Curtiss-Wright Corp (CW) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Curtiss-Wright fourth quarter 2010 financial results conference call.

(Operator Instructions)

I would now like to introduce your host for today's conference call, Mr. Martin Benante, CEO and Chairman. You may begin, sir.

Thank you Kevin and good morning. Welcome to our fourth quarter and full year 2010 earnings conference call. Joining me today is Mr. Glenn Tynan, our CFO. We're pleased to introduce a new approach to our earnings call this quarter. The goal is to provide additional clarity to our business unit and market performance as well as our outlook. We trust you have read the press release, which includes several new tables and breakdowns. We hope you like these changes. Now Glenn will begin our forum today.

Thank you, Marty. Our call today is being webcast and the press release as well as a copy of today's financial presentation are available for download through the Investor Relations section of our Company website at www.curtisswright.com. A replay of this call also can be found on the website.

Please note today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. Forward-looking statements always involve risks and uncertainties and we detail those risks and uncertainties in our public filings with the SEC. For our agenda today, Marty will provide an overview of Curtiss-Wright's 2010 operating performance and then I will discuss our segment performance, markets and 2011 guidance before turning it back to Marty to wrap up the presentation and formal remarks and open the call for questions. Marty.

Thank you, Glenn. Curtiss-Wright delivered another strong year that exceeded the high-end of our guidance range. Full year 2010 profits grew faster than sales. Our operating income up 6% compared on a 5% increase in sales. It would have been 12% if not for the significant unfavorable impact of foreign currency translation. The results reflect the impact of our ongoing cost reductions and restructuring initiatives implemented across the Company. However, during the economic downturn we continue to invest in new product development, new and expanded facilities, and our employees, which has served to strengthen our Company. In addition, we continue to expand our global footprint with international sales, now representing 30% of our total business.

Our performance is also driven by our ability to overcome several challenges including a slowing overall defense budget as well as several large program terminations that impacted our results. We offset these challenges with strength in both our naval defense and our intelligence, surveillance, and reconnaissance or ISR related businesses. Despite these headwinds, we still produced 3% overall growth in defense. Meanwhile, ISR continued to be an area of the defense budget that has received increased funding, and we will remain excited about the overall opportunities that our defense portfolio of electronic products provide.

We also had significant unplanned investment in the China AP1000 program in 2010. However, we completed several successful tests on our reacting cooling pumps setting the stage for anticipated growth in our power generation business. We have also benefited from the turn around in some of our economically sensitive commercial end markets as the global economy begins to slowly rebound. Now, I would like to turn it back to Glenn to discuss some of our key financial metrics for 2010 and also walk you through our segment and end market performance.

Thank you, Marty. Looking at our fourth quarter performance, we posted a solid quarter overall with sales up 4% to $523 million, 2% of which was organic. Our segment organic operating income also rose 2%, consistent with our sales. Looking at our segments, Metal Treatment led the way with solid sales and strong profitability as it benefited from higher volumes due to the rebound in several of its businesses, most notably in Shot-Peening and Heat Treating services to the general industrial market. Flow Control produced solid profitability primarily due to higher sales volumes in naval defense, despite an overall shift in mix towards some lower margin products and in additional investment in the AP1000 program that will benefit us on current and anticipated future orders.

In our Motion Control segment, sales growth was primarily driven by acquisitions, which typically carried lower margins in the first few years of ownership. Profitability in this segment was also impacted by strategic investments booked in the fourth quarter as well as termination claims that were recorded in the prior year that did not recur this year. Turning to the full year results, as Marty indicated, we delivered a strong performance in 2010 as sales, net earnings and free cash flow all exceeded the high-end of our guidance range. Total sales grew 5% to $1.89 billion, 3% of which were organic, while our segment operating income increased 9% overall and 14% organically. The benefits generated from our cost reduction and restructuring programs coupled with higher volumes and favorable absorption led to a strong 32% organic growth in Metal Treatment in 2010, despite higher start-up costs related to investments in international expansion initiatives. Additionally, we had solid organic operating income growth in our Flow Control and Motion Control segments, up 15% and 8% respectively. Overall, we succeeded in growing our organic operating margin 80 basis points from 9.4% to 10.2% with strong contributions from each of our three business segments.

