Curtiss-Wright Corp (CW) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Curtiss-Wright first-quarter 2011 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)

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

Thank you. Good morning, everyone. Welcome to our first-quarter 2011 earnings conference call. Joining me 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 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 can also 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 2011 first-quarter operating performance; and then I will discuss our segment performance, markets and updated 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 a strong start to 2011 that exceeded our expectations. First quarter profits grew faster than sales. With our operating income up a solid 34%, a 5% increase in sales. Our operating margins extended 200 basis points, and we also produced solid EPS growth of 50% over the prior-year period, driven, in large part, by a very strong performance by our Metal Treatment segment, in addition to increased sales and higher new commercial orders.

These results reflect the impact of our ongoing cost reduction and restructuring initiatives implemented across the Company. Overall performance in our defense markets were solid, as we saw continued strength in both our naval defense, and our intelligence, surveillance and reconnaissance, or ISR, related businesses. We are pleased to see that the fiscal year 2011 defense spending bill was passed, and we are no longer operating under a continued resolution.

We continue to believe that we offer a strong and balanced defense portfolio, tied to the right programs, those destined to perform at or above the overall level of growth in topline defense budget. We benefited from the turnaround in some of our economically sensitive commercial end markets. As the global economy continues to improve, this is most apparent in our general industrial market, which serves 22% over the prior-year period. Based on improved demand across a variety of industries and customers that we serve. Commercial aerospace is another bright spot for Curtiss-Wright in the first quarter, as we strongly benefited from the ramp-up in the commercial aerospace market.

Now I'd like to turn the call back to Glenn to discuss some of our key financial metrics for the first quarter of 2011, and walk you through some of the segments and end market performance. Glenn?

Thank you, Marty. Looking at our first quarter performance, we posted a solid quarter overall, with sales up 5%, 2% of which was organic. Meanwhile, our segment operating income rose 34% overall, and 40% organically. That's all three segments produced solid gains. We ended the quarter with a strong backlog of approximately $1.7 billion, which was split approximately 68% in Flow Control and 32% in Motion Control.

Free cash flow was negative, as we would typically expect in the first quarter. Although this year was lower than historical Q1 levels, primarily due to the expected $17 million pension contribution, as well as planned capital expenditures related to our Cedar Crossing, Texas facility expansion in our oil and gas market.

Moving to our segments. Flow Control produced solid profitability, primarily due to higher sales volumes and our general industrial and naval defense markets. Operating margin in this segment improved 90 basis points, compared to the prior-year period, as a result of our ongoing cost reduction and restructuring programs. This was achieved despite lower margins on several long-term contracts within the oil and gas market. Early in the second quarter we announced the acquisition of Douglas Equipment Limited, a leading supplier of aircraft handling systems, within our Flow Control segment. We expect this business to add approximately $30 million in additional sales in 2011.

Next we will look at Motion Control, which also produced a solid quarter overall. Sales growth in this segment was partially driven by acquisitions, which typically carry lower margins in the first few years of ownership. Profitability in this segment was also impacted by approximately $1 million in unfavorable foreign currently translation. Although, it is worth noting, that excluding FX and acquisitions, our operating income grew nearly 30%, and our operating margin improved 240 basis points. Again, primarily the result of our ongoing cost reduction and restructuring programs.

Moving on to Metal Treatment, which had a solid sales and stronger profitability in the first quarter. This segment benefited from higher volumes due to the improving global economy, most notably in Shot-Peening, heat treating and coating services to the general industrial market. In early Q2 we also completed the acquisition of the BASF Surface Technologies business, a leading supplier of thermal coatings within the Metal Treatment segment. This business is expected to add approximately $20 million in additional sales in 2011 to our general industrial market.

Next, I'll discuss our overall end markets. And if you look at slide 8, you'll know that the percentages on this pie chart relate to the first quarter 2011 sales for each of our end markets. For the first quarter ,our overall defense markets grew 5%, while our commercial markets increased 4%. The key highlights include the ongoing recovery in commercial-industrial, which had strong growth during the quarter led by our general industrial end market, along with solid performances in our aerospace and defense naval markets.

Growth in these markets was offset by contractions in our ground defense and oil and gas markets in Q1. We will begin with our aerospace defense market, which had solid sales growth over the prior-year quarter, most notably for ISR applications on helicopter programs, such as the Blackhawk and Apache, along with increased production on the B-22 Osprey. We achieved this growth despite the winding down of the F-22 program.

Looking ahead to the remainder of 2011, we see a ramp-up in sales on the F-35 joint strike fighter, and various helicopter programs. As well as continued strong demand for our embedded computing and censor products supporting ISR applications, most notably in UAVs. Similar to the first quarter, we expect this growth to be somewhat offset by 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, unchanged from our prior guidance. Next, we will discuss our ground defense market. Sales during the quarter were lower than the prior year, as expected, due to the reduction in US ground vehicle sales and the winding-down of the FCS program. However, we did have a nice pick-up in production sales related to the TOW Improved Target Acquisition System, or ITAS.

