Curtiss-Wright Corp (CW) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Curtiss-Wright second 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 and instructions will follow at that time. As a reminder this conference is being recorded.

I would now like to introduce our host for today, Mr. Martin Benante, Chairman and CEO. Sir, please go ahead.

Well, thank you, Karen, and good morning everyone. Welcome to our second quarter 2011 earnings conference call. Joining me today is Mr. Glenn Tynan, our CFO, who will begin our forum today.

As you will see this morning, we believe our second quarter performance and our future outlook gives further evidence to underscore our confidence that Curtiss-Wright is well positioned to generate long-term shareholder value. 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 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 will detail those risks and uncertainties in our public filings with the SEC.

For our agenda today, I will provide you with an overview of Curtiss-Wright's 2011 second quarter performance, followed by Marty who will discuss our strategic markets including recent news in our power generation market and open the call for questions.

We are pleased to report that Curtiss-Wright delivered a solid performance as our profit again grew faster than our sales. In the second quarter, operating income was up a solid 19% on an 11% increase in sales. We had very strong sales growth in our defense markets, up 11%, as well as solid performance in our commercial markets up 12%. Recall from our May Investor Day where we indicated that our defense business is uniquely positioned to benefit from areas of the defense budget that are expected to grow in future years. For example, in ISR and UAVs, and we intend to continue to grow this portion of our business faster than our peers.

Our operating margin expanded 60 basis points overall to 10% and grew 140 basis points to 10.8%, excluding the negative impact of foreign currency translation and acquisitions. We also produced solid diluted earnings per share growth of 21% over the prior-year period. Overall, our results reflect the continued benefits of our ongoing cost reduction and restructuring initiatives implemented across the company. Many of which were presented at our May Investor Day.

We also experienced solid new order activity primarily in our power generation market for equipment to support the safety and reliability of existing nuclear operating reactors and also in oil and gas due to increased demand for MRO products and supervessels. We are very encouraged by these positive trends experienced in both markets.

Looking deeper into our second quarter results, segment operating income rose 12%, while segment operating margin was 10.8%, up slightly from the prior-year. Excluding acquisitions and FX, organic segment operating margin was 11.6%, an improvement of 90 basis points from the prior year. In addition, corporate costs were lower by $2 million.

We also ended the quarter with a strong backlog of approximately $1.7 billion, due to solid growth in new orders of 10% year-to-date. Our backlog at quarter end was split approximately 70% on Flow Control, and 30% in Motion Control.

Moving to our segments. Flow Control produced solid sales and profitability primarily due to the higher demand in our Naval defense, power generation, and general industrial markets. In addition, the April 2011 acquisition of Douglas Equipment, Limited, accounted for nearly $6 million in sales in the second quarter.

Operating margin improved by 10 basis points overall, and 50 basis points organically compared to the prior-year period. Due to the aforementioned increase in sales, along with benefits resulting from our ongoing cost reduction and restructuring programs. Both our current and prior-year financial results were negatively impacted by costs associated with the consolidation of our oil and gas businesses in Houston and unanticipated costs relative to strategic investments in the AP1000 program.

Next, we'll turn to Motion Control which also produced a solid quarter overall, led by strong double-digit gains in the commercial aerospace and defense markets. Sales growth in this segment was favorably impacted by $4 million of foreign currency translation, and $2 million from the first-quarter acquisition of PSI. A key component of the profitability performance in Motion Control, was the unfavorable impact of foreign currency translation, as it reduced the segment's operating income by nearly $2 million and operating margin by 120 basis points to 10.7% in the quarter.

Excluding FX and acquisitions, operating income grew 13% on a 7% sales increase. And operating margin improved 60 basis points overall to 12.4%. This solid improvement was achieved from the higher sales volumes and our ongoing cost reduction and restructuring initiatives.

In addition, yesterday we announced the acquisition of ACRA Control, Limited, a leading supplier of data acquisition systems for the global aerospace and defense markets. We expect this business to add approximately $13 million in additional sales to this segment in 2011.

Moving on to Metal Treatment, which followed up a strong first quarter with a solid second quarter. This segment benefited from increased demand and higher sales volumes due to the improving global economy, across all major lines of business with strong increases in the commercial aerospace and general industrial markets. In addition, the April 2011 acquisition of BASF Surface Technologies added approximately $7 million in sales in the second quarter. Metal Treatment produced a solid operating margin of 14.5% in the second quarter, an increase of 270 basis points from the prior year.

Please keep in mind that despite the solid sales growth in this segment, we have invested in several new facilities in the past 24 months and it usually takes at least 2 years before we begin to see measurable increases in operating income and margin from the strategic investments.

We also recently announced the acquisition of IMR Test Labs, a leading provider of mechanical and metallurgical testing services, for the aerospace power generation and general industrial markets. We expect this business to add approximately $7 million in additional sales this segment in 2011.

Next, I'll discuss our overall end markets. And please note that the percentages that you see in the pie chart on this slide, relate to the second quarter 2011 sales for each of our end markets. For the second quarter, our commercial markets grew 12%, while our defense markets increased 11%. Performance in defense was solid as we saw strength across all of our defense markets. We continue to believe that we offer a strong and balanced defense portfolio and will benefit from the programs targeted for growth in the topline defense budget.

As we said during our Investor Day, our defense business is expected to show healthy growth and we currently project our overall sales from defense to grow 5% to 7% in 2011. Well above the overall topline defense growth forecasted by the DOD.