Here are some additional highlights from 2010. We ended the year with a strong backlog of nearly $1.7 billion driven by an 11% increase in new orders of $1.92 billion. Our book-to-bill ratio has held steady at or above one, due to the diversification of our product portfolio and end markets which provide stability while lowering our risk. We generated free cash flow of $119 million in 2010 for free cash flow conversion percentage of 111%, which is particularly notable since we achieved 127% free cash flow conversion in 2009 when we had significantly higher advance payments. The CW corporate pension expense was $21 million for 2010, up from our $18 million guidance due to the true up of our census data, which occurred in the fourth quarter. This true up occurred later than usual as we transitioned to new actuaries in 2010.

Moving to our segments beginning with Flow Control for the full year 2010, sales were driven by a 15% surge in sales to the naval defense market, which benefited from increased production on the Virginia class submarine and the CVN-79 Ford class aircraft carrier, most notably for pumps and generators. We also saw strong sales for helicopter handling systems for US and foreign Navies. Our commercial markets were flat overall with increased sales to power generation driven by increased demand for upgrades in plant maintenance offset by continued slowness in the oil and gas markets. Organic operating margin was 10.5% for the full year, up 100 basis points over the prior year. This improvement was achieved despite the strategic investment of approximately $7 million in the AP1000 program, which will benefit current and anticipated future orders.

Next we'll turn to Motion Control. For the full year 2010, higher sales were driven by double-digit growth in our commercial aerospace and general industrial markets, which were offset by a 3% overall reduction in sales to our defense market. We had a double-digit increase in our aerospace defense market led by higher sales on ISR applications, in particular on the Global Hawk for the Air Force and the BAMS Navy Barrien. This increase was partially offset by lower sales related to program cancellations as well as the Bradley platform. Overall, electronics now represents 60% of our Motion Control business, 50% of which is in ISR applications. We had a strong double-digit sales increase in our commercial aerospace market primarily related to the ramp up in reduction on the Boeing 787 program and increased demand from helicopter programs. The general industrial market was up significantly and benefited from the continued rebound in the global economy and increased demand for our embedded computing and sensor products. Organic operating margin was 14% for the full year, up 100 basis points over the prior year.

Moving to Metal Treatment, for the full year 2010, sales were mainly driven by a 22% surge to the general industrial market as we experienced gains across all of our Metal Treatment service offerings. Organic operating margin was 11.8% for the full year, up 200 basis points over the prior year, due in large part to absorption on the higher sales volume; which was partially offset by higher start-up costs related to strategic investments in international expansion initiatives. Next we'll discuss our overall end markets. Please note that the percentages that you see on the pie chart on this slide, slide 9, relate to the full year 2010 sales for each of our end markets. Defense markets represent approximately 40% of our sales, while commercial markets represent 60%. In 2010, our overall defense markets grew 3% while our commercial markets increased 6%.

For 2011, we are projecting over all growth of between 2% and 4% in defense and between 5% and 7% in commercial. Exceeding the relative comparisons for the 2011 defense budget and annual GDP, which are each expected to grow between 2% and 3% respectively. Our 2011 growth, although similar to 2010 overall, will come from changing and market dynamics. We'll begin with aerospace defense market. Looking ahead to 2011, we see ramp up of sales on the F-35 Joint Strike Fighter and various helicopter programs as well as continued strong demand for our embedded computing and sensor products supporting ISR applications. Most notably, in UAVs, as well as new programs such as the SEWIP, the US Navy's new surface electronic warfare program. This growth will be achieved despite the winding down of the F-22 program.

Overall, we are projecting sales to grow 1% to 3% in our aerospace defense market in 2011. Next, the ground defense market in 2011, while we anticipate ground vehicle upgrades and modernization programs for the US Army will continue to be funded, the timing remains somewhat uncertain. Overall, we expect to see growth in foreign military sales helping to drive our ground defense market for the near term, while the US ground defense market begins to rebound from the heavy reduction in funding over the past two years. Overall, we are projecting between 8% and 10% sales growth in our ground defense market in 2011.