We also experienced higher sales of sensors, controls, actuation equipment and turret drive systems to international customers. For the remainder of 2011, the timing of ground vehicle upgrades and modernization programs for the US Army continues to be somewhat uncertain, and we expect most of our growth to come from foreign military sales. Overall we are projecting 8% to 10% sales growth in our ground defense market in 2011, unchanged from our prior guidance.

Next we will look at naval defense market, where our performance in the first quarter is indicative of where the bulk of our revenue streams are likely to come from this year. Virginia class submarines and the CVN-79 aircraft carrier, where we have significant content. For 2011, we remain optimistic about our naval defense programs. We expect a ramp-up of our sales on CVN-79 to outweigh the winding-down on CVN-78, a shift from development to full production on our AAG program, and increased retrofit activity on the DG-51 destroyer program.

As a result, we are now projecting sales in our naval defense market to increase 3% to 5% in 2011, which includes the acquisition of Douglas Equipment and is an increase from our prior guidance of 1% to 3% growth. In our commercial markets, we'll start with commercial aerospace, which delivered a strong start to the year, based on the ramp-up from the aircraft production cycle. For Boeing we saw increased sales on the 737, 747, 777 and 787 platforms, and for Airbus primarily the A-320.

Looking at the remainder of 2011, Curtiss-Wright remains well positioned (technical difficulty) from the anticipated multi-year up-cycle in commercial aerospace, as we are a key provider of critical components and various metal treatment services to both Boeing and Airbus. Based on those expectations, along with our outlook for solid demand from regional jet and commercial helicopter markets, we are now projecting sales from our commercial aerospace market to increase 18% to 20% in 2011, which includes the acquisition of Douglas Equipment and is an increase from our previous guidance of 10% to 12% growth.

We will move on to the oil and gas market, which continues to come under some pressure due to the ongoing delays in spending on large refinery projects, both domestically and internationally. However, we did see a solid increase in demand for our domestic maintenance, repair and overhaul business for the refinery industry during the first quarter.

For the full year 2011, we still see modest growth in production for US refinery-related products, most notably in terms of valves and large super vessels, and look forward to the opening of our new, world-class Cedar Crossing, Texas facility later this quarter. However, given the current economic conditions and somewhat slower-than-expected recovery in this market, we are trimming our 2011 sales forecast from 3% to 5% growth, down to 1% to 3% growth.

Next, we will discuss power generation market, which saw strong after-market sales on existing operating reactors, offsetting an expected decrease in AP1000 sale compared to last year's first quarter. Looking ahead in our nuclear after-market business, which supports the existing 104 domestic nuclear reactors, we expect to see continued demand for content related to the plant life extension process and power upgrades, to drive our power generation business.

Despite an expected decrease in the number of planned outages this year, we expect to continue to achieve higher content per reactor, which offsets lower outage levels. Regarding new build opportunities, our revenues will continue to be more heavily weighted to international sales in 2011, as resources shift from the China AP1000 project to the ramp-up on the US projects. For 2011 our projected sales growth for our power generation market remains at 1% to 2%.

Lastly, we will turn to our general industrial market, which produced a strong surge in sales from the first quarter, topping expectations, based on improving economic conditions, higher volumes and overall stronger demand for metal treatment services. Looking ahead to the remainder of 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 now projecting sales in our general industrial market to grow 19% to 21% in 2011, which includes the BASF Surface Technologies acquisition, and is an increase from our prior guidance range of 9% to 11%. Summing up, based on our rationale and expectations across all of our end markets, we have increased our expectations to total Curtiss-Wright sales growth of 6% to 8%, above our previous guidance of 4% to 5%.

Additionally, given some of the changing end market dynamics that we've witnessed thus far in 2011, along with some recently completed acquisitions, we have increased our projections to grow 3% to 5% overall in defense, above our previous guidance of 2% to 4%; and also it raised our expectations to grow 8% to 10% commercial, up from 5% to 7%. Our revised financial guidance for 2011 reflects solid overall operating performance across all three of our segments, and includes our recently completed acquisitions.

We are looking for our 2011 sales to be up 6% to 8% overall, operating income up 15% to 19%, and diluted EPS up 12% to 16%, to range from $2.58 to $2.68 per diluted share. I also wanted to point out a few other drivers regarding our operating performance. While Motion Control did get off to a good start in Q1, we are expecting some FX headwinds later this year to impact their margins.

Also, Metal Treatment produced one of their best quarters in years. However, we remain somewhat cautious in our guidance until we start to see this performance continue throughout 2011. Additionally, despite producing positive operating income, we are expecting that the BASF acquisition will be approximately 80 basis points diluted to metal treatment margins.

