Curtiss-Wright Corp (CW) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Curtiss-Wright second-quarter 2010 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Martin R. Benante, Chairman and CEO of Curtiss-Wright Corp. Sir, you may begin.

Thank you, Devon, and good morning, everyone. Welcome to our 2010 second-quarter earnings conference call. Joining me on call today is Mr. Glenn Tynan, our CFO, who will begin our forum today. Glenn?

Thank you, Marty. Our call today is being webcast and the press release, as well, as a replay of this call can be found on the Company's website. Before we begin please note, today's discussions will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. The statements are based on management's current expectations and are not guarantees of future performance. Forward-looking statements always involve risks and uncertainty and we did detail those risks and uncertainties in our public filings with the SEC. For our agenda today I will provide a overview of Curtiss-Wright's second-quarter 2010 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 $462 million during the second quarter of 2010, a 3% increase over the second quarter of 2009, which was driven primarily by solid organic growth, as well as $4 million of incremental sales from our recent acquisitions of Skyquest, Hybricon and SES, all of which were in the motion control segment. Our consolidated operating income in the second quarter of 2010 of $43 million was essentially flat with the prior year. However, excluding the negative impact of foreign currency translation of $3 million, organic operating income was up 6%, with solid contributions from all three segments including 52% in Metal Treatment, 17% in Flow Control and 6% in Motion Control. These increases were partially reduced by higher nonsegment operating costs, primarily higher healthcare and pension costs and FX transactional gains in the prior year quarter that did not recur this year.

Our consolidated organic operating margin was 10.2%, or a 40-basis point improvement from 2009. For the second-quarter 2010 our segment organic operating margin was 11.5%, a 130-basis point improvement from the prior year. The segment organic operating income and margin improvement was due primarily due to favorable overhead absorption of higher sales, improved cost performance on certain long-term contracts and the benefits from our cost-reduction and restructuring programs. Net earnings for the second quarter increased 6% to $0.56 per diluted share. Our operating performance includes absorption of the negative impact of foreign currency translation of $3 million, or $0.05 per share, which was partially offset by lower interest expense due to lower debt levels and a lower effective tax rate of 32%.

New orders received year to date through June 2010 of $892 million are up 4% over the prior year, and as of June 30th our backlog was $1.61 billion. Free cash flow, defined as cash flow from operations less capital expenditures, was $14 million for the second quarter of 2010. Cash flow from operations of $26 million was down $42 million from the prior-year quarter due to significantly-higher progress payments on the AP1000 program in the second quarter of 2009. Capital expenditures of $11 million were down $9 million from the prior year due to the completion of our AP1000 facility expansion. I am pleased to report that we are increasing our full-year guidance for free cash flow to between $85 million and $95 million, primarily due to lower expected capital expenditures. In particular, we'd initially planned for a significant capital expenditure this year to consolidate and expand our oil and gas business in Houston. However, we subsequently decided to enter into a long-term lease for the land and the building. Our balance sheet remains strong with $72 million in cash, working capital of $419 million and total debt outstanding of $537 million as of June 30, 2010 for a book net debt to capitalization of 30%.

Moving to our segments, in our Flow Control segments sales increased 4%, of which 3% was organic. We continue to have strong Naval defense sales, particularly for the Virginia-Class Submarine, Ford air -- Class Aircraft carrier and our helicopter landing system. Offsetting some of this growth was a reduction on the DDG1000 destroyer program, as we complete work on the third and final ship. On the commercial side higher sales in the general industrial market, primarily control systems for the HVAC market, were offset by lower sales for the oil and gas market due to order placement delays for our non-coker products. Foreign currency translations had a favorable impact of sales of $1 million. Flow Control's operating income increased 14% overall. Excluding negative foreign currency translation of $1 million organic operating income increased 17% and organic operating margins improved 120-basis points to 10.2% in the second quarter of 2010. The organic operating income and margin improvements were mainly due to improved cost performance on long-term contracts, favorable absorption on the higher sales and savings generated from our cost-reduction and restructuring programs. Please note that we did incur an additional $1 million in AP1000 remediation costs in the second quarter and we believe that the prospering issue is now behind us.