We will begin with our aerospace defense market, which had solid sales growth over the prior-year quarter, most notably for increased sales on the V-22 Osprey and P-8 Poseidon programs. Higher sales from ISR applications on helicopter programs such as the Blackhawk and a pickup in JSF sales. We achieved this growth despite the winding down of the F-22 program, and nearly flat year-over-year sales on the Global Hawk as this program moved from development to production.

Overall, we are projecting sales to grow 7% to 9% in our aerospace defense market in 2011 which is an increase from our previous guidance of 1% to 3% growth, primarily due to increased organic sales, as well as the expected contribution from the acquisition of ACRA Control, Limited.

Next, to ground defense where we experienced higher sales of current drive systems to international customers in the second quarter. We also saw a slight pickup in sales on the Abrams and Stryker programs. This performance was somewhat offset as expected by weaker year-over-year sales on the Bradley program and the winding down of the FCS program. 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, where our performance was primarily led by sales on Virginia Class submarines, supporting the ramp-up in production from 1 to 2 subs per year, as well as several spare orders for pumps and generators. We're also seeing solid growth in production on the Advanced Arresting Gear program. Overall, we are projecting 3% to 5% sales growth in our Naval defense market in 2011, unchanged from our prior guidance.

We are clearly benefiting from the ramp-up in the commercial aerospace market. Our commercial aerospace business had a strong second quarter that led all of our end markets. Due to solid growth in both our Motion Control and Metal Treatment segments. For Boeing, we saw increased sales on the 747, 777 and 787 platforms, and across all platforms for Airbus. Sales to regional jet market also showed a marked improvement.

We are now projecting sales in our commercial aerospace market to grow 26% to 28% in 2011, which is an increase from the previous guidance of 18% to 20% growth, primarily due to the acquisition of ACRA Control, as well as a reclassification of our BASF acquisition sales primarily from the general industrial market.

In our oil and gas market, we saw a solid increase in demand for our MRO business for domestic refineries. Along with increased orders for super vessels coming from our new facility in Cedar Crossing, Texas. However our business supporting large capital projects continues to be soft, primarily internationally. We are pleased to report that our Q2 sales increased 13% sequentially from our low point in Q1. And we see this positive trend continuing through the second half of 2011 and into 2012.

For the full year 2011 we see modest growth in both the US refinery-related MRO products and large super vessels in the second half which represent approximately 40% of our current oil and gas business. This will be partially offset by the continued delay in large global capital projects which currently represent the larger portion of our oil and gas business. As a result of the recent sale of our Legacy Valve Distribution business, we have lowered our 2011 sales forecast from 1% to 3% growth down to a decline of 3% to 5%.

Next, we will turn to our power generation market which benefited from the timing of revenue on domestic AP1000 projects as well as solid aftermarket sales for pumps and valves on existing operating reactors.

On the heels of the Fukushima incident and the recently issued 90-day report from the US NRC, our orders are up substantially in this market which Marty will discuss in more detail in a few minutes.

For new-build opportunities we still expect our revenues to be more weighted to international sales in 2011, as resources slowly shift from the China AP1000 project to the ramp-up on the US projects in 2012.

For 2011 we are increasing our sales projections to in our power generation market to 6% to 8% growth from our previous guidance of 1% to 2%. Primarily due to solid organic growth from the recent orders supporting existing nuclear operating reactors.

Lastly, we'll turn to our general industrial market which produced a solid second quarter based on improving economic conditions, higher volumes, and overall stronger demand for Metal Treatment services. In addition, sales to the commercial HVAC and automotive industries were particularly strong, both domestically and internationally.

For 2011, we are adjusting our projected sales in our general industrial market from our previous guidance of 19% to 21% growth down to 10% to 12% growth due to a reclassification of our BASF acquisition sales primarily to the commercial aerospace market. This correction is not a reflection of reduced demand within our general industrial market. Our revised guidance also includes the expected contribution from the recent acquisition of IMR Test Labs.

Given our current outlook as just discussed, we have increased our sales projections to grow 5% to 7% overall in defense, above our previous guidance of 3% to 5% provided at our Investor Day. And also have raised our expectations to grow 9% to 11% in commercial, up from 8% to 10% previously due to the improved outlook in the power generation business.

Summing up, based on our rationale and expectations across all of our end markets, along with the recently announced transactions, we have increased our expectations for total Curtiss-Wright sales growth of 7% to 9%, up from our previous guidance of 6% to 8%. This overall increase in our sales guidance of $20 million is equally split between organic growth, and the recently announced M&A transaction.

Let me now walk you through our guidance for each of our 3 segments. Starting with Flow Control, there is no overall change to our sales guidance. However, we increased net organic sales by $10 million due to strong new orders and increased demand in power generation. However, this was offset by lower sales in oil and gas due to the sale of our VSC Legacy distribution business.

Flow Control's operating margins were lowered 20 basis points to a range of 10.5% to 10.7% which reflects unanticipated costs relative to strategic investments in support of the AP1000 program.

Our sales and operating income guidance for Motion Control have been updated to reflect the recent acquisition of ACRA which is expected to add $13 million in sales but is expected to be $2.5 million dilutive to operating income causing an approximately 50-basis point reduction in operating margin from our previous guidance. We expect the strong operational improvements in benefits from our cost reduction and restructuring programs to continue in the second half of the year but these improvements are likely to be offset by unfavorable foreign currency translation which is estimated to be an additional $2 million in the second half of the year.