Overall, based on our revised 2011 financial expectations, along with our continued focus on business restructuring, cost reduction and margin improvement, we now expect consolidated operating margins to increase 80 to 100 basis points over 2010, to approximately 10.3% to 10.5%. Which is an improvement over the previous guidance range of 10.2% to 10.4%, despite the acquisition margin dilution and FX headwinds. And on Slide 18 are some of our additional financial guidance metrics for 2011, all of which remain unchanged from our prior guidance.

Now I would like to turn the call back over to Marty for his final comments before we wrap up the call. Marty?

Thank you, Glenn. Following a strong start to 2011, we remain optimistic heading in through the remainder of the year with increased guidance in sales and profitability. Growth forecasted across all of our end markets and expectation for an improving economy. We also continue to see increased M&A opportunities as we look to build our portfolio of highly engineered products and services.

Within defense, we have increased our growth forecast for 2011, and I want to reiterate a few areas of strength. Curtiss-Wright has a solid presence in current military platforms, as well as future platforms in development for the Army, Navy and Air Force. Given the role we play and the diverse range of defense platforms that we participate on, particularly as it relates to our ISR and embedded contents, we should continue to do well across various end markets in which we participate.

As we have previously noted, we will also start to overcome several of the large defense headwinds, which have significantly laid down our sales and profitability over the past couple of years, including large program cancellations, as well as other programs nearing the end of their production life. Moving to our commercial market, we increased the range of guidance based, in large part, of our expectation for a strong performance in our general industrial and commercial aerospace market throughout the remainder of 2011.

This is primarily based on the healthy demand within both our Motion Control and Metal Treatment segments, as well as a steadily improving global economy. In the commercial aerospace OEM, outlook continues to be positive. As we indicated in a number of announcements during the past few months, we have several long term commitments in place with our key customers, and remain encouraged by the improved performance that we'll have witnessed throughout the industry.

In addition, as we started to see in the first quarter, our general industrial market should continue to improve as companies increase their capital spending levels and overall order activity, as is typical in an improving economy. The increase in demand will materialize across a multiple of industries, including new automotive, industrial controls, sensors and embedded computing, to name a few areas which we serve.

Within the oil and gas market, we experienced some shifts of new orders out of the first quarter, primarily major capital markets for international refineries. There is no change to our win ratio or content on these projects. But, we did see a modest impact to our bookings and backlog in Q1. However, we believe these are near-term issues, and expect the gradual increase in new orders on large refinery projects, including our super vessels being produced in our new facility in Texas. Also, the uptick in domestic MRO business is a positive sign, and increases in MRO typically precede spending on major capital projects.

Turning to our power generation market. As a result of the tragedy in Japan, and subsequent damage to the Fukushima reactors, there will be a need for the industry as a whole to support the needs for Japan for a long-term recovery, and a stabilization of the plants in surrounding areas. While we are sincerely sympathetic to the impact this tragedy has had on the people of Japan, the problems associated with the Fukushima reactors, and subsequent safety checks will lead to increased opportunities worldwide for our vast portfolio of advanced nuclear technologies that are specifically designed to enhance plant safety, seismic design and control, fire safety, spent fuel storage, backup site power, and also comply with other regulatory requirements on existing plants.

Elsewhere, several countries around the world are in the process of implementing or updating advanced safety measures to their existing plants. We have already started to receive orders to address some of those needs. In China, the AP1000 is being used as the benchmark for safety evaluations as they review current operating reactors, those under construction, and new proposed reactors in light of the events that occurred in Japan. The AP1000 has been chosen as the benchmark because it's considered by industry experts to be the leading GEN-3 reactor design.

The AP1000 patented technology provides the safest nuclear reactor system, and incorporates many improvements of GEN-2 reactors, and may play a larger role than previously identified in future reactor construction. The AP1000 reactor employs an impressive self-cooling emergency system that relies on gravity to feed emergency cooling water from the top of the reactor vessel to its core, with the steam generator within the enclosed reactor working as a continuous cycle to cool the system down. Therefore, it does not require a powered system to cool its core.

While they work to complete their safety evaluations, countries around the globe continue to express their interest in building future AP1000 plants. We still expect our next major AP1000 order to come from Japan. The expanded use of the AP1000 technology in new plant construction, timing of energy needs, as well as our broadening relationship with the Chinese, will provide increased scope and business opportunities in China.

We will begin negotiations with the Chinese in June, when we would expect a new order to follow once those negotiations are completed. As we indicated in our last call, we still expect this new order to being to impact our financial results in 2012. And its inherent safe design -- sorry, the increased global interest in the AP1000 technology and its inherent safety design, and the urgency of global energy demands, should provide additional business opportunities for Curtiss-Wright not only in China, but in the rest of the world.