Next we'll look at our naval defense market. For 2011, we remain optimistic about our naval defense exposure. We expect a ramp up of our sales on CVN-79 as we overcome reduced sales relating to the winding down of our work on CVN-78. A shift from development to full production of our AAG program and increased retrofit activity on the DDG-51destroyer program. As a reminder, our work on the Virginia Class submarines, given the ongoing shift from one to two subs per year along with the ramp up in production on the CVN-79 aircraft carrier, is expected to provide stable revenue for CW over the next several years as we have $60 million and $250 million respectively of content on these naval vessels.

Overall we're projecting 1% to 3% sales growth in our naval defense market in 2011. We will now move onto our commercial markets beginning with commercial aerospace. Looking ahead in 2011, Curtiss-Wright is well-positioned to benefit from the anticipated multi-year production up cycle anticipated in the commercial aerospace market as we are a key provider of critical components and various Metal Treatment services to Boeing and Airbus. As a result, we're projecting sales to increase between 10% and 12% in this market in 2011.

In oil and gas, the coker market, both domestically and internationally, was expected to rebound in 2010 from the full year low experienced in 2009. And while performance improved overall, the number of orders expected to be received in 2010 have shifted into 2011. So in 2011, we see modest steady growth in production for US refinery related products. Most notably in terms of valves and large super vessels that we'll begin working on in our new Cedar Crossing Texas facility later this year. We are projecting sales to grow between 3% and 5% in our oil and gas markets in 2011.

Moving onto power generation, in 2011, our nuclear after market business, which supports the existing 104 domestic nuclear reactors, is expected to hold steady as the plant life extension process continues. Even though the number of planned outages is expected to decline again in 2011, we expect to continue to achieve higher content per reactor which offsets the lower activity levels. For the nuclear new build, our focus in 2011 will be on China. Completion of final testing and shipping the first four units on time in the fourth quarter.

There are several AP1000 projects proceeding as planned both in the US and internationally; as a number of countries across the globe have expressed interest in building future AP1000 plants. We expect the next major AP1000 order to come from China. Our projected sales growth for the power generation market is between 1% and 2% for 2011. And lastly, our general industrial market, looking ahead to 2011. We expect to see continued growth based on improved economic conditions across several industries in which we participate, especially in the automotive market. As a result, we are projecting sales to grow between 9% and 11% in our general industrial market for 2011. And on slide 17, summing it up. Based on a rationale and expectations across all our end markets, our 2011 guidance by market shows defense growing between 2% and 4% overall. And our commercial market up 5% to 7% overall in 2011.

Our financial guidance for 2011 reflects solid operating performance and continued margin expansion across all three of our segments. We're looking for our 2011 sales to be in the range from $1.96 billion to $1.99 billion, up approximately 4% to 5%. Operating income up 11% to 15% and EPS from $2.48 to $2.58 per diluted share, up approximately 8% to 12%. We expect to generate 60% of our EPS in the second half of the year, with the weighting of our quarterly sales and EPS to very similar, percentage-wise, to 2010. We expect to see margin improvement in all three segments with consolidated operating margins expected to increase 70 to 90 basis points over 2010 to approximately 10.2% to 10.4%, aided by our continued focus on business restructuring, cost reductions and margin improvements.

Here are some additional financial guidance metrics for 2011. We expect our free cash flow to be in the range from $90 million to $100 million, which puts us at a cash conversion rate of approximately 80%. Not only have we been running over 100% for the past two years, but 2011 includes a $36 million pension contribution, which we did not have in 2010, and negatively impacts our free cash flow. Please note that we do expect that our first quarter cash flow will be down from the prior year primarily due to a $17 million pension contribution. We expect our D & A will be fairly similar to 2010 while our capital expenditures are expected to increase to approximately $70 million. 2011 pension expense for the Curtiss-Wright corporate plan is expected to be $23 million, an increase of approximately $2 million from 2010, driven primarily by a lower discount rate down from 6% to 5.25%. Now I would like to turn the call back over to Marty for his final comments before we wrap it up. Marty.

Thank you Glenn. Looking ahead to the future of Curtiss-Wright, we remain optimistic heading into 2011 with increased sales forecasted across all of our end markets, expectations for an improved economy, increased M&A opportunities, and in management team's steadfast on cost containment and continuing to improve profitability. We will also start to overcome several large defense headwinds, which have significantly weighed down our sales and profitability for the past few years, including large programs cancellations such as the FCS, F-22, and as well as other programs nearing end of their production lives such as the DDG-1000 and CVN-78. Defense Secretary Gates has outlined the reduction in funding for defense programs over the next five years with low single-digit real growth expectations in the next few years before it flattens out by 2016. However, while several pundits see defense as a sign of weakness or concern, we see as a net positive for Curtiss-Wright in 2011 and beyond.