The sales guidance for our Metal Treatment segment has been increased to reflect the recent acquisition of IMR Test Labs and our operating income and operating margins have been raised to reflect the better than expected operational performance. We have increased the operating margin to between 14.5% and 15% for the full year. And finally, we have reduced our corporate expenses by $2 million to reflect lower expenses based on our half-year results.

In addition to our solid sales growth, we expect overall operating income to grow between 15% and 19% and diluted earnings per share to be up 12% to 16% over the prior-year, unchanged from our prior guidance. However, please note, we are maintaining our EPS guidance range despite absorption of the negative impact of foreign currency translation which amounts to $0.06 per diluted share when comparing rates are guidance was based on, versus the current forecasted rates. Also the dilution relative to the purchase accounting for the ACRA acquisition which amounts to another $0.04 per diluted share. As well as the unanticipated strategic investments in the AP1000 program. Having said this, we do expect to end up at the high end of our current guidance range.

Overall based on our revised 2011 financial expectations, we now expect consolidated operating margin to increase 70 to 90 basis points to approximately 10.2% to 10.4%, slightly lower than our previous guidance primarily due to the acquisition margin dilution.

From a half-to-half perspective, our first half-year results included approximately $3 million of facility consolidation costs that are expected to convert to $3 million of benefit in the second half of the year. In addition included in our first half of the year performance are certain one-time costs on long-term contracts that are not expected to recur, most notably in the oil and gas business in Q1 and strategic investments in the AP1000 program in the first half-year. Here are some additional financial guidance metrics for 2011 all of which remain unchanged from our prior guidance.

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

Thank you, Glenn. Following a strong first half of 2011, we remain optimistic heading into the remainder of the year, with growth forecasted across our defense and most commercial end markets.

We expect to benefit from improved market conditions as demand for our products and services will result in sales growth rates over and above anticipated growth rates in several markets in which we participate, mainly in defense and nuclear this year, and oil and gas as we look to 2012. Given that outlook, I am pleased to say that we are forecasting solid growth in sales for 2011 along with double-digit growth in both operating income and earnings per share.

In the near term, we expect to see continued solid returns in our commercial aerospace, defense, nuclear aftermarket, and general industrial markets. And, longer term, remain confident in our overall energy businesses based on the projected future increase and worldwide energy demand in our expectations for an eventual rebound in capital spending levels on large global projects in oil and gas.

Looking at our markets, I'd like to begin with our power generation market and an update on the AP1000 program. We successfully passed all of those critical tests earlier this year, such as pressure, flow, power consumption, and [toe stack]. We have been making design modifications throughout the development and certification process. Which is normal, when delivering this level of technology.

During the final phase of testing, we discovered a localized high temperature. We elected to investigate and modify the design to ensure that our pumps continue to be the most reliable in the industry. As a result, we are rescheduling the delivery date for the first 4 pumps from the fourth quarter of 2011 to the second quarter of 2012. This new delivery date meets our customers requirements and will not impact the overall plant construction schedule. We expect final testing to begin shortly and conclude successfully.

Curtiss-Wright has over 60 years of experience making reactor cooler pumps, and the AP1000 pump is the first of the kind that is highly advanced, state-of-the-art technology. We take a very conservative approach in our designs to ensure ourselves and our customers that they have years of reliable service, which is the hallmark of Curtiss-Wright. The estimated cost to correct the issue and complete final testing are reflected in our second quarter results. At this time, we do not foresee any future financial impact.

Looking ahead, we still expect our next major AP1000 order to come from China in 2012. Our [budding] relationship with the Chinese have provided increased scope and business opportunity in China. A long-term view on our new-build nuclear power generation business, remains positive. Meanwhile, our content on existing operating reactors worldwide remains strong and we continue to expand as assessments and analysis from Fukushima drive safety and reliability improvements.

We also expect to benefit from our improved technologies solutions to upgrade existing plants so they operate more effectively and meet plant life extension requirements. This MRO activity is essentially the sweet spot for Curtiss-Wright. As we discussed in our Investors Day, there was an immediate need for our technology to support the events in Fukushima. We have identified an additional $75 million in additional requirements directly related to the cleanup efforts in Japan.

And we expect this trend to continue, especially in the wake of the NRC's 90-day report that was issued last week which spells out new requirements that our advanced technologies can help our customers need. The NRC's first set of recommendations based on lessons learned from the simultaneous natural disasters at Fukushima fell into 3 categories. Number 1, requirements for design-based events with protection and mitigation. Number 2, requirement for beyond design bases events such as blackouts, fires, and explosions. And, number 3, voluntary industry initiatives.

While these recommendations are not regulations yet, they point directionally to where the regulators will likely end up. In all 3 cases but especially the first, increased design requirements, protection and mitigation. The industry will require monitoring, protection, testing and analysis of the cornerstones of Curtiss-Wright's nuclear aftermarket business.

Additionally, we expect to see increased opportunity 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. In particular, we believe the focus on spent fuel pools and fuel storage will generate an expedited opportunity as far our snap-in products and spent fuel infrastructure. One such opportunity in a recent $43 million order from a major domestic utility company.

Certain materials that are commonly used in existing spent fuel storage racks are subject to degradation over time and will need to be changed to meet the safety requirements mandated by the NRC. To extend the life of the plant, existing operating reactors have to ensure that all safety-related systems can perform during the extension period. Our snap-in product provides -- product solves that issue for existing spent-fuel storage racks where aging is problematic and thus an exciting opportunity -- presenting us with an exciting opportunity for Curtiss-Wright moving forward.