In the meantime, we remain focused on the completion of the final testing of our reactor coolant pumps for the Chinese AP1000. We are presently working through the endurance testing, which has included some major design specification changes -- minor, I'm sorry, design specification changes to help improve the overall performance, and we anticipate completion by the end of July or early August.

However, we continue to expect that we will shift the first floor reactor cooling pumps on time in the fourth quarter. Throughout our history we have developed numerous advanced technologies for the global nuclear market. We are proud to be a significant equipment supplier in building the safest and most advanced nuclear power plants in the world. Nuclear energy has been, and will continue to be, a key element in meeting the world's energy needs.

Finally, we remain focused on executing our strategic plans, implementing cost controls, improving our profitability across our segments, and increasing the long-term competitiveness of our business. We will look forward to continuing to make strategic investments and build our Company through the acquisition of businesses which, together, we will strengthen our ability to compete within the markets we serve, which will -- while helping to expand our global footprint as we approach and look to exceed $2 billion in sales.

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

Thank you. (Operator Instructions) Our first question is from Michael Ciarmoli from KeyBanc Capital Markets. Your line is open.

Good morning, guys. Thanks for taking the questions. Glenn, just a question maybe on Metal Treatment. Looks like you guys are projecting to exceed peak revenues. I'm looking at the margin guidance for the rest of the year. It would imply that you are going to be down. I understand some dilution from BASF, but you have the revenue strength projected there but not really the margin strength. Can you just sort of walk me through why we should think margins go down into a 14-percentage range for the rest of the year?

Sure. The way we look at margins, what you don't have is that, included in their first-quarter results is what we call, they have the benefit of what we call a nonrecurring type item. They get a big favorable workman's comp credit, which is a testament to their efforts and their safety programs, which is all good, and it was good for their results, but we don't consider that an ongoing thing. If you adjust for that, they're really at about 15% in the first quarter. That was a full percentage point. We said, we are projecting them organically to remain at about the 15% level for the year, at this point in time. And the BASF dilution does bring them down into that 14% to 14.5% range. We would like to see a little bit more steady improvement on it, but that's how we get -- .

The other thing, Michael, is also that we may have higher sales but we also have more facilities. We put brand-new facilities in China and Ireland. I believe we have six brand-new facilities. You are seeing greater revenue but across more companies.

Right.

And just reiterating what Glenn said, we are optimistically conservative.

Okay. Can you give us a sense of some of those new facilities that you opened, where they are in terms of ramping or capacity, and could that sort of -- as they come up to full speed, does that play a role in getting these margins up higher?

Without a doubt. It normally takes about two years for those plants to become profitable. So, you are going to see, as time goes on, especially next year, a lot of them will start to become into the profitability range, which will obviously add margin to it. But it normally takes more than a year.

Okay. Maybe just one other one. You guys are getting some pretty good margin expansion on the cost cuts here. At what point do you guys maybe lose some leverage? Organic growth, 2% on the top line. Can we expect the margin expansion story to continue even if you don't get some more meaningful top line growth?

Yes, without a doubt, because we still have construction going on. We still have $2 million costs in gas and oil. We haven't finished that consolidation. So, you are going to see, sensors, we still have new equipment going in. That should pick up. One of the things when we go to our conference, investors' conference in Ottawa, that's going to be one of the topics that I'm going to actually touch on, because we've made a lot of investments for new plants and equipment, and cost reductions, and we have yet to see the full extent of those cost reductions coming home yet.

Okay. And last one and I will get out of the way here, can you remind us what is the expected size of the Chinese order you are waiting for? In sort of the June timeframe -- ?

We didn't say this time. But if you notice what I said during the presentation is that we expected our content is going to go up quite a bit.

Right.

So even though the order may not come at the end of the year, it could come at the end of the year, and we will see revenue in 2012, it should be revenue on probably a bigger contract than we previously anticipated, which is good.

Thank you. Our next question is from Rama Bondada of Royal Bank of Canada. Your line is open.

Thanks, good morning. Quick question for you guys on the commercial nuclear business. I'm trying to get a better understanding here of how the after-market business kind of works out. We have had a couple of plants in Europe and also in California where they said they were not going to renew the licenses, not provide life extension. How does that come into play as you also see this increased demand from new safety measures that are coming through. Is there one comes in earlier than the other? I want to get a better idea of how that happens.

The thing is that there are several plants that will be putting in for extensions besides the ones that indicated they may not go for life extension, because those plants are old and probably require significant changes to it. But when you take a look at the outages -- first of all, our outages is not as great as last year. Our content continues to go up. So, if there were a couple of plants that did not renew, it would have an impact but not significantly.