Given the role we play and the diverse range of defense platforms that is we participate on, particularly as it relates to ISR applications, aerospace defense should be positive as revenues related to the F-35 ramps up in 2011. We also expect that our ISR and embedded content ,which counts for approximately $180 million of our total sales should continue to do well across various end markets in which we participate. This especially relates to the Global Hawk program for the Air Force and Navy and various surveillance aircraft and helicopter platforms. In naval defense, typically the least risky defense market for Curtiss-Wright, we expect to see continued growth in aircraft carriers, submarines and related content. We also have significant development opportunities of future platforms, most notably on the next generation Ohio-class replacement submarine program where we have estimated nearly $80 million and future content so far, with potential of initial $30 million for the electric drive propulsion system.

We're also beginning to see a turnaround in ground defense influencing our sales in 2011. Looking beyond 2011, our future outlook for ground defense remains positive. This area is expected to receive additional funding for modernization of the Bradley, Abrams and Striker fleet, under the Defense Secretary Gates recent 2012 defense spending plan. We will continue to monitor this as we get closer to 2012. We also expect to see development work on ground platforms of the future, most notably related to the ground combat vehicle or GCV program. We are on all three competing teams that have been selected to supply vehicle electronic subsystems for two of the three teams. We would expect to see increased content on existing international platforms as well, such as new drive systems.

In our commercial markets, the commercial aerospace OEM outlook continues to be positive, especially as both Boeing and Airbus plan to increase their production rates over the next few years. We have several long-term commitments in place with key customers and expect to receive no program wins on business jets and other commercial aircraft. In oil and gas, we expect to have sustained savings as we move past the recent consolidation at our new world-class Cedar Crossing, Texas facility, which will be fully operational in the second quarter of 2011. We have already received orders for some of our super vessels, which easily justifies the first year investment and provides an entree into a billion dollar market for Curtiss-Wright. Although, as we previously told you last quarter, we announced a large $10 million plus order from an international customer to provide a complete coker system and engineering services. This order has led to the sale of new products and systems beyond the tops and bottom valves, such as isolation valves and cutting tools, and we expect sales of isolation valves to exceed $5 million in 2011.

In addition, we also have plans for a Phase 2 oil and gas modernization project where we intend on significant upgrades in the existing Channelview, Texas facility with state of the art equipment and technologies that will provide improved overall manufacturing efficiencies further reducing our manufacturing costs and sharpening our overall world market competitiveness. As for our power generation business, one of the key milestones for our new build nuclear business in 2011 is the outcome of our endurance testing on the reactor cooler pumps for China's AP1000, which is expected to conclude in the second quarter of 2011, prior to shipping the first four pumps on time in the fourth quarter of this year. As we previously commented, we believe that the successful completion of this test will open the door for future orders in China and other parts of the world. In fact, we're pleased to announce that we recently signed a memorandum of intent from State Nuclear Power Technology Corporation in China relating to a significant follow on order for our reactant coolant pumps that we expect to wrap up by year-end, which will ensure Curtiss-Wright's continued participation beyond the first two plants being constructed.

We're very excited about this opportunity as it will position us well to receive bookings later in 2011 and when combined with our existing new build nuclear business, should lead to a ramp up in sales and earnings in 2012. Overall, the new build nuclear business is very attractive throughout the world. Elsewhere, our general industrial market is expected to be positive as the global economy continues to rebound, which should encourage companies to increase their capital spending levels and overall order activities. Finally, we continue to successfully execute our strategy and long-term shareholder value as a result of our strong earnings growth and cash flow performance. With the management team intensely focused on driving execution and cost control, we enter 2011 expecting strong profitability across all of our segments and should have a strong backlog from which we will continue to grow our business.

We will look to continue on build our Company through the acquisition of businesses, which we will believe will strengthen our overall competitiveness and the markets that we serve. It will help expand our global footprint. For instance, we're seeing strong growth from our integrated sensing facilities in China and we are evaluating the construction of a second facility for our Metal Treatment operations among other opportunities. We also will continue to invest in future technologies and the development of our employees as we approach and exceed $2 billion in sales. At this time I would like to open the conference for your questions.