Another example of the importance of our technology relates to the recent award from Progress Energy which selects Curtiss-Wright to provide a new safety related core cooling protection system for its Crystal River unit 3 plant in Florida. This first of a kind instrumentation and control system will enable the plant's up-rate capabilities, simplify licensing process, and enhance its long-term performance and safety.

These are only a few examples of the potential opportunities for Curtiss-Wright, based on our long history and expertise in the nuclear power generation industry. Also we expect the industry will have a significant increased need for the types of products and services that we offer once the new NRC regulations become effective.

Based on our strong orders in the first half of 2011, some of which we expect to turn to solid organic sales growth this year, we raised our full year power generation guidance up to 6% to 8% growth over 2010 above our previous guidance of 1% to 2% growth and expect improved sales in the future.

Considering the oil and gas industry as a whole, the announced investment requirements in the Americas in 2011 and 2012 are the largest back-to-back years in recent history. The 2011 projects are taking longer to come to fruition than expected but there has not yet been any cancellations, as would be typical in prior years. Which is expected to lead to a pickup in orders later this year and throughout all of next year.

2012 investments are already 85% of 2011, and will continue to rise throughout this year. In addition, [gold] year carry-forward of some of the 2011 projects to 2012. So even though the order rate has been somewhat lower than downstream project work where Curtiss-Wright has been more [stactive], expectations continue for a turnaround later this year and well into next year due to the underlying capital requirements.

Within Curtiss-Wright's oil and gas market, we continue to see a gradual pickup in the domestic MRO business. A welcome change given the slowness that was experienced over the past 2 years. MRO is the leading indicator of increased pent-up demand caused by stretching out plant operations as far as possible. Typically of what you would expect during a prolonged recession, and normally precedes spending on major capital projects.

We are also pleased to report that we have seen increased demand for our super vessels being produced in our new facility in Cedar Crossing, Texas. And we have more than doubled our first year's expectations in new orders. We currently operate the only manufacturer of these large vessels in the Americas which greatly benefits our local customers as we can provide significant logistics and transportation savings, to name only a few benefits. And to reiterate what we told you at Investor Day, this opens up an accessible $1 billion market for us. Together the MRO and super vessel business represents about 40% of our total sales in this market.

Elsewhere another initiative that we're undertaking is the modernization of our Channelview, Texas, facility, where we have been consolidating our oil and gas businesses. Part of a $14 million investment to establish a fabricated, balanced center of excellence that will be second to none in terms of technology, efficiency, and quality.

Although we expect capital investments to be ongoing throughout 2011 and 2012, we expect to eventually realize $5 million of annual savings. So, as you might expect, our overall outlook in the oil and gas market remains somewhat tempered for 2011 as we are still experiencing slower orders due to delays in capital spending of large downstream projects especially in the international market.

Typically, about 6% of our total oil and gas sales come from larger capital projects. At this point, we are maintaining our sales forecast in this market excluding the divestiture as the MRO and supervessels sales will offset these large capital projects. However, we certainly expect the benefit, as these conditions improve later this year and well into 2012.

It is also worth noting that we are expecting to see an improved second half from a profitability standpoint related to the consolidation of our manufacturing operation in Houston. While we have met facility consolidation impact, as a result late last year into the first half of 2011, we expect that to turn into net savings in the back half of the year and to have an ongoing annual annuity in years to follow.

Elsewhere within our commercial markets, the commercial aerospace OEM outlook continues to be positive. And we're seeing healthy demand for our products and services within both our Motion Control and Metal Treatment segments. In addition, we started to see in the first quarter conditions within our general industrial markets to improve as companies increase their capital spending levels and overall order activity. As has been typical in an improving economy, increased demand will materialize across a multitude of industries including automotive, transportation and HVAC, to name a few areas which we serve.

Turning to defense, our guidance reflects a very solid outlook, where we now expect to grow between 5% and 7%. This supports our views from our Investors Day, where we expressed our confidence in our current and future outlook even during years of flat budgeting or decreases overall. We are well-positioned on current key future defense platforms for the Army, Navy, and Air Force that will continue to support our growth well into the future.

We are market leaders in embedded computing and position sensors and expect to benefit from the increased demand for intelligence, surveillance, and reconnaissance for ISR and electronic warfare opportunities in the battlefield. Both expected to be strong contributors to our growth over the next 5 years.

We have a very solid position to be in navel defence driven by the ramp-up in production for the Virginia class submarines and the CVN-79 aircraft carrier over the next few years, as well as the future Ohio class replacement program. And as previously noted, we expect to overcome several of the larger defense headwinds which have significantly weighed down our sales and profitability over the past few years, including large program cancellations as well as other programs nearing the end of their production lives.

Turning to other matters, as you've seen in the past few days, we continue to actively pursue acquisition candidates to help expand our portfolio of highly engineered products and services. And I wanted to provide some highlight on the recent deals. We believe the recent acquisition of ACRA Control, Limited will expand our product offerings and growth potential in the aviation electronics market through their module data acquisition and recording technologies for both military and commercial aerospace technologies.

We also acquired IMR Test Labs, a strategic acquisition which further diversifies our offering of Metal Treatment services into metal material testing. We expect this business to become the cornerstone of a new engineering service business unit within our metal treatment segment, that is synergistic with our current capabilities.

We will look to continue to build our Company through acquisitions in organic investments, and also expand our unique portfolio of highly engineered advanced technologies that have enabled us to continue to outperform the markets in the markets we serve.

Finally, our consistent focus on strategic investments, diversification, and improved operational efficiencies have positioned us to grow our profits faster than sales and increase the long-term competitiveness of our business.

We expect improved profitability despite the various consolidations, unanticipated investments, unfavorable foreign currency transactions, and margin dilutions from acquisitions. We put our numbers in the first half of 2011, and raised our guidance across our defense and commercial end markets, based on improved market outlooks in defense and nuclear. With those headwinds behind us, and our cost reductions going in full swing, this shapes up to be a solid second half of 2011 and positions us well heading into 2012.

And at this time, I would like to open the conference call for questions.

Thank you, sir.

(Operator Instructions)

Our first question comes from the line of Myles Walton from Deutsche Bank.

Thanks, good morning.

How are you doing?

Good, good. A few questions, one on the AP1000 in terms of the design work that you're doing above and beyond what was previously planned and also the delay there to the first delivery in the second quarter of 2012. First is, what was the size of the recognized charge, I guess, in the quarter. And second, why doesn't it impact negatively the revenue expectation for the rest of the year if they're not going to be delivered this year?

The margin impact or the profit impact was $2.8 million. The other is, we have been posting sales based on an accrued basis. We have a lot more MRO nuclear that's making up for any reduction that you would have from slipping the schedule into the second quarter of 2012.

Okay. And the other is, from a risk reduction milestones ahead, this was the last discovery of the high temperature point you had to revisit. Is there another test coming up soon that would potentially be a risk element that there could be other discoveries on, or can you just give us an --?

As I indicated -- or as we indicated, we passed those -- the tougher tasks that could have been showstoppers. We were into our 14th cycle of 50 cycles for endurance and noticed a localized increase in temperature that could limit the life of the pump.

So, we did not fail any tests, so we thought it better to take it down, look at what was going on. We had put in some additional insulation to cut down on the current. That should be able to fix it.

We are going to also test that, make sure that's okay. But, the bearings lasts, everything looks in great shape after 12 cycles, so we don't anticipate any other problems going forward.

Okay, and the commercial nuclear and oil and gas markets, you talked about the order trends there, within oil and gas, obviously retrofits, and your supervessel order rates look good -- the MRO, not so much -- or rather the capital expenditures, not so much. Commercial nuclear, the MRO seems pretty good in new-builds. Obviously, bookings aren't coming through, just yet. Can you give us some perspective on book-to-bill in the first half, maybe, for the oil and gas markets?

We don't quite capture it by the markets. We have it by segment, Myles.

So I'd only be guessing that it would be a pretty healthy one based on what we saw in the first half, but I don't have the number for you.

Okay, I mean Flow Control has, obviously, the Navy piece in it, which I'm not sure how to separate out, so I was trying to isolate it to just your commercial piece of that particular segment.

Yes.

And any way to look at just the commercial book-to-bill in Flow Control?

Yes, the commercial book to bill for Flow Control in the second quarter was [181.82].

That sounds pretty good.

Yes.

And then cash flow guidance, for the full year you didn't raise it, and I'm not asking you to either. But just kind of curious of puts and takes as you look for the rest of the year on the cash flow guidance?

Well, if you look at where we're kind of -- we're still a little negative, but usually by about mid-year we break even. But really the only difference this year is we had about $22 million of pension contributions this year we don't normally have and we're about $22 million negative free cash flow this year relative to that. So we have that going on.

It's our typical cycle of we -- our inventory goes out in the second half of the year. We usually build in the first half of the year. We have big customer payments that are scheduled in the second half of the year and our sales are up in the second half of the year. So it's really our normal cycle from a cash standpoint.

I don't see this year being too much different than prior years.

Okay, the last one was on the ACRA acquisition. I think you said it was $2.5 million diluted for the rest of the year?

Right.

I guess the price point, right, it was $61 million for you said $13 million of sales in the second half, is that right?

Yes. In the last -- yes.

So I'm trying to reconcile the implied price for that acquisition versus the implied profit for that company.

Let me give you a little background on the profit peace. It's -- the issue is this one has a significant amount of transaction cost, first of all, that we don't normally -- it's international.

We had a banker. We have lawyers. We had a lot of -- so that will flush out immediately in the third quarter. Probably it has already flushed out already since we bought it yesterday.

In addition, there is some pretty hefty what we call short-term purchase accounting.

Right.

Things such as inventory step and the value ascribed to backlog, which is -- it's a good and a bad thing. They have a pretty substantial backlog, but unfortunately purchase accounting makes you recognize the -- so those all roll out, primarily in the third quarter. Some will spill over to in the fourth quarter.

The second six months of their first 12 months, they are very accretive. It's timing for us, it's not -- they're a very, very -- you'll see. As it was before, but that's the way it timed out for us.

We did not overpay for the business, I guess.

So the underlying margins, if we stripped out transaction and purchase accounting costs that burn off in six months, they should be significantly both Motion Control segment, I would imagine?

Yes, they will be good, yes, yes,

Okay, all right, thanks.

All right, Myles, thank you.

And our next question comes from the line of Eric Hugel from Stephens.

Hey, good afternoon, guys. Can you update us on the time frame of certification now for the AP1000 pumps and are there any milestones that we can keep track of?

No, there's just that once we go back on tests when this test is over with, which takes about 90 days, it will be certified.

And so, when should that be? And, I guess, if it's just a little bit of a delay, why is delivery being pushed out into next year?

It's just the fact that as you -- we already had other pumps that were past the point of where they also need to be reinsulated. So, we're going to do some preliminary testing, make sure that the current's cut down, based on the change that we've made. And we are going to go back into test by the end of September beginning of October.

Okay, fair enough. In terms of your metal treatment business, just trying to, in my mind, think about the timing here.

Obviously I guess you guys felt the impact of auto production coming down because of Japan issues, and rippling through the supply chain. What's sort of the timing that should we think of that sort of coming back? Is that -- are you starting -- did we start to feel some of that in the quarter or is that more a back half of the year event?

Well, I don't know -- you are looking at the automobile production affecting our profitability going forward, is that the question?

Yes, on the Metal Treatment. The leverage there.

That's not really a big issue, because more of our sales is in the heavy -- it was in truck, and the heavier model cars. We're doing well there. I think that what should be looked at significantly, is that we expect to end the year somewhere between 14.5% to 15%. For this business, that's still not robust.

If you remember when we had the last recession, the lowest we ever got to was 13.4% which is different this time around. It was the -- the great recession. So from a return standpoint, we're not seeing a robust economy. We're seeing something that is going along at a -- at a rate, but not a fantastic rate.

Maybe, Martin, can you help us maybe just sort of put a -- maybe a better idea in terms of how profitable the business is right now? You talked about making a healthy amount of investments in several new facilities. What kind of margin impact is that having to the business?

Right now, on about $3 million of sales out of that new -- out of the new facilities and right now we have eight of them. This year, we're looking at a $288,000 loss, compared to two years ago being about a $2 million loss.

So you're going to start to see, next year that will start picking up. Not being at the returns that obviously, the rest of MIC is at but to start having some good contribution.

All right. Glenn, what's sort of a good run rate that we should be looking at in terms of corporate and other expenses?

Yes, we're still -- we took it down a couple of million, so we're still -- we're still looking at somewhere between $25.5 million and $26.5 million. What's going on is the big driver in that expectation is we ran pretty favorable in the medical field in the first half of the year, and towards the latter part of the quarter we started to see that turn to a little bit of negative trend. So we're pretty cautious there because deductibles start maxing out and all kinds of different things impact that, but we've never ran the whole year favorable, so we're being a little cautious there but we're projecting that to be unfavorable for us in the second half. That's one item.

Pension will be a little bit higher in the second half by about $1.5 million, second half versus first half.

And the other piece is, in our long -- in our compensations and long-term compensations, we had a credit of $1.5 million in the first quarter because one of our grants, we recalculated based on numbers and things. So we had a credit there, and the second half will actually have an expense. So that's the $3 million swing.

So you get about a $4 million swing, half to half in medical, $3 million swing. Half to half in LPI, long-term incentive comp, and $1.5 million. Those are the three big ones. And pension, half to half.

Hopefully the medical may not -- we don't -- we're not really -- can't predict exactly where that's going to come in, but that's where we think it could be. If it's better, then it will be better.

Great, thanks a lot, guys, and good quarter.

Thank you, Eric.

Thank you. And our next question comes from the line of Tyler Hojo from Sidoti & Company

Good morning, guys. The first question, a really great quarter in Motion Control, just from a sales perspective.

If I look at your guidance, the low end would imply that we kind of dipped down just in the third quarter -- third and the fourth quarter and the high end would suggest maybe we're only up a couple million bucks. When I think about the ACRA deal rolling on, what's going on there?

I'm not sure I'm following your math there, Tyler. Maybe you can go through that again for a minute?

Well, usually you have a really strong fourth quarter within that business. Just seasonally speaking, Q4 is typically pretty strong. If I did the math right, the high end of your guidance implies something like $178 million or so in quarterly sales within Motion Control in both the third and the fourth quarter.

Yes. Yes, we're being a little cautious with our Motion Control segment right now.

Okay.

Yes, good point.

But, it does include -- it has been updated to include the ACRA deal that was announced last night?

That's right.

Yes, it is. And the other piece is part of -- part of our year this year is a little bit of an anomaly. And you got -- as you know, we have outperformed in the first half of the year, and a good part of that's in Motion Control. So a lot of it's kind of timing with their business, so it may not be as typical for them. They're a little more linear this year than they have been in the past, which because it -- it's kind of working out a little bit more that way.

But you got a little bit of that going on. And that's primarily in Motion Control.

Okay, that's what it looked like. All right. I just wanted to ask you, you guys have announced some seemingly pretty nice wins on the commercial aerospace side. You announced a deal with Parker Hannifin on the 787. It looked like your Predator acquisition announced a couple of wins, I believe on the Trip 7.

What's the outlook look there? What's your ship set content currently on 787 and where can it go?

Right now, our ship set level is about $430,000, which is obviously quite an improvement from when we originally announced it. It seems like our content continues to rise.

As you start looking at some of the changes that they're making. We had some sensors that also were associated with the 787. So I think, since they're starting to ship it, that's going to be our ship set content for a little while.

Okay. And any opportunities on any of the other seven series aircraft?

Yes, there are. I'll just leave it at that. [laughter]

Fair enough. I guess we'll look to hear about that. Thanks a lot.

Thank you. And our next question comes from the line of Steve Levenson from Stifel Nicolaus.

Thank you. Good morning, Marty and Glenn. Sticking on the commercial aerospace theme, with build rates going up, what's the sort of lead time you guys have for the parts that you are going to be delivering? How can we build that in if we know when the build rates are going up? Are they short or longer term?

Short.

Short? Okay. So, three months?

Three months.

Okay. That's good, thank you. You were talking about the spent fuel casts and pools? Does your ability to make vessels play into that or are these mostly other amounts?

No, no. This is a -- this is a patented design that we have, that is used in spent fuel that -- if you remember, about a year ago I indicated that we were qualified for the BWR but not the PWR, which is currently in test and that will be concluded in about a year. So it's a patented design that helps store these rocks and neutralize the isotopes.

And were these exotic metals?

It's a patented design.

Okay. What's the sort of pipeline you have for that as well as for parts similar to the ones that you just got the order from Progress?

Well, right now we've have looked at about -- we think there is about, in the near-term $56 million of opportunities for the spent fuel storage.

Realistically, with this thing with Fukishima, what you have to really look at, this is really a step --once those recommendations our regulations come out from the NRC, all 104 nuclear power plants are going to have to do whatever gets agreed upon or dictated to. That is going to really step up the amount of services that we're going to have to provide when those regulations come out. I can't put a dollar figure on it, but it's not a small number.

Sounds good to me. I know there's been some concern, based on calls that we get, that there's nothing going on in the business, and obviously, there's quite a bit going on.

Well, I think everybody looked at it when it first came out that this is going to delay new-builds. But for us we don't have a break in production. We are anticipating something in 2012.

I think what people don't realize is how much expertise we really have in this area and how much we do -- we do this every day. Our content continues to go up every time there is outages, but when it comes to safety, seismic readings, we're one of the best in the industry. Right now, I think the amount of order book that we are beginning to take in, especially in our Intertech which runs our nuclear aftermark division, the phone is ringing off the hook.

Got it. Thank you. Last one -- I know there is some discussion now about building an all new armored fighting vehicle to replace the Bradley. Is that something you're participating in, and if so are you going to have to do some R&D or will you be able to adapt the devices that you're using now in the Bradley?

Well, okay. No, you can't adapt the device you're using in the Bradley. T he CGV has now been -- said that it's going to be -- go forward.

There will be three participants, of which we are teamed with, all three. We expect R&D money to be given to the primes this year, and us probably getting monies for R&D next year. Depending on who wins those, depending on what kind of content we'll have.

Got it, thank you very much.

You're welcome.

Thank you. And our next question comes from the line of Ken Herbert from Wedbush.

Good morning, thank you. Just wanted to first -- on Metal Treatment, I think you said you opened up eight facilities in the last -- well, maybe in the last year to two. Is that the correct number?

Yes, that's two years, yes. Yes.

Last two years? Can you give any visibility on the plan for new facilities in the next -- into 2012 and 2013? Is this a pace you expect to continue or do you start to see maybe --?

No, I think that when you take a look at some of the investments we've made in Europe, that's where some of the manufacturing from the United States has gone to. So we are basically following that trend. We're looking to open up new plants in China in the aerospace area.

There is a great need for shot peening and also plating, in India. But India is another country that we've been surveying. A lot of the customers that we serve in the United States are in China, and also in India. Obviously, they'd like to have our services there.

So we do intend to put in a couple of more plants in China, and at least one in India over the next, let's say, three years.

Okay, I guess fundamentally -- I've always thought of this business, you've got great operating leverage here. And you've added a fair amount of capacity from a business that historically -- the last cycle, obviously, was peaking at 20% plus operating margins.

With the capacity additions in some of the incremental plans, do you still see even maybe upside to that number this cycle? And I'm just trying to get a sense as to calibrating this business moving forward. Because I think it's -- it's got some great upside, but -- and clearly the investments are warranted as you follow the manufacturing, but longer-term, how should I think about this business?

You'll see, if it's a robust economy, we'll hit 20. But we'll hit a much higher sales number.

Okay so those kind of operating margins are --? [ Multiple Speakers ]

I don't think that -- I think we can reach those operating margins. We're also doing a lot of investment of new state-of-the-art machinery, that should improve margins. But, realistically we always expect that during a robust economy, we'll hit around 20%. Right now we have a lot more facilities.

And one of these -- not today, but one of these calls, I'll go through how many plants we had last cycle compared to how many plants we have this cycle which will give us a good indication of where we think the sales can go in a robust economy. And then obviously the operating margin will follow.

Yes, that would be very helpful.

With the plants you had, obviously excluding the recently opened plants, where are you at these facilities in Metal Treatment? Can you give any sense as to where you are in terms of capacity utilization? I can imagine we have seen a pretty significant uptick, but --?

We have handled a lot more than what we have right now.

Okay, so as volumes ramp, the variable cost addition should be fairly limited, I guess is a good way to think about it.

Almost negligible. We normally pick up $0.75 on the dollar.

Yes, okay, that's very helpful. And then, on the oil and gas side, you talked about starting to see some recovery within I guess I would call it the MRO side.

What's been, historically, the lag which is always a good leading indicator? Can you comment on what we might then expect to see in terms of a lag from when now maybe on the new installation on the new capital project side, you might expect to see some pickup, now that you're seeing some of the activity on the MRO side start to pick up?

Well, we're going to see -- MRO has been picking up, even last year. We have very, very good sales from our relief valve and also service. Which is running well in excess of 20% of what it was last year.

The project side, we use two surveys to take a look at one project during the startup. One predominantly in the United States, and they're much more accurate. And you're seeing -- what I mentioned at, right now 2012 is 85% of 2011 at this point in time. There's going to be a larger buildup in the United States. That's a survey that's a very accurate -- so there's going to be a pickup in new orders in the second half of 2011.

Some of that will turn into sales and profit in 2011, but it's really going to show a robust 2012. Internationally we also -- shows a good 2012. The only problem there, is the foreign governments have had more delays than we're used to seeing in the United States.

So, it's a little bit more variable. But, net on net, it's going to be a nice increase in 2012.

Okay, so it sounds like, Marty, you're much more confident now in terms of the new projects in the timing as we head into 2012 within oil and gas?

Yes. We are.

Great, that's very helpful. Thank you very much and very nice quarter.

Thank you. Ken

Thank you, sir. And our next question comes from the line of Lucy Guo of RBC Capital Markets.

Good morning. I'm calling in for Rama Bondada here. I was actually wondering on your EPS guidance, there were a lot of pluses and minuses versus what you said in the first quarter.

I was wondering if it's possible to do a walk-through of what's changed in underlying operating results versus you have that revenue mix, and -- M&A dilution and FX impact. And just other one-time items like restructuring, and delays here and there. Is it possible to just go through what are the pluses and minuses, since you're keeping it the same as last quarter?

I think you just named them all. That was a pretty good recap.

But what we're trying to fix -- first of all, the majority -- or the or half of the increased guidance is from acquisitions which I think we've previously said aren't really accretive this year. So we're not getting any of the effect of diluted. So we're absorbing that dilution.

I'm certainly not raising guidance for that. We did raise overall organic sales up about $10 million. Offsetting that, is we expect another $2.5 million -- $2 million of FX for the second half of the year.

Well, I was kind of talking about EPS guidance, because you maintained the range as the same.

Right, the $2 million would impact it. It would be $0.03 per share.

We said we were at the higher end of the range.

Right. So despite all that, is what we're trying to point out, plus we had these expenses. So if you look guidance to guidance, those were the two pieces. We added on from acquisitions and net M&A activity that isn't going to -- is actually going to be dilutive overall to us for the remainder of the year. And any EPS we'd get out of the $10 million of incremental organic growth is going to be swallowed up by FX in the second half of the year.

So despite that, we still think we're going to be in the top half of the range as well. Despite these things. So --

And, did you -- was the delays in the deliveries and facility restructuring, was that factored into last quarter's guidance or is that new as well?

That was in -- it was in the second quarter. It was in the second quarter. It's reflected in our second quarter results.

Right, so that --?

The consolidations were in our first quarter -- yes, our first -- our first quarter. Or in our guidance from the very beginning.

Okay. How about the $75 million cost related to the cleanup in Japan? How does that -- how is that factored in?

It's not a cost. We're saying there is $75 million of quotations that we have out for the cleanup of Fukushima.

So does it impact P&L, then?

As we get orders, they can, yes, definitely. Some of them are longer-term solutions, some of them are not. Some of them are immediate, so -- depends on how they come in.

Okay. And then, a general question on the nuclear sector. I was wondering if -- how does the margin opportunity differ between your product sales and MRO and support sales, because you talked about support being stronger now.

Well, yes, our aftermarket sales have a lot more margin in it than our build-for-plant projects.

Okay. So for plant projects it would be something like high single digits or low double digits and then aftermarket would be mid-teens kind of range?

You could say that.

Okay, that was helpful. Thank you.

Thank you.

Our next question comes from the line of Michael Ciarmoli from KeyBank Capital.

Hey, good morning, guys, nice quarter. Thanks for taking my question.

Just a follow-up. I want to make sure on the earnings bridge, It sounds like there's $0.10 or so, I think you mentioned earlier, of negative items hitting EPS in the second half of the year?

Yes.

Okay, and then you also had a one-timer in the beginning of the year, I think the workers comp.

Right.

What is that -- I'm trying to balance out the one- timers that might not be impactful to 2012. That created a little bit of a tailwind in the first quarter, right?

Yes, I think the workmen's comp was like a million and a -- a penny and a half.

Penny? Okay. So it wasn't --

Yes, I remember it was from the first quarter.

Okay. And then a quick cleanup. What are the acquisitions at the backlog in the quarter?

About $32 million.

Okay. And, are you seeing any change in the pace of defense bookings? It looks like a lot of the defense peers out there are seeing some pressures with what's gone on in the continuing resolution. Are you seeing any impact, delays or slowdowns there?

No.

Okay, fair enough. Thanks, guys.

Thanks Mike.

Our next question comes from the line of Jim Foung from Gabelli & Co.

Hi, good morning guys. Good quarter. I have one question on commercial aerospace. I guess specifically your Motion Control segment. By 2012, Boeing and Airbus are going to have their production rate increases on all their airplanes.

And then we'll see also new airplane models come in, like the 787, 747. And I was just wondering, can those -- can the margin in Motion Control get back or surpass the peak level margins you've seen in the past, about 14% to 14.5%?

I believe so. If you were to take a look at the margins right now, two full -- or 200 basis points is based on acquisition.

Okay.

So if you were to put that -- if we weren't acquiring it, you'd put that back in there. We talked about, at the investor's conference, several new initiatives we have going on in sensors, in Mexico. We're also putting a new plant up in Mexico for the aerospace to produce the 700 series for Boeing. We've had quite a bit of consolidation, so, yes, we would expect that if we weren't acquiring and we intend to acquire, that we would be over and above those margins.

If I add back the 200 basis points, you're almost there, close to your peak margin. So, I guess maybe you can give us -- can you give us a range in terms of high how you think you can go as we get to 2014 with the peak monthly production for the airplanes?

Well, just that we can exceed 14.5%.

Okay. And should I use the 35% contribution margin?

I don't know. I don't have that particular number. You can use that if you think it's correct. I couldn't tell you.

Okay, thank you.

All right, Jimmy. Thank you.

I see no further questions in the queue at this time.

Okay. Well, I would like to thank everybody for joining us today. I look forward to speaking to you again at the end of October. Thank you, and take care.

Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.