As far as the changes or looking at what's going to be lessons learned from Fukushima, that's going to be ongoing for quite some time. We've already put together a special team to handle the increased amount of inquiries that we are receiving from that situation, and that's going to be ongoing for quite some time. Can I put a number on it? No, because it could be a very wide-ranged set of improvements, of which we are not too sure of what is going to come out of that study.

I think historically, at least in the US, that life extensions were given to roughly about 85% of plants.

So far.

Is that changing?

Not really, no.

Okay.

I don't think -- the thing is, is that I don't know the impression that people have out there on nuclear power, realistically, the United States, China, India, all have come out that the nuclear power is only going to be going forward. It's going to be part of our energy needs and the world's energy needs. If you take a look at Fukushima, which you have, it wasn't the earthquakes but it was the tsunami being much greater than the size of what they ever expected. The fact that these are old plants and had switches in the basement, and they lost power, a lot of the new plants, newer even GEN-2 designs, and as you know, Fukushima 5 and 6, or 3 and 4, continue to operate, because they had switches in different parts of the building, that is a one-time type of occurrence. And the thing is, is that nuclear power is going to be a part of a lot of countries' energy demands.

I think previously in your guidance you were talking about $100 million in new orders and $250 million in after-market for the commercial nuclear business. Does that shift still stay the same, in your new guidance?

Yes, definitely.

I think I might have missed it, but could you provide your updated margin guidance by segment?

Yes, sure. For Flow Control, it's 10.7% to 10.9%. Motion Control is 12.3% to 12.4%. Metal Treatment is 14% to 14.5%.

Okay, great. Thanks a lot.

Okay, Rama.

Our next question comes from Ken Herbert of Wedbush. Your line is open.

Yes, hi, good morning, everybody.

Good morning, Ken.

First, I wanted to ask about the oil and gas number in the quarter. We've heard from a lot of other companies that the oil and gas markets are really starting to pick up. And I know, Marty, you talked about timing and -- but I'm really just wondering, can you further elaborate on your confidence now, in terms of some of these orders coming through and the timing, because it's starting to imply a fairly significant ramp here in the latter part of the year to maintain the current guidance you're talking about for that market?

Right. Without a doubt. We are very confident that this will take place. There are situations that I don't want to disclose, or go into, but we are very confident on quite a few orders that we expected. So, we're pretty confident we're going to hit the numbers.

So, were there some orders that slipped out of the first quarter, you think, that we should be hearing about here in the next quarter or two?

Yes, without a doubt.

Okay. And then, on the nuclear side, have you -- because I feel good really about China and obviously that opportunity continuing to move forward, but I continue to see greater risk on the timing of the three US plants that are obviously in the early stages. Are you starting to hear -- and I know all three this summer are due for obviously milestones from the NRC we should be hitting here in May, June and July. Are you starting to hear any change at all in discussion from either the customer or in your conversations with Westinghouse or the NRC about any change in timing of any of these, and obviously change in political or business commitment to these that may obviously have any impact on your business this year and the next few years on the US side?

No, I do not.

Okay. So, nothing yet that would cause any concern about the US business, then.

No, but if we did know, we would obviously say something. We have not heard anything about that.

Okay. That's encouraging. Then finally, when I strip out Douglas, it looks like the revenue guidance increase was about $20 million to $25 million or so. Can you break that out? I know obviously with the guidance raised on general industrial and commercial aero, but are you seeing stronger in either one of those areas in particular in terms of the outlook for the year?

Ken, actually it's also the BASF acquisition. So we've brought our guidance up about $50 million, $30 million of it is Douglas, $20 million is BASF.

Okay, so BASF wasn't in the guidance then, either?

It was not in the previous guidance, right.

Okay, so the revenue increase is exclusively, then, in terms of the guidance acquisition?

Yes.

We've also had some shifts where we took down 787 a little bit, and we increased Metal Treatment a little bit, so they kind of offset each other.

And oil and gas went down a little bit.

Right.

Okay. So, with the puts and takes by the end market, it looks like then, obviously organically, the current guidance is still pretty -- obviously the organic growth you had in the prior guidance holds for the year.

About 4% to 5%.

Okay. Perfect. Thank you very much, and obviously a very good quarter.

Thanks a lot.

Thank you.

Thank you. Our next question comes from Tyler Hojo with Sidoti and Company.

Good morning, guys. First, I was just wondering if you could provide the backlog by segment.

Sure. Backlog in Flow Control is about $1.164 billion.

Okay.

And Motion Control is about $542 million.

Okay. All right, great. And just to kind of close out Mike's question on Metal Treatment, I totally get the caution in terms of future margin expansion and the dilution from the deal, but is there anything that is kind of fundamentally changed relative to when you were able to generate the peak margins in the 20%-type range?

No, not really. We also have cost reductions there, so no, it's just a matter of volume.