(Operator Instructions)Our first question comes from Rama Bondada, with the Royal Bank of California.

California, Canada, same thing.Good morning guys.

Good morning, how are you doing?

Good, good. So, looking at the DOD's FY '12 budget requests that came out yesterday, was wondering if you can provide us with some of your key highlights in the budget in terms of your businesses, specifically ship building and ground vehicles.

Right, well, you know, the thing is, is that a lot of it is centered on ISR applications for both unmanned vehicles or air vehicles, in which we have quite a bit of content on. Our ISR business has been growing quite rapidly and it also centers on improvement in that area, a second Virginia class submarine which was already in the budget, so it really centers on a lot of the programs they're looking at increasing really is down our alley and also the modernization of the Bradley Striker in Abrams are all programs that is we participate on, so in reality I think it is as far as the budget or defense budgets, it is leaning favorably for Curtiss-Wright.

And then turning to FY '11 guidance, for the commercial market side, can you just provide a bit more color on what your end market assumptions were that were baked into your guidance, so, for like oil and gas, the after market and then power (gen) and aero?

Okay. You know, the thing is on our commercial side, we're looking at 4% to 6% growth. Commercial power is one of our biggest components and it is only growing 1% because we've grown quite a bit over the last few years. We've had double-digit growth over the last few years. We expect to do extremely well in sensors. Some of the things that are not growing, MIC or metal improvement is growing at double-digits, but the areas that we're not going to be growing as fast as is in gas and oil.

Alright, great. Thanks a lot, guys.

All right.

Our next question comes from Tyler Hojo, with Sidoti & Company.

Hi, Tyler.

Hi, hi.So, first question, just when you look at your expectations for growth in the defense businesses in 2011, just wondering what your assumption is in terms of getting through this continuing resolution for the FY '11 budget? I mean, is there downside of fiscal '11 budget isn't signed into law?

Yes, there is, there would be downsides, but the thing is, is that I think that we are -- I wouldn't say conservative in our estimates. Last year we said that we would be flat we grew at 3%. One of the things that they're going over as far as a new tanker, we really don't have anything to budget. The re-engining or an alternative engine for the F-35 is something we would have business on, but it is not that much. I don't think that even though there are people on both sides of the fence on the budget, the areas that I think we're participating in will come through and we'll do fine on.

Okay, and you brought up tanker. What's your exposure there?

Realistically, right now we see ourselves being somewhere on that program, a few hundred thousand dollars, but right now we have no sales in 2011 anyway, so it is not really -- doesn't really mean that much to us as far as 2011 is concerned.

Got it. And then just --

Realistically right now what's being battled over we don't have any sales in 2011.

Yes. I get that. Just moving onto something else -- I don't know if I missed it in the presentation, but did you provide a segment margin guidance for 2011?

I am not sure. I will give it to you right now, though.

That would be great.

For Flow Control.

Yes.

Between 10.7% and 10.9%.

Okay.

Motion Control is 12.8 to 12.9.

Okay.

And Metal Treatment is 12.5 to 12.8.

Okay. Great. And last one for me. In the prepared remarks you guys mentioned SEWIP.I have never heard you mention that one before. Just wondering if you could kind of maybe talk a little bit about what your role is there and if you have a ship set content you can provide, that would be great as well.

Tyler, I really wouldn't like to comment on it. We were on the development phase and the production phase is yet to really start up, so we'll just leave it at that.

All right. Great. Thanks.

Okay.

Our next questions comes from Ken Herbert, with Wedbush Securities.

Good morning, everybody. Hello.

Hello. How are you doing?

Pretty good. Thanks. Just wanted to dig a little deeper into the power gen guidance, Marty. When you look at the 1% to 2%, can you talk about your expectations for existing reactor business versus new construction as part of this guidance for the year?

New construction is approximately about $100 million. It is about the same as last year. About the only area that we have some increases is we do have some additional foreign business. Our domestic business is approximately the same. So, we have some additional foreign business and our new reactor business is about the same as last year.

Okay, so it's safe to say that the guidance doesn't include potential impact of incremental orders out of China for 2011.

