?

Yes. Yes.

Fair enough.

The same way we've been moving along.

Can you talk about EMALS, there's been a lot of talk about delays into the program, maybe it's not going to get into the new CVN on time. Can you talk about sort of your content on that? Is everything going okay? And just sort of how you're looking at that.

Everything's going fine. In April, the Navy put in the EMALS will be part of the CVN-78 baseline.

But they're very concerned about it.

They were concerned about it. It has nothing to do with us, thank God.

Okay. Good. That's good to hear.

Or I would be getting a lot more phone calls than I normally get. (multiple speakers)

Can you talk about Petrobras and the deep sea pump, is there any update there?

Yes, it finally got under water. It's in 750 feet of water in Brazil. They're going to attach the umbilical cord in June and we should start pumping oil in July. So it's very good news.

Wow, that's been a long time coming.

I know, tell me about it.

Best of luck, guys.

All right, thanks.

Thank you, Eric.

We'll take our next question from Tyler Hojo with Sidoti & Company.

Hey, good morning everybody.

Hi, Tyler.

Good morning, Tyler.

Hi. I was hoping you could maybe update the guidance. Last quarter you kind of went through the actually by end markets and just kind of curious on how that changed?

Yes. Sure. I mean, right now if you look at each of our markets, we're holding the fence. No change to our last guidance. We still see that as being up 8% for the year. Commercial aerospace, we're still holding flat. Oil and gas, we said last quarter that we thought it would be down 8% for the year for our base businesses, that's true, but we did have an acquisition, primarily in the oil and gas business that will help us a little bit. But coming into the year, 8% is still what we're looking at. Power Generation, we said 15% up last - in February, we think it might be a little bit higher than that. We're now projecting about 18% for the year. Automotive, again, smaller piece, but we projected 10% down. Now we're saying we think it's more like 15%, and general industrial is probably the biggest swing. We said 4% down last call and we're saying about 23% this year. So overall, defense up 8%. Now we're projecting our overall commercial will be down about 1%.

Okay. Great. And then just to follow on to I think what Myles was trying to get at, what would the fourth quarter segment backlogs have been in Flow and Motion Control to kind of account for the adjustment? Or the reclassification? Sorry.

I'm not sure. I don't have that reclass with me. We have adjusted numbers now.

Right. Okay. Well, maybe we can swing around later with you on that. And then just lastly, well, actually, two more things. I understand you held the free cash flow guidance. Was there any change just in terms of the CapEx that was implied in there?

No, no, we're still -- CapEx is still -- we're still projecting to be $100 million.

Okay. Great. Lastly, what kind of interest expense are you expecting for the year now?

Again, we're still holding that at around $31 million.

All right. Thanks very much, guys.

Okay, Tyler.

We'll take our next question from Michael Ciarmoli with Boenning & Scattergood.

Hey, guys. Good morning. Thanks for taking my call.

Good morning, Michael.

Most of my questions have been answered. Just I guess on what Secretary Gates had to say a couple weeks ago, what really -- your content, it seemed like the procurement of reconnaissance UAVs is going to be increased, specifically the Global Hawk. How much -- have you determined how much revenue that will add that you kind of didn't predict?

No, because what happens is the FCS, which is not still up in the air, where it's going to go, what that looks like in the future, as far as immediate impact it's probably positive. And the FCS, we thought we had going out in the future the vehicle content was going to be quite high. Now those technologies are going to end up either being in legacy and/or new vehicles because we are doing the development of the new technologies now and those technologies will be used. So that's kind of hard to quantify how that stuff is going to work its way out. (multiple speakers) Going up is great. The aircraft carrier comes down a little bit. The DDG-1000 adds another $30 million that we didn't anticipate and there's a lot of little of puts and takes from there. The thing is, it's positive for us. It's got (multiple speakers) for the next few years. The F-22 is probably -- we expected the F-22 was not going to make it, so that doesn't really mean much to us.

And your shipset content on that Global Hawk, is it about 600,000?

Yes, it is.

Correct me if I'm wrong. You're also on the Predator. Are you on the Reaper as well?

I'm not sure.

Okay.

But I think the other thing is that the P-8A Poseidon, we have about 700,000 on. So that's another program that will start moving forward and there was a lot of confidence on that.

Okay. That's helpful. And then what about -- obviously, you got a lot of puts and takes with the FCS vehicles and everything else. What is your input, I guess, on the potential ramp-up for the MRAP vehicles, the all terrain vehicles, I mean, could that be a substantial revenue source? I know they're kicking around volume requirements anywhere from I guess 2,000 to 10,000, but can that be a near-term catalyst for you guys?

No, not really.

Okay. And then just one other question. On the Metal Treatment, can you give us an update on the status with the laser peening?

Laser peening is going fine. We have our laser at Boeing. We're shaping wings. We have quite a few development programs that we're still working on. So that continues to increase and also the profitability has been increasing.

And have you disclosed -- I don't think you disclosed what the margins are on the laser peening versus your traditional Shot-Peening?

I never have and I never will.

Can we assume -- is there the belief that as we migrate through the year and into next year that you'll start to transition more work to laser peening if your customers are willing to go that route. Could that help profitability in the long-term?

Not really. There's really two distinct different processes. Even though they perform the same, not the same improvement and reliability but they're both used to improve reliability and safety. Obviously, laser peening, which is more expensive, adds an order of magnitude degree better than what Shot-Peening does. There's really a place for each one of them. Again, they don't -- the thing is that the equipment that we laser peen we also Shot-Peen. One doesn't take the place of the other. They actually work in tandem with each other.

Okay. That's helpful. I think that's all I had. Thank you, guys.

All right. Thank you.

(Operator Instructions). We'll take our next question from Robert Stallard with MacQuarie.

Good morning.

How you doing, Rob?

Great. Thanks and you guys.

Very good.

First of all, Metal Treatment posting 12.5% margins in the quarter, (inaudible) 15.5% for the full year, can you run us through the sort of puts and takes that should allow you to achieve that in terms of maybe where general industry is going, where aerospace is going and any cost cutting in that area?

Well, I think you hit the nail on the head. First of all, the first quarter, most of its revenues are generated out of aerospace. The first quarter was a very low quarter, as it was last year. So what's going to happen is the demand for aerospace products will actually start to increase because you have not only a lower demand but you also had the replenishment of the inventory and the effect of the Boeing strike. A lot more of it really deals with the fact that people like ourselves manufactured products while there was a Boeing strike going on because obviously you don't know when that's going to come off. So we were producing hardware as well as our customers were. So that had a large effect on Metal Treatment. And the replenishment or I should say the realignment of our customer inventories was used in the first quarter. We expect that to change. We expect that the aerospace, which they're the number one industry, and their general industrial will start to improve as the quarters go out.

And also, Rob, they had negative [4X] in the first quarter. That will improve as the year goes out. That changes a little bit. And they had some business restructuring costs also in the first quarter that will not return.

We'll not see.

Right.

And if the aerospace OEMs move forward and Boeing, for example, cuts the 737 rate. We know they're cutting 777 and the Air Bus is bringing down the A-320. Do you think that the margin, looking out to 2010 in Metal Treatment, could be similar to what we have in the first quarter or will it be slightly better given the cost cutting and maybe some movements in general industrial?

In our worst year when everything was down and commercial aerospace was down, our margins were about 13.5% return on sales. So yes, they could go down into that area in 2010.

Right. Okay.

In fact, would you expect that. We would expect that also.

And then just finally, on the defense side of the business, sounds like it's difficult to track this but what do you think your potential exposure could be to the supplemental which is starting to trend down?

What we used to get at the supplemental was a lot of Strykers and some additional Bradley. The Bradley work we also have --they're going into their sixth change in configuration based on what was required to change for the (inaudible) right now which is in turn going to be a seventh change. So we still see that in spite of the supplement continuing to go on. So the supplement used to help us on the Bradley and the Stryker. The Stryker, our content's not that great. So I really don't see that much of a turndown as far as the defense is concerned, given that the supplements may start going down.

I suppose if you put Bradley and Stryker together, 1% to 2% of sales, it's actually not that big, is it?

It's not that big.

Okay. Thanks very much.

(Operator Instructions). We'll take a follow-up question from Eric Hugel with Stephens.

Hey, guys, just two quickies. Any auto exposure to guys like Chrysler?

Yes. They just claimed bankruptcy. But right now, our accounts receivables from an indirect basis, not with Chrysler themselves, is about a quarter of a million. And GM, which would be the next question, we have about a million receivables of which only 121 is direct and the rest of it is from their subcontractors. So that would be our exposure.

Okay. But -- yes, okay. Pretty minimal?

Yes. Exactly.

And going back to laser peening, any new lasers placed during the quarter or utilized?

No.

Okay. All right. Thanks, guys. How many lasers do you have actually in operation, currently?

Nine.

And what's the build plan?

Right now we don't expect to build any more until demand starts to improve. Right now, all lasers are used either in production or for development.

Great. Thanks.

At this time, we have no further questions in our queue. Mr. Benante, I'd like to turn the conference back over to you.

Thank you, Kristin. I'd like to thank everybody for joining us today. I look forward to seeing you at our investors conference in June and also speaking to you again in July. Thank you very much and take care.

Bye-bye.

This does conclude today's conference. We thank you for participating.