Okay. All right. Having said that, I mean, is it possible that we see those peak levels perhaps within the next couple of quarters?

I don't think you're going to see it within the next couple of quarters. I don't think the economy's going to be anywhere near what we have seen in the past. It's improving. We are seeing what has taken place in the first quarter is continuing, so that is encouraging, but I don't think the economy is going to get to where it was previously.

Okay. Alright, great. I guess just as a clarification, Marty, I think in your prepared commentary, you mentioned a new order from Japan, did you mean China?

Yes. Did I say Japan? I'm sorry.

I just wanted to double-check on that. I guess a couple of people have asked questions different ways in terms of potential slippage of the Chinese order. Could you characterize your confidence level regarding this order slipping? I imagine it's gone down somewhat, even if you're still relatively confident, but if you could just provide commentary around that.

The thing is, is that the required energy requirement in China remains constant. The end-date doesn't change of when they need to have the power. There are some -- obviously some slack time in -- if you're negotiating in June, when will you conclude negotiations and when would we be able to actually announce the fact that we have an order, okay? China requires the power, okay. They are going to do a review of their plants. But they're going to use the AP1000, remember, as the benchmark.

Okay.

So, right off the bat, you have to first come up with the fact that the benchmark is, indeed, safe. That's the first reactor that they're going to review. Based on that, based on the successful conclusion, which it should very well get, it would say that their new orders and be able release new orders on the AP1000 is going to be the first reactors that they're going to let go. So, we should be in the front of that line. Now, it's just a matter of negotiating the terms of the contract, and then announcing it. I feel extremely confident about that.

Okay.

So, that gets reiterated back and forth. We are in China every day. So, it's not like this is news that is coming -- that was three months old. The news we give you is taking place at this point in time.

Also, I think we had said on the last call that we expected this order wouldn't impact our results until 2012, and we are still on that -- we are still in the same position.

And then there's the other fact that if the order gets bigger, and the order comes a little later, it's still going to have the same impact as if it was the small order sooner.

Just in terms of your -- what you think your new shift-set content is per reactor, are you able to comment on that at all?

No.

Okay.

Hopefully it's going to be a pleasant surprise.

Good deal. Thanks a lot.

Thank you.

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

Thanks, good morning, everybody. I want to relate feedback and say thanks myself for the presentations you have been using the last couple of quarters. They've been very helpful. I had a question on -- .

How are the presenters though?

Presenters are also doing a good job. That was supposed to be a given. You caught me there.

That's okay.

You didn't comment a whole lot on the Advanced Arresting Gear, or EMALS, but I have been seeing some commentary that they're going to use more unmanned systems on carriers, and the steam catapults and arresting gear there now aren't really set up to handle the smaller unmanned systems. So what sort of opportunities do you have for retrofits?

Well, the EMALS right now, we have kind of done this first shift set, that's moving, so we have revenue. We have a big piece of pick-up in the Advanced Arresting Gear, exactly what you're talking about, and we have increased in sales this year. Now, the Advanced Arresting Gear is supposed to be retrofitted on other aircraft carriers, that we really don't have a good insight as to when exactly that is going to take place. But the thing is, is that, as you just indicated, for them to get heavier airplanes and/or lighter airplanes, they going to need the AAG system.

Okay, great. Thanks. Does the relationship in China help you at all with Douglas? I know they have either 100-plus airports, either new or expanded under construction over the next five years or so. What does the competition look like? Is there a local competitor, or do you think you have a shot at some business over there?

We do. I won't elaborate on that, but yes, we do.

Okay. My other questions have been answered. Thanks very much.

Thank you, Steve.

Thank you. Our next question comes from Eric Hugel of Stephens. Your line is open.

Good morning. Good quarter. Just a couple of questions. Can you talk about, in your -- I guess in your outlook for the ground vehicle, defense ground vehicle business, you talked about some uncertainty with regards to timing. Can you maybe delve a little bit more into that, and discuss some of the puts and takes or where your uncertainty lies?

When we talk about uncertainty, first of all, there's supposed to be a modernization of the Bradley and the Abrams, and even though we've put some quotations into the Army, we are not too sure when that is going to come out. We know there is a modernization program. It's kind of the timing. We have both the FRES and the CGV ongoing as far as quotation is concerned, the FRES in Europe and the CGV in the United States. Obviously we expect to get content on all of it. The uncertainty lies in how much and when the new program starts, and also when the modernization. But we have not taken aggressive outlooks as far as that is concerned, as far as our future business is concerned.

Okay. Can you talk about, on the reactor coolant pumps, it seems like the completion of the certification has slipped out by a couple of months. I guess prior it was supposed to be by the end of this quarter, maybe now you're saying July, August, not a huge slip, but can you talk about some of the issues that you are finding, or that you are having to correct and maybe the cost impact to that, also?

There were minor changes that we made. One of the things is that we are welding the pump into the loop instead of just hooking it up, which is also adding some time because that totally simulates the way it is going to be in the plant. So, there is just some minor things that have taken place. In fact, we were supposed to have started the endurance test already this week. So, we should be done in the July timeframe. So, we still think that we are in good shape to ship by the fourth quarter.

When you get down this far, the things should definitely work. I addressed that in our last call that, we have been through what we consider to be many of the major tests in endurance, although it's the last thing you do, is normally based on impacting all the other tests should definitely work, or normally it would fail in the prior test. And there were just some minor tweaks that needed to be done, but that normally have to get done with most designs. This is not that big a deal when all is said and done.

I understand, these things always take longer than you initially expect. But -- .

The thing is, is that what you have to change is a lot less than what you would expect, also. So, not everyday, but quite often, the amount of changes we had to make to the AP1000 were not significant. So it shouldn't cause us a problem in endurance testing, is basically what I'm saying.

All right. I guess following up maybe on a prior question, I don't know -- I remember reading the other day that there was an issue with the EMALS program in terms of SEALS on it, or maybe -- I think it was the EMALS program, that the Navy was sort of -- there were some issues with that. Is that maybe with regards to any of the equipment that you supply, or is there any impact to the program there?

Not that I know of. I know that during their testing done in -- is it Lakehurst? That the trials went very, very well.

Okay. Maybe I was -- .

-- the amount of power they were able to generate from the system. But there could be some problems, I'm not familiar with it.

Okay. I'm guessing if it was your problem, you would know about it.

I would know about it. If you were the first person to tell me, that would not be good.

We haven't talked about the deep-sea pump in a while. They dropped it, it broke, and then they had to fix it, and then it was winter by the time you could start testing it. Lots of delays. Can you give us an update? Obviously, with oil prices so high, that has to be something that could potentially be interesting.

Eric, are you keeping a history of this just for the heck of it?

Of course.

You could write a book.

As a matter of fact, I didn't want to bring it up, but since you asked about it, it is being refitted right now. It's going to be deployed in the third quarter of this year. There is actually a new configuration that we are working on with Cameron, which will also be featured at the convention in May. So, another chapter, see how -- we've already increased pumping capacity by 20% on the limited amount of time that the pump was going, and we will get much better information throughout this year. So, we will see how that goes.

I guess lastly, Marty, your earnings split for first half, second half that you gave last quarter was, what, 40% in the first half, 60% in the second half?

That's correct.

Is that still a good target?

It's going to be a little greater in the first half, it's going to be 42%, somewhere in that area -- a little above 40% and a little below 60%. Half-to-half split.

Great. Appreciate it.

Thanks.

Thank you. (Operator Instructions) Our next question is from Myles Walton of Deutsche Bank. Your line is open.

Thanks, good morning. First, I want to touch on corporate costs. I may have missed it, Glenn, but they seem to be running light and you didn't change, I don't think, the expectations for the full year unallocated corporate costs. I'm just curious what picks up in the back half?

We didn't because it's the same things that fluctuate for us from time to time. The two drivers -- well, first you're buried in a, you have a $1 million increase in pension, and that's offset by favorable medical for us in this quarter, and also on our hedging program, we had about $1.5 million losses last year. We actually broke even this year, which is delightful to see. So, it's obviously an improvement over last year. But they fluctuate from quarter to quarter, so we are still holding the year in terms of what we expect corporate to be.

Did the first quarter run lighter than you were expecting, though?

Yes, absolutely.

Seems like -- .

Third quarter, our medical could be unfavorable. It shifts based on claims of our employees, so it does shift around a little bit from time to time.

That is fair. You mentioned the $50 million from the increase in guidance was essentially on the back of the acquisitions. But if I'm reading you right, the $0.10 increase to the EPS wasn't necessarily acquisition-driven, it was more a drop-through that you are seeing out of Metal Treatment. Is that fair, or can you correct me?

Well, it would be -- yes, it's more from the operating margins of all three divisions, but especially Metal Treatment.

We increased the segment operating income $7 million, essentially on both ends of the range. That is essentially your $0.10.

I was interpreting that most of that was not from the acquisitions.

Most of that is not from the acquisitions. They are accretive, but they're dilutive in margin, accretive in dollars, but that's not driving that.

That is helpful. On the acquisition front, Marty, can you qualify, you did a couple of deals in the quarter, qualify or characterize the pipeline you're looking at now. And is what we saw kind of what you are driving towards, or just give us characteristics of the types of businesses you are currently evaluating?

As we mentioned, the M&A activity is heated up, I think that we're starting to see where valuation and offers are starting to come closer to one another than they have in the past. Right now we have activities in all three divisions, and some good prospects out there. And that's about as far as I'm going to go.

Two more, one on cash, Glenn, the cash flow in the quarter, both the operating cash flow and the CapEx, were those consistent with what you're expecting to hit your target for the full year, or are we going to -- or you have some more work to do than you otherwise would have expected?

It's fairly consistent. We had the pension contribution, it was about $17 million in the first quarter. That's up in the operational cash flow. We also had the timing of some of our CapEx. We are opening the new Cedar Crossing facility in a month or so, and a lot of the -- or in a couple weeks, I should say, officially -- so a lot of that CapEx hit in the first quarter.

We also spent, we started spending and we're also modernizing our oil and gas facility, the existing facility down in Channel View, Texas. That also started. We started making those investments in the first quarter, as well as, you probably saw the press release on the Boeing 787 contracts, so we started to make some investments -- .

We started putting the building up in order to support that contract.

Okay. And on that contract, is there any further detail that you can provide, outside of what was in the relatively -- .

Vague?

We were able to put in and disclose to our --. It is Boeing, you know that. No, the thing is, is that essentially some of the problems that Boeing is having is putting the first couple of 787s together would be some of the works that we would be doing. So, we're going to be doing machining and a lot of surface treating for them. We are putting in an $11 million to $12 million facility for that contract. So, I think based on the investment, would probably tell you where we think peak revenues will go to.

That's helpful. The last one for me is on the utilization of facilities. I'm more curious on your oil and gas side than anywhere else, in terms of, if you can quantify your current utilization levels, just trying to get a sense for your operating leverage on a potential recovery there.

Myles, I'm not too sure I'm following you there. You're saying that we have unobserved overhead because we don't have the sales volume, but once we get the sales volume -- ?

That's the direction I'm going.

Let's see. Right now our business is sized to it, to the amount of volume we have right now. We are putting in new machinery that would tend to keep that headcount down, but that's going to be later on. Even though it was mentioned before that we have an uphill battle on gas and oil, I feel very confident that we're going to be able to get there.

So, I can't go through it exactly the way you are asking me to, I know what you are asking, but it's kind of a tough question right now because we are going through a consolidation there. So, the break-even keeps going down, as we speak. But how far it drops over a period of time is not an exact science.

Maybe another way, how close is your oil and gas market margins to your flow control margins at this point?

They are not that close yet. Let's put it this way, from that question, there is a lot of improvement that is going to be done there, okay? If you ask it in that standpoint of where do we expect it to go from where it is now, we expect a lot more improvement in that area.

Okay. Thanks.

Thank you. Our final question comes from Jim Foung of Gabelli & Company. Your line is open.

Hi, good morning, everyone. Good quarter.

Thank you.

Just trying to get an update on the nuclear business. How much revenues did you plan to book this year and next year from China and the US?

It's the combined new build, roughly, these are rough numbers, the new build revenues are about $100 million this year. Okay? And the after-market, the other side of our business is about $250 million, roughly.

Okay, and then for next year, what were you anticipating next year?

We didn't provide next year, yet.

Okay. But that should, from your standpoint, should increase with the potential new China business that you will be negotiating sometime this summer.

Just based on that, depending upon when we would get the order, we would expect to increase, but what you will find is, on the new build side, without that new order, you're going to have China finishing, trailing off, but then the US is going to pick up. And it's going to -- we have that ramp-up coming up in terms of production. Right now the resources are all primarily on China, because we want to get those first four pumps out. You will see the mix shift, but unless, if we get the new order, that would absolutely result in an increase.

Okay. Then, just the last question is on the F-35, what is your ship set content on that, and what kind of revenue contribution do you expect this year and next year?

Right now our content is a little over $400,000 an airplane. And I have the revenue here, I just don't remember it. Hold on one second.

Do you do any business on your alternative engine, or this is just the standard one?

Right now our revenue is about, in the area of about $18 million.

$18 million this year.

Right. The next [L-rip] is about the same quantity. So, we would expect that revenues will probably be consistent from this year to next year.

Right. Then, as production increases -- .

That's right. It will start ramping up. That represents about a 126% increase over last year.

Right. Okay. And then, do you have any content on your alternative engine at all, or are you not involved in that? The alternative engine for the F-35?

No, we would have some laser -- or Shot-Peening on that, but nothing other than that. I think some sensors.

All right. Great. Thanks so much.

Thank you.

Thank you, I'm showing no further questions in the queue at this time. I will hand the call back over to management.

Thank you. Before I conclude the call, I want to remind everyone about our upcoming May 19 Investors' Day event in Ottawa. Folks on our defense markets, we have an exciting day planned to highlight key programs in which we participate, as well as the management team responsible for driving those businesses. Thank you for joining us today, and I look forward to speaking to you in May, and also at the end of July. Take care and thank you very much.

Take care. Bye-bye.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.