That's correct.

Okay. And you mentioned timing. Obviously you got to start to ship these units under the current contract before you start to maybe receive some firm orders, but can you talk about for the potential new orders out of China you mentioned you have got an MOU signed. Is there anything that could happen prior to the fourth quarter or can you just give a little color on sort of what we should be looking for over the course of the year in anticipation of potential fourth quarter orders or more concrete activity?

Let me give you a little bit about where we are right now. We did most of the engineering testing, which says that we met all the critical parameters of what the pump should, should mean, which is extremely important. We then are going to put the pump on endurance tests. Realistically and again once we get past all of those tests, this pump should pass through endurance. Normally they've never had a situation where that has not met the test.

So, we were very confident that we have a pump that will meet the requirements of the AP1000. As severe of those requirements that they were. So what will happen is, we are forming a team as well with China to start negotiating that MOI and it just is coincidentally that the negotiations will probably coincide with our shipment of the first four pumps. I don't think that we -- it's going to be up to our customer of what we can say about it, so I am not sure that we're going to be able to talk about it until we actually finalize it, but I do believe that it's going to be a favorable contract for Curtiss-Wright.

Okay, no, that's encouraging. What's the time frame you're looking at for the endurance tests and some of the other milestones?

It will end by, before the end of the second quarter.So, it will start at the end of the first quarter and finish before the end of the second quarter, basically a three-month endurance test.

Okay. Great, that's helpful.

Realistically, once we've gotten past all of these tests, that normally should happen without much trouble.

In terms of the shipments?

In terms of it being -- having the ability to pass the test.

Yes.

When they work, they work for a prolong period of time.

Yes, and if I could just one final question. Shifting gears, it's, after like you talked about a perhaps more protracted recovery in oil and gas and I think a lot of people had expected and you're now looking for up low single-digits in that business. Can you just comment on some of the trends you're seeing in terms of the backlog and specifically the order flow and the confidence heading into this year on that market, because it's historically been, obviously as you very well know, very lumpy and timings can be a bit challenging.

Right. Well, we already talked about the super vessels that we've already received more orders than we anticipated for the first year of justifying our investment there. If we go to the valve side, our backlog is a little bit low, lower than we would like it to be, but the encouraging thing is that the future if you look at what the price of oil is being pegged at, right now it is in the, per barrel is about 80. It's expected to go to 100.

The light crude is now marginally profitable because of the spread, and new facilities are being put in, in foreign countries that we are participating in, that would say that you're more than likely going to see more facilities start using more of the heavier crude, which is where most of our processing is in. And the new program that we did receive, where we are basically the general contractor, there is going to be more orders associated with that, so with our cost reduction program that we should be putting in, and that will be completely facilitized by the end of this year, I think we're going to be in pretty damn good shape to get where we intend to go to.

So, I think that things are starting to -- are looking more positive as far as just the overall metrics associated with gas and oil industry.

Great. Thank you very much for the color.

Our next question comes from Steve Levenson, with Stifel Nicolaus.

Good morning, Marty and Glenn.

Good morning.

Hi, Steve.

Thanks a lot for all the data to, the presentation is very helpful.

Did you like it?

Yes, definitely.

Any comments that anybody would like to make for us to improve, please.

Got it. Thanks. Just a question on the current environment where revenues, organic revenue growth is sort of in the single digits here. So, the cost reduction restructuring plans, are those capable of producing multi-year margin expansion the way you expect it to be in 2011?

Yes, without a doubt. I think that you are going to see that continue in '12 and it should go into '13 without a doubt.

Great. Thanks. Same sort of levels you think, or any acceleration?

It would be tough for me to predict. I always think we can do better, but realistically if we get any kind of volume improvement going through the improved manufacturing that we have across the board, obviously things should improve, but let's just not make that as a comment and not a statement.

Got it. And in light of the low sales growth environment, I know your most recent deals have been sort of tuck-ins, add-on's.

Right.

Are you looking at anything more significant?

Yes.

And is it in same areas or more in the electronics area?

No comment.

Okay. There has been a lot of activity in India on naval ships, aircraft and ground vehicles. What sort of participation if any do you have there? That you can discuss of course.

We would rather not. So far you've batted not too good so far (laughter).