In our Motion Control segment sales were level with the prior-year quarter but down 2% organically. Lower sales to the ground defense market due to the cancellation of the FCS program and lower sales on the Bradley platform were largely offset by stronger sales to airspace defense; in particular for the, reflecting sharply-higher demand or our integrated sensor products due to the improving economic conditions and stronger sales to the commercial aerospace market, primarily due to inventory replenishment at our customers and the ramp up in production on the Boeing 787 program. In addition, we had incremental sales of $4 million from our Skyquest, Hybricon and SES acquisitions and a negative $1 million impact from foreign currency translation. Motion Controls generated organic operating income growth of $2 million, or 6%, but was offset by $2 million of negative foreign currency translation. Organic operating margin improved 100-basis points to 13.5%, the second consecutive quarter of triple-digit organic operating margin improvement. The performance improvement was driven by our cost-reduction and restructuring programs and higher volumes in our commercial markets, which tend to have higher operating leverage.

Sales in our Metal Treatment segment increased 11% over the prior year. Excluding the negative impact of foreign currency translation, organic operating income increased 13%. Organic sales increased across most major markets and service offerings, with thir -- with higher volumes most notably concentrated in the general industrial market and the commercial aerospace market. Foreign currency translation had an unfavorable impact of less than $1 million on sales. Operating income improved 45% in the second quarter as compared to the prior year. Excluding the negative impact of foreign currency translation operating income improved 52% and operating margin improved 310-basis points in the second quarter over the prior year, reflective of the favorable cost absorption on the higher sales, as well as the benefits from our cost-reduction and restructuring programs.

I will now turn the call over to Marty to discuss our strategic market performance and our full-year garden -- guidance. Marty?

Well, thank you, Glenn. Our second-quarter performance exceeded our expectation with a strong operational performance in all three of our segments, the benefit from cost- reduction and restructuring programs implemented across the Company, and the early signs of an [economic] improvement in our commercial markets, most notably our general industrial market where we saw nearly a 40% increase, which was generated by greater than 20% increase in each of our three segments. Commercial aerospace also generated a healthy 6% growth due to broadly-higher demand for integrated sensing and metal treatment services, typically the early cycle products for Curtiss-Wright and the economy.

Going forward, those of you who attended the Farnborough Airshow know the long-term fundamentals for commercial aerospace continue to be attractive. Large orders from new leasing companies, new rotorcraft product introductions, the flurry of new orders announcement throughout the show and a general increase in global air traffic all indicative of the healthy future the commercial aerospace market. Besides the announcement of new orders for 206 airplanes, Boeing Commercial Aerospace increased its 20-year forecast, including nearly a [70%] increase -- of the increase from single-aisle airplanes. We have strong content on Boeing's flagship single-aisle 737 program, as well as Airbus' A-320, so we expect mid single-digit uptick for both airplanes in each of the next two years on the strength of their customers' current backlog.

As we watch the commercial aerospace market gain momentum, we look forward to generating strong performance from our recent investments in China. Despite the downturn in the economy and resulting weakness in the commercial aerospace market over the past few years, we moved forward with our plan to establish a state-of-the-art shot peening and coatings facility in Tianjin, China. Our customers are now beginning to come on line, which should provide additional growth going forward as this emerging market becomes a significant base for our commercial and general industrial markets. Additionally, our intention is to continue to expand our global presence with eight potential new facilities, including three in the Asian region, targeting for opening in the next five years, providing our shot peening, laser peening and coating services to our customers as they continue to expand globally. Finally, we are increasing our full-year 2010 growth in the commercial aerospace market to 14%.

Our commercial nuclear power market experienced a 1% overall decline in the quarter. New construction revenues are dow, primarily due to lower revenues within China AP1000 program, which will continue as we approach initial deliveries on this program. This decline was partially offset by increased revenue for the domestic AP1000 program. The new construction decline was mostly offset by strong increase in domestic operating reactor turnaround demand. Although we anticipated domestic turnaround to the decrease from record levels last year we generated a healthy 27% increase in operating reactor maintenance sales in the second quarter, primarily due to increased content for projects.

We are truly happy to report that on May 15th we successfully verified both operational and performance parameters that were considered highest risk within the AP1000 development program. This achievement is a major milestone on this program, which is a first of its kind production on this highly technically-advanced program. However, three minor modifications remain that are currently being developed and will be verified by testing when we start testing in October 2010. All production hardware remains on or ahead of schedule and the first [core pumps] are expected to be delivered on or ahead of schedule.

New nuclear construction activity continues to be at the forefront of global energy policies, driving a number of positive industrial activities. China remains a key market for us and earlier this month Sanmen Nuclear Power Company announced their plan to sign a new agreement with Westinghouse to build more reactors in eastern China. In addition, India has at least 36 nuclear projects in process and Vietnam plans to build 13 new nuclear reactors by 2030. Saudi Arabia's plans to spend $400 billion by 2013 to diversify its economy away from hydro carbons. Toshiba entered into a teaming agreement with Shaw and Exelon to extend nuclear power plant construction contracts and Japan announced government backing to compete for new construction globally. All these activities indicate that the outlook for the commercial nuclear power market is extremely promising, as Curtiss-Wright's diverse portfolio of nuclear technologies and capabilities support all the major reactor designers competing in the global market today.

Our gas and oil market contracted 7% in the second quarter. As anticipated, capital spending in this market is delayed, particularly in the United States, as curtailment of off-shore drilling and the possibility of new cap in trade legislation has dampened capital investment activity in this market. However, refining margins have trended up and the spread between light and heavy crude prices have widened in recent months to nearly double of which it was last year, which supports a recovery ahead. This industry is known for volatile [fundamentals] and we expect the recovery to be slow. In the meantime we continue to position ourselves for when this market recovers. As we mentioned on our last call, we are making an investment in consolidating manufacturing operations in Houston and expanding our facility to provide enhanced large vessel fabrication, state-of-the-art finishing and on-site barge transportation access. We will continue to enhance our competitive position for what we consider to be a strategic growth market for Curtiss-Wright's long-term portfolio.

We will now move to our defense portfolio, which provides significant growth last year during the economic recession. We are seeing our program diversification providing stability in this market. In the second quarter our defense market was flat overall as compared to last year with a lot of variance within different components. We previously indicated that we were losing approximately $60 million in revenue from 2009 due to reduced orders for the Bradley, Striker and the cancellation of the FCS and F-22 program. We were able to make up this lost business through sales of our imbedded computing products, primarily for intelligence, surveillance and reconnaissance, or ISR applications. This activity supports the proposition that the electronics portion of the defense budget will continue to grow despite anticipated declines in other areas within the defense budget. One example of this activity is our recent receipt of a contract award worth $10 million from Northrop Grumman for our state-of-the-art radar signal processor system used in the Air Force RASP system of joint STARS program. As anticipated -- excuse me -- we were down 39% in the ground defense market due to lower Bradley and FCS sales. However, we continued to actively participate in the bidding for the ground combat vehicle. We do not expect to have any news on this program until year end, at the earliest.

In addition, we continue to gain traction internationally; in particular with our turret stabilization subsystem, which has successfully fielded on a number of vehicles. The long-term value of such programs is typically in the tens of millions of dollars and we continue to be involved with a number of new global programs as militaries look to upgrade current or design new vehicles. In commercials aerospace defense -- in aerospace defense we generated a solid 16% growth due to the ramp up of the Global Hawk program for both the Air Force and Navy, as well as higher sales on imbedded computing products, in particular radar signal processing technology. This performance is particularly impressive consider it including -- includes significantly-lower F-22 revenue due to the program's cancellation.

Looking forward, we're excited about some of our new technologies for this market, including our recent acquisition, Skyquest Video Management System, state-of-the-art multifunctional display -- visual display system that provides extensive video capability and flexibility to air crews across a variety of missions. We experienced 8% growth in Naval defense due to the ramp up of procurement for the Virginia-Class Submarine program, increased production on the Ford-Class Aircraft carrier program, including the first rotary shipment for the electromagnetic launching systems; and stronger sales of helicopter landing systems internationally. As stated in our earnings release, our second quarter beat our expectations and I am encouraged that the trend will continue, enabling us to overcome approximately $4 million, or $0.06 a share of unexpected foreign currency translation. Despite the FX headwind, I am happy to report that we expect to be at the high end of our guidance for the year. We continue to have a healthy backlog of demand across our portfolio of highly (inaudible) products in both defense and commercial markets. In addition, we have the flexibility within our capitalization structure to make strategic investments that we'll continue to actively pursue both organic and oper -- acquisition opportunities.

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

Thank you. (Operator Instructions). Our first question comes from Ken Herbert of Wedbush.

Hi, good morning, thank you.

Good morning, Ken.

Just wanted to touch base. I know you just said right there at the end, Marty, that you were looking for guidance at the upper end of the range, but I wondered if you could just give a little more granularity on the revenue guidance? You didn't change that, but when I quickly do the math it looks like the implied second-half revenue numbers to get to guidance would be flat to down slightly, which -- and I know -- I can appreciate, obviously, some uncertainty maybe now in oil and gas markets and your -- couple of down quarters versus initially looking for an up year and power gen maybe some uncertainty there -- but seems like obviously against a softer second half of the last year -- can you just give a little more granularity on maybe some of the you're seeing and why still -- obviously I can appreciate the conservatism, but the excess caution on the top line?

Well, the thing is we are expecting increased sales in the second half of the year. We're not looking at down sales for the second half. And Glenn, would you mind breaking out the --

Yes. Our second half sales, we did maintain -- let me just break it down a little bit. The top of our range was $1.850 billion, but within the components we have made some changes so let me run you through those. The top end of the range now for Flow Control is $1 billion and we took them down basically $20 million due to the oil and gas order delays.

Okay.

Motion control is now -- the upper end at $630 million, so we actually increased them $10 million and that breaks down to about $15 million due to their acquisitions offset by $5 million of negative FX net $10 million increase. Metal Treatment, we increased $10 million, as well, to $220 million and again, that's increased sales of $18 million offset by $8 million of foreign currency, so that's how we reshuffled our sales. The margin expectations also changed. Flow Control we expect to be slightly different than -- slightly down a little bit. I think we had them at 10% before, now we say 9.9% and again, that's the lower sales plus $1 million in negative FX that we're expecting. Motion Control top end is -- or I'm sorry, their margin expectation is 12.7% and again, mostly due to the increase in the sales from the acquisitions with relatively no margin this year. Metal improvement, we increased to $25 million. That's an increase of $5 million for sales offset by $2 million of FX, that is mix. But half to half can we see our sales increasing from $904 million to $945 million in the second half, so we have about a $40 million increase in sales, half to half.

Okay. No, that's appreciated.

It's also even bigger when you start to figure in FX.

Yes, exactly. Right. You expect to face some continued FX headwinds then I guess?

Yes.

Right. So we hope that's going to be one of the increases in the margins when you look at second half, as we don't expect that the FX will be as great in the second half as in the first half.

Okay, good. And if I could -- that's very helpful, thank you. If I could just one other question, particularly on oil and gas. You mentioned at the beginning that part of the increase in the cash flow guidance is reduction in CapEx associated with the facility in Houston. Does this change at all your thinking? I know now you're leasing and I'm assuming still making an investment there, but does this change at all your thinking on the long-term outlook for oil and gas and your positioning in that market?

No, it's just a better deal. We eventually got the lease to make more sense and better business deal. It has nothing to do with our outlook.

Okay, very good. Thank you very much.

Okay.

Thank you. Our next question comes from Steve Levenson of Stifel Nicolaus.

Thanks, good morning, Marty and Glenn.

Good morning, Steve.

If I heard correctly, you're going to build a plant in China to do shot peening?

No, we already have. We built the plant starting two years ago, we now have it fully licensed and we have several customers that we are bringing (inaudible) that we have and we are moving both shot peening and coatings.

Okay, is that for the Chinese aircraft or mostly for --

No, that's for Boeing in the United States. I should say Boeing and/or Airbus on the commercial aerospace side. We also do some industrial for US companies located in China.

Got it, thanks. And you mentioned that the spread is widening between light and heavy crude. What's the inquiry activity on (inaudible)?

The inquiries are still there. We still have a lot of foreign companies that are interested in putting in refineries, expressly in Brazil. I think with the moratorium on drilling in the United States, you're going to see some aberration where you won't see domestic investment, but I think you're going to start to see more investment coming out of foreign countries. But you'll start to see that probably later on in the year and into next year. Obviously going to look at this as an advantage for them.

Got it, thanks. In relation to the moratorium, do you think what's going on in the Gulf is going to create some regulations that increase the demand for any of the Curtiss-Wright products?

Not at this time.

Okay, thanks very much.

Thanks, Steve.

Thank you. Our next question comes from Eric Hugel of Stephens.

Hello, good morning, guys.

Good morning, Eric. How you doing?

I'm doing well. Can you talk about the weakness in the ground vehicle market? Do you have any visibility as to timing on when you might start to see a pickup there? I know the new generation vehicles are kind of questionable, but what about Bradleys and Strykers, and things like that?

I think the Bradley you're going to start to see pickup next year. I think they're going to continue with the retrofit of the Bradley. They temporarily suspended that because they were looking at fighting the war in Afghanistan, where Bradleys aren't used as extensively as they were in Iraq. So, I think you'll start to see some (inaudible) picked up there. The ground vehicles, they're going to take some time. But realistically, the area that I see growth in is going to be in the ISR -- or IRS, is the intelligence reconnaissance and surveillance. There's a lot of the defense budget is starting to gear itself more in that area and you can see it in the [BANDS] program, which is the Navy side of surveillance. Helicopters are going to be outfitted with surveillance capabilities. And basically, that's where a lot of money is going to be spent. So, the ground vehicles will -- I think will start to improve, but I think you're going to see some nice pops coming out of the IRS side.

Great. Can you talk about -- your metal treatment business is a pretty good indicator of overall US economic activity, or now maybe even some global activity. Can you talk about what you're seeing in that business, in terms of the US and Europe?

I think we're seeing a little bit better sales in the United States than we are in Europe. Europe is, I think, still not coming out of the economic doldrums as -- and I wouldn't say as fast as the United States. We're just doing a little bit better. Obviously, the car manufacturing is up from last year, 2009, which was anemic. So, the big three are up, which is helping us out. Commercial aerospace is up. Last year you still had the reduction of inventory balances, so a lot of it has picked its way up in the United States on commercial aerospace. That's basically where we're seeing the improvements in the shop peening and plating in the United States.

I was curious, you mentioned before, I guess with regards to the AP1000 that Sanman signed an agreement with Westinghouse to build some new plants elsewhere in China. Is there any clarity with regard to what your position is in that, given that your agreement with the technology transfer?

We'll be there.

You'll be there, but will you be -- would you be building the pumps or would you just be overseeing a Chinese company building the pumps? Is there any clarity there?

We'll be there.

Okay, understandable. And then lastly, Glenn, can you update us on where things stand with the pension, in terms of returns and where your discount rate is and where it would be -- where it is today if you had to cut it in terms of value?

I will tell you, I don't have all that right at my finger tips, but I will say that our asset balance is probably down slightly from year end. I think it's down about 3%. So, are underfunded -- it's still underfunded and the underfunded status will -- has increased about $28 million to about, little bit over $90 million. I don't have the assumptions with me right now, but we are -- this is the time when we do our annual review with our actuaries on that in the third quarter. So we will be -- I'll have an update for you at the next call.

Do you have any general idea for what sensitivities are, in terms of changes in asset returns, as well as discount rates?

I do not.

All right. Thanks a lot.

Eric, not to be smug, or kidding around. On the China side, we intend to be participants and I think it'll be a nice situation for us between us and the Chinese.

Great, thanks.

Thank you. Our next question comes from Myles Walton of Deutsche Bank.

Thanks. Good morning, guys.

Good morning, how you doing?

Good, good. A couple questions for you. First on the commentary on the AP1000 passing the May 15 test hurdles. And I'm just trying to reconcile the passing of those test hurdles with the commentary, Marty, you talked about on the three minor modifications that have to be done.

Right.

So, do you have to essentially rerun the same test trials and you --

No, now you go into the long qualification testing.

Okay.

So, the pump had to be pulled apart, which takes a long time. The parts were then inspected. The thrust bearings were in great shape. This is a situation where they either are damaged real quick or once they work, they work, they continue to go on. So the -- several testing parameters that were essential to the pump were all passed, they came out very successful. There's always some minor glitches. These are -- it's a brand-new pump. You saw how these are made like Swiss clocks, even though they're gigantic, and there's nothing that we don't think that can't be overcome. We think they're relatively minor changes. We have buttoned that up, we'll put it back on test in October and be able to qualify the pumps and then ship them -- ship out the pumps in the early part of 2000 -- or latter of portion of 2011.

Okay. And Glenn, are they accounted for the pumps on the revenue side POC, or units of delivery at that point?

No, it's all POC.

Okay. And then the other one on EPS, is this -- you're following a usual pattern for you guys, flat, sequentially and then hockey stick 4Q?

You got it.

Could it be any different? Could we not live on the edge?

And the last one on cash. So, what is the new CapEx guidance and was the cash performance in the quarter in line with your expectations?

Let me answer the second one first. No, it wasn't. Actually it was a little bit of surprise for us. But the major item that caused our cash flow from operations to be down a bit was a big increase in unbilled receivables, so that's basically a timing issue. Obviously they're going to be -- they're going to flush out in the third quarter and maybe some in the fourth quarter. But that was a spike we didn't really expect. But luckily, it's a timing issue for us so that'll fall in the second half of the year. The guidance now for CapEx is about $75 million.

Okay.

For the year.

Great. All right, great. Thanks, guys.

All right, Myles.

Thank you. Our next question comes from Michael Ciarmoli of Boenning & Scattergood.

Good morning, guys, thanks for taking my questions.

Good morning.

Glenn, I missed the -- what was the new guidance for the Metal Treatment margins? I'm sorry, I missed that. For the year.

11.4%.

11.4%, okay. And if I were to look at -- I don't know if this is an apples-to-apples comparison -- if I were to look at the Metal Treatment margins in the current segment, 11.8% on the $54 million, and in that Q1 2009 you did about $52 million and generated 12.5% margins. What are the difference there? I was always under the impression this is a volume-based business. Are there still some lingering costs in there from resizing the operations? Or, if you can, assuming you guys stay at this run rate, why can't you get back to that 12.5% level, or if not higher?

Well -- it is, it's close to 12.5% when you take out the FX impact. It's -- it's pretty much in line, actually.

And not only that, we are also opening a new plant in Ireland and the one where I talked about in China, which is not profitable. So, we're also absorbing those additional costs this year that we didn't have last year.

Okay, perfect. And then just on the -- you guys have talked about strength in ISR. No secret that the budget is being scrubbed, and it even looks like some similar programs across various branches, maybe BANDS being one, Predators and Global Hawks being others, there can be some consolidation. Have you sized up what your revenue risk might be if some of the various branches decide to consolidate these platforms and maybe curtail certain programs? Is that baked into any of your assumptions?

Well, no. It's going forward as far as 2011 are concerned. There's going to be a lot of speculation about where defense budget's going to go. One of the other things that people have to understand is we -- this administration hasn't generated that many jobs. When you take a look at swipes at defending budgets and laying off another tens of thousands of people, this defense budget is going to go all over the place. One thing they do need is they do need more surveillance-type products. It's going to come out one end and it's going to have to come up someplace else. So, if you were to look at some of the threats, if you will, in the upcoming budget and some of the pluses, I think that we would be down a little bit if it were to combine some things. But I don't think anything significantly, quite frankly.

Okay, fair enough. Thanks, guys.

Thank you. (Operator Instructions). Our next question comes from Ken Herbert of Wedbush.

Hello, thanks. Just wanted to follow up, Marty, you mentioned -- if I heard properly -- for operating reactors in the United States, that business was up in the quarter?

Correct.

Can you break out-- because I think you mentioned part of that increase was just increased offering -- can you break out what was the organic increase versus -- or was that all organic?

That's all organic.

Okay. And what's the -- how do you see this playing out through the rest of this year and into next year. Is there still significant opportunity here for the operating reactor side, both domestically and internationally?

I think so. We have strong quoting activities. We indicated in the very beginning of the -- for the guidance that we expected sales to be down but profits up, and now sales are only down a little bit and we still see a lot of opportunity in this marketplace. So, yes, we see nice things happening in this market space.

Okay, good. So, by increased -- or quoting activity holding up it looks like we could be -- in the second half of the year the operating reactor -- or the existing reactor parts of the business could continue to be strong and up, as well, year over year.

That's correct.

Great.

Which is really not baked into -- our thinking.

Yes, exactly. Okay, perfect. Thank you very much.

All right.

Thank you. Our next question comes from Eric Hugel of Stephens.

Are you mad I was a little smug with you on the last question? You're going to ask another one?

Yes, can you talk about the M&A pipeline, what you're seeing, how pricing is looking, are things are starting to become available again?

Yes, it's -- Eric, it's heating up quite a bit. I think that (inaudible) has indicated that M&A activity is up 10% and along the aerospace and defense companies. I think valuations are starting to come together between buyer and seller. One of the biggest problems was that the seller was thinking in terms of 2008 revenues and profitabilities and the buyers are thinking about 2009 profitabilities and revenues, so you're starting to see gaps. Not the gap -- not being as wide there, and there's quite a bit of opportunity out there for us.

So, you think flattening, shrinking defense budgets are going to put you in a good position to pick up some additional (inaudible) imbedded computer properties or things like that?

I don't think it's that. I don't think it's the matter of the shrinking. I think it comes as a matter of people who can take their technology to a position, but only so far, and then they need somebody to bring it home for them, if you will. If you start to look at the pieces that we're buying. The skyquest is something that, in our portfolio, the projects do extremely well, both in the United States and in Europe. We have the other parts that go with it that make it -- make a lot more sense out of it. So, it's not so much that the shrinking of defense, it's the increase of the technology. And then on the -- the sensor side, they are growing, regardless of where defense business is going to go. If you look at commercial aerospace, that's growing and you just saw a recent -- our recent press release on solenoids and sensors. That's more, again, companies and their ability to fulfill the global aspect of being able to (inaudible) across a global network compared to ourselves. There is a lot of opportunity out there. Previously, obviously, these companies wanted a lot more for their business than what their business was worth at that particular point in time.

Marty, you haven't been bullish on commercial aerospace M&A for basically, I think, as long as I've known you. Given where we are right now in terms of looking out, are you any more bullish? Might that be an area? What are your areas of focus?

I'm not more bullish on it, I don't let temporary changes and -- that's not temporary. Commercial aerospace market is going to do extremely well for itself and we are on programs. We're on programs in the imbedded computing side, in the sensor side and coating side and things like that, so I'm not really making acquisitions to enhance any position there. But I think people who are in it are very happy that are in it and we have 14% in that market. But we look at our nuclear capabilities and where it is going. It got slowed by the recession but you're starting to see it heat up. Gas and oil, first of the technologies we can bring to it, and we haven't fully extended ourselves as globally as I'd like to. Just because this temporarily has a problem doesn't mean the fundamentals will come back to it. So we still see a lot of opportunities in the markets that we're in, quite frankly.

Perfect. Thanks.

Thank you. I'm showing no further questions, sir.

Well, if there's no other further questions, I'd like to thank everybody for joining us today and we'll look forward to speaking to you again in October. Take care, everybody.

Bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, you may now all disconnect. Thank you and have a nice day.