No. Well, I don't know if I should take that as a good sign or bad sign.

You know, normally if we don't want to discuss it, it's not because we don't know anything about it. We just don't want to discuss.

Got it. Okay, last then, on these super vessels, can you give us a little more detail? What are they made out of? Who's using them and for what?

Well, the super vessels are large vessels. They're are, there only was two companies in the world that produce them. Now there is a third and it is ourselves. We have the ability to bend materials up to eight inches, so we're talking about very large structures, something the United States hasn't produced for a while. Obviously the North and South America areas, we have somewhat of an advantage because we don't have to spend the monies shipping these vessels through the Panama Canal.

It is as modern as you can be, and we intend to have an investor conference there as one of the several investor conferences we're planning this year. We just show people what we are doing there later on in the year. So we're quite proud of it, and we hope we feel that the economics are going to pay off for themselves very, very well.

Okay, and just last, these are mostly for energy-related applications?

That's correct.

Okay. Thanks very much.

It could be energy and nuclear applications quite frankly.

Got it. Thank you.

Thank you, Steve.

Our next question comes from Eric Hugel, with Stephens.

Hi Eric, how are you doing?

Good morning.

Doing well.On Flow Control, you guys are looking for some pretty nice margin expansion versus 2010, and I guess it doesn't look like a lot of the Flow Control commercial stuff has grown especially strong, so maybe not mixed. Can you maybe talk about really what's driving that?

Well, it's one thing, is we don't expect as much investment in the China AP1000 this year as we did last year, and also it's cost containment and investment in equipment.

Okay. Great. In terms of your sales outlook for this year, the 4% to 5%, should we consider that pretty much all -- what percentage of that would be sort of acquisition versus organic?

That's all organic.

There are no acquisitions in there.

We don't assume acquisitions.

Okay. Well, you have made a couple, I guess middle of last year to current, right, but it 's not meaningful?

That's right. I mean, the only thing we don't have in our guidance is the current announcement of BASF. We have not disclosed on that yet.

Okay. I guess, well we, can offline. I guess last quarter you talked about your AP1000 certification, sort of coming in April. I guess now you're saying Q2, sometime by the end of Q2. I mean, obviously that's still in the second quarter, but should we read that things are maybe going a little slower than that you were thinking last quarter?

Not at all, not at all.

So, you're still on track for April, then?

Yes . We said, you know, there are a couple of different tests, but if we said that, I was wrong, but we're going exactly on plan, I think quite frankly had to schedule a couple, on a couple of the tests.

Okay, great. Good to hear. And I guess lastly, the 8% to 10% in growth that you guys are forecasting in the ground defense business for this year, can you maybe talk about specifically what some of the key programs are that are driving that?

Yes, sure, Eric. It's actually, and it goes back to the question, too, about this defense overall, because most of our ground defense growth is coming from international programs, which has nothing to do with the US budget. And it's mostly for our current systems. I think we announced mostly, that these are contracts we have gotten on --

There is one that we haven't announced of (drawing) systems.

So, and it's predominantly in the UK, for UK systems.

And that stuff is it already in backlog, there is no risk of that sort of getting --

No, it's already, we have orders for it.

You have orders and all of that stuff. Great.

As a matter of fact, from an equivalent standpoint, if you were to take out MIC, that really doesn't have a backlog. We probably have close to 70% of our sales already in backlog.

For this year.

For this year.

Great. Thanks a lot, guys.

Okay, Eric.

Our next question comes from Myles Walton, with Deutsche Bank.

Thanks. Good morning, guys.

Hey, Myles.

Good morning, Myles.

So, good cash flow in the quarter. Glenn, curious, the pension funding you mentioned for $36 million in 2011, what does this look like beyond the 2011 period?

It's about $40 million a year for the next four years.

Okay.

That's what we have. That's as far out as we have gotten.

Got it. And then I just want to clarify, the AP1000, $7 million investment, is that essentially -- are you viewing that as a cost overrun or an enhancement of capability?

Well, it is really making improvements in the process. It's part of -- it's really development of the AP1000, you know, as we actually go through the manufacturing process that will benefit obviously any future AP1000s that we're going to have to make so we consider that an investment.

The other thing is, is that sometimes when things don't work, you end up putting in parts or processes that are more expensive, and that happens to be the case with the AP1000. So, that's part of that investment is when you look at the costs going forward, there were additional costs associated with production parts, that put in so that the pump will run correctly.

So, are the current margin booking rates on that significantly below Flow Control?

No, as a matter of fact, we actually went back to the presentation that mostly we're at, that we held it at in Pittsburgh, and we're actually on target with that because the second order obviously is doing extremely well. The only thing that we're missing is we didn't get the additional United States plants that we expected, which would be plant three and four. We only got the first two.We are actually are where we said we were going to be.

Okay, and the last one for me. On raw material, is that something dealing with the new oil and gas segment or is it in the commercial energy piece that has start to creep in to the cost structure in a meaningful way we should think about?

Haven't seen it yet.

Okay.

Always, normally when things heat up, that's always something that starts getting in, starts hitting at the margin, and we haven't really seen that yet.

Okay. Good enough. Thanks.

Thanks, Myles.

Our next question comes from Michael Ciarmoli, with Keybanc Capital Markets.

Good morning, guys. Thanks for taking my question.

Good morning, Mike.How are you doing?

Good.If we can focus maybe on Metal Treatment. The margins are still way below kind of the historical peak levels. What are sort of the puts and takes there, and I know you're guiding for some nice expansion. But, what needs to happen to get those Metal Treatment margins back up say over 17%, if that is still in the cards?

Right. It is going to be in the cards. The thing is, is there is a couple of things. One is, this year it received an unusual medical cost hit that just happened to be the luck of the draw. The second thing is, is that we have put in nine new facilities, seven of them international across the seas, and when we put new facilities in, they normally are not profitable. So, what you're seeing is you're seeing, sales of about $6 million to $7 million with a negative almost $2 million profitability, and that's a drag right now.

We're also putting two new laser facilities that again add to costs, but don't really add that much to profit, and that will obviously add to our future profitability as we go in -- we have not really slowed down on our expansions or -- so you're seeing a little bit of a drag as far as those new facilities are concerned, but that obviously will add some profitability as things pick up.

Okay. Do you have a lot of free capacity at your existing systems? Are there certain markets like business jet that's obviously still weak that are contributing to maybe still lighter volumes? Or, is this simply all just excess costs related to these facilities?

Just excess, yes, just they're start ups and getting additional flow-throughs through those new facilities.

And what about on the -- you mentioned the laser peening. You should be seeing a ramp up if I am not mistaken on the 747-8 program. Is that one of your opportunities there?

That's correct. Yes. And, that was one of our installations, was -- of the two laser installations, yes.

Okay. Perfect. And then just circling back to the budget and you touched on it earlier. The Ohio-class submarine looks like funding for that vessel is up significantly.

Right.

12. What's sort of your lead time? What are you guys expecting when you might start to see some orders for that program?

Well, we've already started getting -- we're not getting production orders obviously, but we're getting a lot of -- the way I look at it is, on the Virginia-class submarine we have about $60 million of install base. Right now we're anticipating at least 80, and with an additional $30 million for the active competition on who gets the drive unit. So, we win the drive unit, we can have 110. The first ship is scheduled for 2019, so you really are starting to look at production orders somewhere around the 215, 214 time frame.

Okay.

So, you'll start to see increased orders as that goes on.

Okay. And then last question for me, regarding your commercial aerospace business, maybe just on the motion control side. You know, as Boeing, Airbus, you know guys ramp new productions, 787 comes online, do you guys have any capacity constraints at all where you would have to -- if Airbus takes --

No.

No capacity? Okay.

No, I think we've won quite a few awards from Boeing of always having on time deliveries and we don't intend to have any problem there. We have always -- we have no problem with capacity.

Great. Thanks, guys. That's all I have.

Thanks, Mike.

I am not showing in I further questions at this time.

Before I conclude the call, I'd like you all to know that we have a very active year planned from an Investor Relations standpoint, where we have a potential for three facility tours to showcase our new technology and strategic investments as well as the efficiency gains resulting from our consolidations. I'll provide you with updates of the timing in the future, and I look forward to spending some time with you on these trips. I know you'll find them extremely informative.

Thank you for joining us today and look forward to speaking to you again the end of April. Have a good day. Enjoy.

Thank you. Bye, bye.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect.