Curtiss-Wright Corp (CW) 2012 Q1 法說會逐字稿

Good day ladies and gentleman and welcome to the Curtiss Wright 2012 first quarter earnings conference call. (Operator Instructions). Later we will conduct a Question and Answer session and instructions will follow at that time.(Operator Instructions).

I would like to turn the call over to Martin Benante, Chairman and CEO. You may now begin.

Good morning, welcome to the first quarter 2012 earnings conference call. Joining me today is Mr. Glenn Tynan our CFO. I am pleased to report we did our previously issued guidance of the first quarter, we are reporting $0.48 per diluted share, excluding the gain of divestiture of our Heat Treating business. As you can see this morning, we have produced solid sales growth of 11% led by strong performance this is the Metal Treatment and Flow Control Segments.

Included in our February guidance we expected our first quarter operating result would be negatively impact by several issues, including restructuring activity, start up costs and investments within our Motion Control segment. Startups in oil and gas within our Flow Control segment results in higher interest and pension costs compared to last year's results.

Despite these anticipated items, this EPS performance is one of our strongest first quarters in several years. With the exception of last year, which was the highest the past decade. We continue to reposition Curtiss-Wright for improved profitability into the latter half of 2012 and beyond. Overall for 2012, we are maintaining the guidance for sales and market growth rates. We expect sales growth to 3% to 5% and commercial of 13% to 15%. So an overall sales increase of 9% to 11%. Our first quarter sales performance along with our outlook for our end markets provide us with continued optimism in 2012. I will now turn the control over the Glenn.

Thank you. Our call is being web cast, and the Press Release, as well as a copy of today's presentation are available for download through the Investor Relations section of our Company website at www.CurtissWright.com. A replay of this call can be found on the website. Please note today's discussion will include projections and statements that are forward looking as defined in the Private Securities Litigation Reform Act of 1995. These are based on Management's current expectations and are not guarantees of the future performance.

Forward-looking statements always involve risks and uncertainties. We detail those risk's and uncertainties in our public filings with the SEC. In addition, certain non-GAAP financial measures will be discussed on the call today. Our reconciliation is available in the Earnings Release and at the end of the presentation and will be available on the Company website.

For our agenda today I will provide you with an overview of the Curtiss-Wright 2012 first quarter performance along with updates to our guidance, followed by Marty who will discuss our strategic markets and our outlook and open the call for questions. We experienced solid growth in sales in the first quarter of 2012 driven by increases in all three segments. Operating income despite being down overall in the quarter included a strong performance in our Metal Treatment segment.

Our sales results reflect solid performance in all of our commercial markets. Most notably in Commercial Aerospace. Based on our position as a key supplier to both Boeing and Air Bus. And also in Oil and Gas due primarily to higher sales of super-vessels. We experienced solid improvement in our Power Generating, and General Industrial markets. The latter based on continued improvements in the global economy. In addition, our performance in Defense was driven by diversification of business model and based on solid growth in Navel Defense, as well as our ability to overcome several challenges, including winding down of production on several sizable programs and the residual impact of several large program terminations.

Our first quarter results and the remainder of this presentation are presented on a continuing operations basis. That means the impact of the Heat Treating business is excluded. Prior year amounts are add justed to conform with the current year presentation accordingly. Overall sales rose 11% led by a strong 29% increase in our Metal Treatment segment.

Overall segment operating income was down 3%. While segment operating margins was 8.2%, down approximately 120 basis points, despite the strong sales and operating income performance in Metal Treatment. I will provide more details on the specifics impact to segment operating income on the next slide. Meanwhile new orders grew 7% year-over-year based on the growth in Navel Defense and Commercial Aerospace. Back log was approximately $1.7billion split across approximately 70% Flow Control and 30% Motion Control. In addition our overall book-to-bill was 1.03 for the first quarter of 2012 led by a solid 1.09 ratio in our Defense markets as orders surged more than 20% due to the timing on certain long-term contracts.

Finally, free cash free flow improved by nearly $40 million compared to 2011, primarily driven by working capital improvements. While capital expenditures were consistent with the prior year. Next I want to explain some of the key drivers impacting our operating income during the first quarter. Some of which are essentially one time in nature and are expected to contribute to increased profitability starting later this year. In the Flow Control segment oil and gas played a major role in the segments performance once again. As expected, we experienced lower margins during the start up phase in the new super-vessel business, which is still in it's first year of operation. We expect these margins to improve as the sales volume continues to increase.

Flow Control also experienced higher year-over-year long-term compensation cost of over $2 million. Next within the Motion Control segment we had planned restructuring costs of $3 million along with startup costs of $0.5 million relative to our new emergent operations facility supporting the Boeing 787 program and the opening of our new low cost facility in Mexico.

In addition, we made approximately $1.3 million of strategic investments and a couple of development programs for Boeing including the Chinook helicopter and flap tracks for the 737-800 aircraft, which combined could provide approximately $85 million of revenue in the future. Although these various investments negatively impact operating income in the quarter, they are expected to benefit our full year 2012 and future profitability.

In addition to these various impacts to operating income, there also was approximately 30 basis points of acquisition related margin dilution primarily in our Flow Control and Metal Treatment segments. Lastly, as we mentioned on the last call, our operating income was negatively impacted as expected by higher pension costs compared to the prior year period.

Now that we have completed the sale of our Heat Treating business, we wanted to pull out our reconciliation of our first quarter earning per share performance compared to the guidance we provided on the last call. Our first quarter 2012 results including the Heat Treating operation results amounted to $0.48 per diluted share, which exceeded our guidance range of $0.40 to $0.44 provided in February. And for external reporting purposes, the Heat Treating business first quarter results and the gain on the sale will be reported as discontinued operations.

All future releases and discussions will focus solely on our results from continuing operations. Moving to end markets. In the first quarter Defense represented 37% of the sales while Commercial represented 63%. Overall we achieved strong sales growth of 17% in our commercial markets based on improvements in all three segments.

We continue to benefit from the ramp up in commercial Aerospace market with a strong 43% growth that led all of our end markets in the quarter. We experienced strong sales across all major Boeing and Air Bus platforms, as well as increased demand from regional jet and commercial helicopter markets resulting in 18% organic sales growth in this market.

In our Oil and Gas market we experienced strong demand for super-vessels and higher MRO revenues primarily from international customers. Our business supporting large capital projects internationally continued to be soft. In our Power Generation market we benefited from high her revenues on the U.S. AP 1000 project as well as increased after market sales supporting existing international operating reactors.

In our Defense market sold demand in Navel Defense for the Virginia class submarine and CVN 79 aircraft carriers programs offset lower sales in Aerospace and ground defense. Due primarily to lower sales on the Global Hawk Program as the development phase winds down and timing on various Aerospace defense programs. We did however experience an increase on the Joint Strike Fighter Program and for turret drive systems and ammunition handling systems for international customers.

Next, I will update you on the outlook and end markets for 2012. Updated guidance reflects removal of Heat Treating business from current and prior periods and otherwise remains unchanged for all of our end markets. In our Defense markets we remain cautiously optimistic. The long-term outlook in Navel Defense remains favorable as well as outlook for growth in imbedded computing and censor products due to our position on numerous C4 ISR Programs.

However, although publicly supported by the Secretary Panetta, the timing of future ground vehicle up grades and modernization programs continues to be uncertain. That said, the recent news from Congress indicating support to reverse the cancellation of the Block 30 Global Hawk Program and support full funding of ground combat vehicle and provide increase funding for production of the Abrams tanks and Bradley fighting vehicles is very encouraging.

In our commercial markets we expect the momentum from the strong first quarter in commercial Aerospace will continue in 2012 as Curtiss-Wright is well positioned for solid sales supported by multi-year up cycle anticipated in this market. Meanwhile our strong outlook and power generation is based on the ramp up in sales for the U.S. AP1000 project in Georgia and South Carolina, as well as continued solid growth for after market business supporting operating nuclear plants world wide.

In our Oil and Gas market we expect study growth and demand for super-vessels and refinery related MRO products. We remain optimistic that some of the large capital projects will benefit the results later in 2012. In addition as we stated earlier, we now expect to see substantial new orders for newly certified oil and gas products beginning in the second and third quarter.

And finally, the continued improvements in worldwide economic conditions are expected to provide solid sales growth in general industrial market. We are maintaining projections for overall sales growth of 3% to 5% in Defense and 13% to 15% in Commercial.

Overall our outlook for total sales growth of 9% to 11% in 2012 is unchanged as well. Let me now cover our segment guidance which reflects a solid overall sales performance from each of our segments in 2012, as well as overall higher operating income and margins compared to 2011 results from continuing operations. Guidance in both Flow Control and Motion Control remains unchanged. The only segment with changed guidance is Metal Treatment.

We have adjusted the sales guidance to exclude $40 million in full year sales pertaining to Heat Treating. Operating income guidance is adjusted to remove $13 million for the Heat Treatment business for the full year and the potential addition of $12 million of previously announced potential restructuring costs that Management is currently evaluating.

While on the surface it appears overall operating income and margin will be lower than 2011. I will illustrate if you remove nonrecurring impact of the potential restructuring from the 2012 operating income we would actually have improved operating income and margin for 2012 compared to 2011 financials from continuing operations. Our forecast for Corporate and other expenses changes slightly to approximately to $32 million.

Taking a closer look at the updated Metal Treatment segment guidance, as I previously noted, our new guidance reflects removal of full year sales and operating income pertaining to the Heat Treating business and the inclusion of the potential restructuring. The new margin reflect approximately $3 million in under absorbed Metal Treatment Corporate expenses that had been or will be absorbed by the potential Heat Treating business and potential facility closures.

However, if you adjust the 2012 guidance to remove the impact of the restructuring costs we are approximately $12 million operating margins will be north 14% which would be 90 to 110 basis point improvement from 2011 results from continuing operations. Looking forward if you consider the benefit resulting from our potential restructuring in 2012 and expectations for lower Metal Treatment corporate expenses, the margins would be similar to the 2012 initial operating margin guidance which is why we expect the 2013 margins will be comparable to prior year levels.

Next I would like to walk you through a reconciliation of diluted earnings per share guidance. Starting with 2011 results the proforma diluted EPS value of $2.54 per share shown here has been adjusted to remove the impact of our Heat Treating business and also excludes the non recurring R&D tax credit of $0.09 per share. For 2012 beginning with the guidance on February call you can see the transition to reach the revised guidance provided on April 2.

The guidance at that time of $3.02 and $3.12 per diluted share included the gain on the divestiture, removal of Heat Treating operation from the final nine months of 2012 and the impact of potential restructuring cost. Next to reach our up dated guidance on continuing operations basis we have removed the first quarter discontinued operations of $0.06 per diluted share as well as gain of $0.38 per share to reach new diluted EPS ranges of $2.58 to $2.68 per share for 2012.

Furthermore, if you remove the potential restructuring charge of $0.17 per share from our current year figures, the result is 8% to 12% increase from 2011 proforma diluted EPS. Looking ahead to the remainder of 2012 we expect to generate approximately 60% of the full year diluted earnings per share from continuing operations in the second half of the year with the fourth quarter being the largest as we have done historically.

Finally, here are additional income statement guidance metrics for 2012. In addition to our solid sales growth, we expect overall operating income from operations to grow 10% to 14% in 2012 and consolidating operating margin to increase 10 to 30 basis points to a range of 9.7% to 9.9% compared to the 2011 financial results from continuing operations.

This including the additional $12 million of potential restructuring in the Metal Treatment segment. In addition we lowered our interest expense by $2 million based on the first quarter results primarily due to results of the interest rate swap program and better than expected cash flow performance. We also raised our estimate of diluted shares slightly, diluted shares outstanding for the year.

We have revised our free cash flow estimate down $10 million to a new range of $80 million to $90 million to reflect removal of the Heat Treating business. Please note, that as a result of this sale we expect to net approximately $40 million in cash which will appear in the cash flow statement and form 10-Q as approximately $49 million cash provided by investing activities and approximately $9 million negative impact to cash provided by operating activities. As a reminder, our full year 2012 free cash flow guidance including approximately $11 million in additional pension contributions and $12 million in higher interest payments compared to the prior year. Now, I would like to turn the call back to Martin Benante before we wrap up the call.

We have discussed thus far today, we have succeeded in beating the previously issued guidance for the first quarter reporting $0.48 per diluted share. As I mentioned earlier, 2012 was one of our strongest first quarters in the past decade in terms of earnings per share second only to last year's record first quarter. We belief we are positioned well in 2012 with sales growth forecast in both Defense and Commercial markets.

Despite the operational investments that impacted the first quarter, we continue to project double digit growth in sales, operating income, and adjusted earnings per share of full year of 2012. Starting with our Metal Treatment segment, I want to provide you with some of the strategic rational behind our decision to sell the Heat Treating business.

First, it was the non core business. As it was lowest on metal treatments technological pyramid and did not fit our strategic direction to move towards more high end engineering services. Furthermore, the business is capital intensive. With several aging facilities that would require significant future capital expenditures that newer equipment and technology. It is very cyclical in nature with operating costs highly sensitive to natural gas prices. Prices are near historic lows they are expected to rise as world economies improve over time to reduce profitability in the future.

Additionally, back in 2009 during the economic downturn, as sales declined operating costs rose leading to operating margins of 2%. In the end, we believe this business is operating at near peak operation toward the high end of the cycle and we believe we received good value for the business. It is also worth noting we expect to net $40 million in cash as a result of this traction. As part of our restructuring consolidation efforts we are evaluating the closure of certain facilities that do not meet our performance criteria. We are considering moving certain assets of these operations to other facilities, a final decision has not been made at this time.

If Management elects these plans we anticipate a positive impact on the Metal Treatment performance beginning next year. The affor mentioned issues are a few examples of how the Metal Treatment segment transforming itself. In addition, this segment will continue to strategically diversify and move up the technological pyramid.

Besides being the world leader in (inaudible) the recent acquisition of BASF Technologies and IMR Test Laboratories significantly stand their service offering to the higher technological advanced processes of thermo spray coating and mechanical (inaudible) testing and these new strategic expansions are expected to be high growth areas and accretive to the Metal Treatment profitability going forward.

In addition to acquisitions and subsequent organic growth, metal treatment will continue to stand the growth through addition of new Greenfield facilities around the world. Which generally start-up costs lead to future organic growth. Currently we have 10 Greenfield facilities in the startup phase including a plant in India and a second plant in China with plans for several more over the next few years.

In 2012 it is expected these Greenfield operations will generate approximately $10 million in sales with a operating loss of $2 million. We consider green facilities in foreign countries a startup operation for the first three years, at which time they will become profitable.

We get some of our end markets, I will begin with Defense, where we continue to monitor the potential changes affecting Defense industry as a whole at the role that Curtiss-Wright place. The Department of Defense has made it clear that widespread budget cuts will be implemented over the next decade. We will be impacted by those decisions.

We are beginning to see a few positive signs from the Congress review of the 2013 budget as the House of Representatives is looking to add back significant funding that had been previously reduced or eliminated by the Department of Defense. These include draft legislation to prevent cancellation of the Block 30 Global program. The authorization for additional procurement spending for the B-22, FA18-E, CH47 Chinook helicopter, Bradley and Abrams and to fully fund the ground combat vehicle in the technological development phase.

We are encouraged by the record number of design wins and bid and proposal activities that we are experiencing in 2012. Particularly in our embedded computing business. 2011 was a record year for design wins and bid in proposal activity, particularly strong during the second half of 2011. We experienced an increase in design wins of greater than 10% in the first quarter of 2012 compared to 2011.

The program value of these design wins exceeds $150 million, the majority is involved in leading CFISR programs to upgrade the next generation platform applications such as radar, missiles, aerial and unmanned vehicle electronics. Throughout the year we discussed the rationale behind the average point of view on Defense including we expect our role in the Navy defense to lead defense results in 2011 with mid sale single digit growth based on the strong support with the expansion of the Navy ship building program.

We remain very well positioned on key current and future events platforms domestically and abroad to continue to support our growth well into the future. We expect to benefit from the increased focus on the new ISR electronic warfare and communications capabilities. They remain key areas of increased investment dollars in the current and future year defense spending plans and will continue to support sales growth in defense. Overall, we are cautiously optimistic in defense we provide down side protection in less favorable items and in fact Curtiss-Wright has historically been able to out perform the Department of Defense budget in defense downturns.

In our Gas and Oil market we experienced solid sales growth in our refinery related MRO products by record sales of our traditional safety relief valves. However, our coker business supporting large capital project continues to be soft. We expect this to strengthen in the second half of the year due to a large number of proposals in the final phase of negotiations but also the introduction of new coker products which are drawing strong industrial interest.

The new products include coker setter feed, electric actuation which will reduce our customer's operating and maintenance cost by increasing the drum life up to several times the current state-of-the-art. These new sales will come sooner than planned so they will have a negative short term impact on the production line entering the startup phase.

In the third quarter after the typical Spring turn around season has subsided we will consolidate our Houston After market Service Center. This will allow optimum capacity utilization of our new machine shop and offer stronger services while reducing the fixed costs. (inaudible) Sales are better than expected as this year is shaping up to be ahead of last year. Super-vessel sales continue to be strong as we are completing several large orders. We are pursuing significant orders which we expect early in the third quarter and will generate increased sales in the second half of the year. Overall the first quarter MRL offset the weakness in the large capital projects. We expect to rebound in the second half of the year as we indicated during or last call.

Next is our Power Generation market and also an update on continued positive events in the business and industry. Following the NRC's grant of full regulatory approval for the AP1000 reactor designed earlier this year, in late April Westinghouse received full notice to proceed with the contract of two Westinghouse AP1000 reactors at it's VC Summers Plant.

This comes on the heels of the combined upward licence at both southern plants in the first quarter. Construction of the first two U.S. AP1000 nuclear plants in South Carolina around Georgia are on schedule. Japan recently announced two of the nuclear reactors in western Japan are safe and would need to be restarted to meet the Country's severe energy needs. They will be the first in Japan to restart since the Fukushima crisis last year. In China, construction essentially made on schedule to the plants currently under development, particularly the first Westinghouse AP1000 reactor. That is expected to be operational in 2013.

In addition China announced that it expects to restart reactor construction approvals later this year. South Korea announced plans to overhaul older nuclear reactor equipment that have been in operation more than 20 years. That will translate to future sales opportunities for Curtiss-Wright. Next an update on the AP1000 program. As you hopefully saw in our April 16th Press Release, we are excited to report we completed the full qualification testing of the lead AP1000 reactor coolant pump. The temperature winding issue from earlier this year was with acceptable tolerances for both China and domestic products.

Conclusion of qualification testing included 50 service and more than 500 total operating hours. Clearing the way for installation of the reactor cooling pumps in China. The first AP1000 reactor to be built in the world. The first two RCP are expected to be ready for shipment in the second quarter which will meet our customer's delivery requirements.

Furthermore, the successful completion of testing also led to praise from Chairman Wong, of the State Nuclear Power and Technology Corporation of China. He stated not only will the successful completion of this important test have a significant positive impact the AP1000 project in China and the United States would also for the promotion of the AP1000 other international markets.

Finally, we still expect our next major AP1000 order to come from China later this year. Overall, our long-term view on new and existing nuclear reactor power generation businesses both in the United States and across the globe remains favorable. Turning to other matters, we will continue to invest in the future and build our company through acquisitions and investments and expand our unique portfolio of advanced technology enabling Curtiss-Wright to continue to out perform in the markets we serve.

Additionally, our consistent focus on improved operational efficiency and higher profitability has positioned us to grow profits faster than sales once again in 2012 which will increase the long-term competitiveness of the our business. A few examples of what we are making. Completion of second low cost manufacturing facility in Mexico. A Greenfield approach for Curtiss-Wright that we deem necessary to revamp our aerospace business to meet industry needs.

Despite near term costs in 2012 and will continue through the next few quarters we anticipate savings from this facility of approximately $6 million per year over the next few years. In addition, we implemented further restructuring in the first quarter of the Motion Control segment. While we incurred approximately $3 million of cost this is the first quarter, we expect another $1 million in the second quarter, we will begin to see the $7 million of annual savings in the second half of the year. As previously indicated, we continue investing in Greenfield facilities, for example, in Metal Treatment we have 10 Greenfield facilities in the startup phase which are expected to generate approximately $10 million in sales in a $2 million operating loss there 2012.

Also we expect to move beyond certain operational investments in 2012 which have impeded our results in recent quarters, including investment in AP1000, as we work to complete the testing for the reactor coolant pumps and start up cost of our super-vessels in our Flow Control Segment. It is about to enter the second year of operation. Overall, our out look for right in 2012 and future years remains bright. Reflecting our disciplined capital deployment strategy combined with our commitment to return cash to shareholders through solid earnings per share growth and dividends and share repurchases. I would like to open up the conference for calls.

(Operator Instructions). Our first question is from Steven Levenson Stifel Nicolaus. Your line is open.

I think it is great the efforts that you are making to shift things around toward higher margin businesses. In terms of the acquisition strategy is there a particular focus on one segment or another or away from one segment or another as you go forward.

No, right now we have our three acquisition teams out. Obviously, in the Metal Treatment we are looking for more advanced technologies. We have a lot more metal services that we are providing. We are expanding the laser efforts or businesses. In our Flow Control, once we get through some of the startup costs within the flow control area, the gas and oil, that business will be in very good stead. We are looking in all three of our businesses to acquire businesses.

Thanks. Do you think there is low hanging fruit in the in aero structure area, it seems like a pretty fragmented business other than a few large operators.

We are not that interested in structure.

Thank you very much. Next question is from Rama Bondada with The Royal Bank.

Going back to the sales of the Heat Treatment business you gave us good color behind the reasoning behind the sale. If my math is right it looks like It was sold for 3.5 times EBIDTA. I know you said there was some CapEx that needed to be brought on line for that business, but Is that how we should be thinking about that for most of that .

I think I can set you straight.

The way we look at it. That business is so cyclical, as Marty pointed out, to go back to 2009 they had 2% operating margin. The last six years, yes, this is a peak year for them. We feel we got a good price. As you go back they average over the last six years about $8 million in EBIDTA. On average historically that is what we get from this business. If you consider that $8 million EBIDTA that would be a 6.5 multiple. In these businesses I think we said 5 to 6 is what we got so we thought 6.5 was pretty good.

If you look at it with more color, first of all, one of the businesses that was bought we purchased in 2001. We haven't made any investment. The facilities weren't in the greatest of shape. It has extremely high fixed costs and the operational cost is varying based on the fuel prices. When you look at it, Body Coat is the leader in heat treating. They know the fair price and we know the fair price. Nobody was taken advantage of during that transaction. We look at it being a little higher sales as far as the EBIDTA level than what you calculated.

Okay. Then looking out for Metal Treatment, this was a business doing 20% margins in 2006 and 2008, has that change potential to get back to 20% margins in a couple years here.

We think we can approach it. When we look at the restructuring next year that adds a whole percentage point to their profitability. The only thing you continue to see.

Percentage point from 2011.

From 2012 going into 2013 with those changes. The thing that is going to drag them down is that we are expanding to new countries. We don't have these facilities. We are not going to be buying things, we will be putting in Greenfields. The numbers as the economy continues to expand will continue to improve.

I will say that to clarify something that is in the thing, when you look at their margins this year, you add back the restructuring in the 14%, 14.2% range. What happened because of the sale of that business and if we close the facilities to under absorbed management expenses metal treatment that we expect to minimize over the next couple of years and benefit of restructuring if we do it going forward would get us back to where we are this year. They neutralize each other.

This you pick up the profitability.

Yes.

Could you give us the new ad market mix in the metal treatment business following this divestiture.

The end market.

How much towards commercial, how much towards, you know, power generation, defense.

We don't have that at our fingertips. We can work that up for you.

It really doesn't change that much.

Yeah, the heat treating was heavily weighted towards the general industrial. That may come down a little bit but not material enough to change it dramatically.

Thanks, guys.

Our next question is from Ken Herbert with WebBush. Your line is open.

Good morning. Just a first question. Just to follow up on an earlier question you have got your debt levels down the lowest they have been in several quarters, you are getting cash on the balance sheet, Marty, would you consider an acquisition beyond the traditional deals you have been doing over the last couple of years as you look at other end market or potential of technologies.

Yes.

So I can take that you have got the balance sheets that are looking strong right now relative to where it has been so I guess to assume that you have got some you are looking at a wide range is how I would put it.

We are. We didn't limit ourselves previously, but I think there is more opportunity now than in the past couple of years to look at larger businesses, not from our balance sheet standpoint but what is available on the market and what we see out there. M&A has been slow. That has been shared by quite a few of the companies but we do see some pretty good properties out there right now.

That is helpful. As I look at the end markets two follow-up questions. It looks like commercial air is growing pretty well. Do you the guidance would imply that growth slows significantly starting in the third quarter. How do you see that potential relative to the guidance for that business over the rest of this year.

Commercial aerospace.

Yes.

You are going to start to see the ramp up of increased small body airplanes by both Airbus and Boeing. The other thing is that our new facility we put in for EVO to assist the plant in South Carolina for Boeing on the 787 existed as startup. We expect that to be in the next couple years $15 million plus there so we still see pretty good growth in the aerospace industry and we are also putting our second facility in Mexico based on the expansion of both production and new business that we have received from Boeing.

We indicated we have the 737 transition flap tracks that we expect over the next few years to be about $40 million in revenue. That is one of the reasons for Mexico to improve or margins. We see pretty good growth in the next few year

That is helpful. On power generation it looked like this quarter that the existing reactor sales growth was lower than we had seen over the last few quarters with the new reactor sales driving the up side here. Is that really due to some you know difficult comparisons? Do you see what is your outlook specifically for the existing reactor sales, operating reactor sales the rest of this year.

We expect it to improve. On our last call we talked about the new standards that have to be implemented based on Fukushima and that was going to be a double-edged sword. We will have more sales because of the requirements, the increased requirements that the plants in other states have to go through based on the Fukushima incident. Right now they are curtailing some of their sales so they can have money to pay for these efforts and these efforts are in the walk down phase and valuation stage which we will be assisting.

As time goes on there will be equipment and that is going to be a very lucrative business for us. We said there is going to be a short term disruption in the amount of money we will receive from operating plants and that is what took in the first quarter. The Fukushima efforts are taking place. You will see improvement in the second quarter this year. You will really see pretty good sales in 2013 and 2014 and beyond that. That is the reason why the first quarter was a little bit light.

Okay. Thank you very much. Thanks for the additional disclosure

Next question is from Eric Hugel with Stephens, your line is open.

Oil and Gas with regards to the large project these things have been being delayed for quite awhile, what gives you the confidence today that this is all just going to happen now in the back half of the year and that we won't see continued foot dragging.

We are in negotiations and finalization of negotiations for some of those projects that gives us more than a little bit of confidence. We are seeing things not moving to the right as much. Most of these sales are in foreign countries. What we experience in the United States is different than what is what is going on in the different parts of the world.

The problem is that they sometimes put their project off and we actually obviously haven't experienced that. We are in the throws of negotiating those contracts. We have a lot more bidding and outstanding quotations and customer interest in new project. Again, we also talked about some of the new products that we are putting out there which will also help improve sales wise, maybe not profit wise this year but obviously it will be the first introduction of products. Those products should do well in 2013 and 2014 and beyond.

Fair enough. With regards to your sales growth, last quarter when somebody asked the question with regards to what was the organic growth in that sales number, is that still in the 6% to 8% range.

Yes.

3% in if the first can you talk about where maybe a little more specifically what areas the business that you are expecting to see a real big ramp up in the organic growth story here.

What you see in the defense side is determination of large contracts that had accrued sales where you were allowed to take sales and profitability as you experienced costs that is replaced. We are going to that we had not too long ago where you are experiencing the cost of the first couple of quarters but shipping the product out and getting the profitability in the third and fourth quarter.

That is one of the fundamental shifts if you look at the sales in commercial and military between the first and last quarter, almost everyone goes up by $100 million but subsequent increases every quarter and by the last quarter almost $100 million increase from the first quarter. You are going to see improved profitability and you are going to have the restructuring control by the end of next quarter that will break even.

I am talking organic sales growth. I assume that this pattern happens every year. The comps are somewhat similar, right? In that regard.

Right. I am talking more organic sales growth, I assume this pattern happens every year so the comps are somewhat similar. What is going if you are looking for 6 to 8% full year organic, you did 3% in the first quarter, what is ramping that higher as we go through the year.

You have got to be more of defense and commercial sales growth.

Oil and gas, as we said it will ramp up when the new project hit. Power generation we are in the beginning phase of the bell curve. They are going to ramp up. We did 9% in the quarter. Guidance is more than that. That is the U.S. contracts ramping up as we move past. Those are probably the two biggest drivers.

I guess lastly, and I will get back into the que, you talk about the potential for $12 million and the $0.17 restructuring it doesn't sound like things are completely finalized. Is that number sort of everything that you could possibly think of or imagine or is that middle of the road a number? Might it go higher or lower? When would that be decided.

That is the highest number. We are working out details with customers to make sure that it can take place this year but we put out the highest number out there so that this disclosing what we can see in the future.

Glenn, what was the G&A in the quarter.

$23 million.

Thanks a lot.

Next question is from Myles Walton with Deutsche Bank. Your line is open.

I am trying to understand and I apologize if you alluded to it. The implied Motion Control margins in the last three-quarters is 15% if the math is right and you reported 7.8 for the restructuring. You get another 300 basis points, call it 10% or so. How do you get from the 10% in the first quarter clean to 15% in the final three quarters? I heard a couple of puts and takes one was restructuring benefit and Greenfield losses, can you give me confidence color that, you know, that the low end of the guidance in Motion Control is hittable.

Yeah, I think you hit the main pieces, meaning restructuring costs in Q1 and in Q2 and the benefits in the second half of the year which can be substantial. You also have strategic investments that are going to go away and the sales increase is typically you mentioned 15% for the quarter. They always have a big fourth quarter, you know, which gets to the 15% that you need for the rest of the year. Between the sales, elimination of the strategic investments and benefits and elimination of the restructuring costs around benefits.

And startup costs on some programs are going to be gone and there are going to be a lot more profitability. There are a lot of moving pieces in the quarter but in the year without a doubt.

That is why I wanted one layer deeper. You said $2 million would be the cost, the losses on the Greenfields for the next three-quarters.

That is on Metal Treatment. On Motion Control we had a half million dollars of startup costs in the first quarter. That is cost only not much revenue. There may be a little more in the second quarter. When they have sales that turns from cost to profit. That is the Motion Control piece of that. Metal Treatment has a number of Greenfields that is their operating motel they have 5 to 10 Greenfields in startup phase at any particular point in time.

That makes sense. What is the pay back for the full year of the restructuring? The $3 million or so you had in the first quarter.

Approximately $7 million.

It is $7 million on an annualized business a good piece of that in 2012. The times is not perfect.

We expect to break even by the end of the year. That $4 million we expands this year will be recouped before the end of the year and it should be $7 million a year.

The other one is Metal Treatment. The margin profile, Glenn, you mentioned get back to where you had the original 2012 guidance for Metal Treatment and the original margins for Heat Treatment were 16.5. You can get to 16.5 in 2013.

Sure, that is our expectation, yeah.

I guess the other question is you sold the business at peak margins and peak operating conditions. Were you expecting you would have had to put a big slug of capital into it this year, next year or was it more the net gas prices that were too attempting to not sell here?

It was actually both. We were estimating if we were going to operate this business coming forward about $10 million in capital we would have had to put in. Whether it was all-in-one year I am not sure. We didn't take it that far because we didn't plan to do that. We will let Body Coat do that, but the natural gas price, of course.

I guess the other piece on the AP1000. What is the timeline for handing off the first pump at this point.

The end of May.

End of May and presumption the order to follow sometime this summer.

What we said was that the government, the Chinese government was looking to start relicensing and they will get back together in September. If they were to do something in September we will definitely see something by the end of the year.

September. Then the last one on clarification, I guess. Glenn, you mentioned strategic investment for Motion Control for $1 million or $1.5 million.

$1.3 million.

I think you mentioned the Chinook. As you look at that should we interpret that as negative VAC or to programs you already had or internal R&D to win a new program.

It's internal R&D. Specific development cost to win those contracts.

The thing is we already won them, we are just developing the product and you will start seeing shipments and profitability during the second half of this year.

So those comps were anticipated in the prior guidance.

We are trying to comply that to go through the reasons why. The first quarter looked like what it does.

That is helpful.

Next question is from Tyler Hojo with Sidoti & Co. Your line is open.

Good morning. Just really quick. What was the split in the power generation related sales between new construction and after market in the quarter? I am also kind of wondering what the expectation is embed understand the guidance for the year.

I don't have the breakdown that way for the first quarter, Tyler.

Could you talk about the full year? Just ballpark numbers. I think last year you were about $100 million new build.

I believe I gave that number out last quarter.

Maybe I can maybe follow up offline on that one. In regards to the laser business. It is awhile since we have got a estimate there. How big is that business today? Could you just discuss what the growth prospects are there, how penetrated that opportunity is in.

Right now it is between $16 million to $17 million. It is not much greater. We reported 12 to 14. A lot of the original work that it was doing on the have come to a minimum. We have a lot more business from steam turbines. We are dealing with the steam turbines operators. We have implant lasers with Boeing. We also are putting one in Singapore and in South Carolina. It is becoming a lot more diverse.

Tyler, the power generation is approximately one-third new build and two-thirds operating reactors.

Is that for the full year or in the quarter or both.

Full year I don't have the quarter.

Great. The only other thing I had, I don't know if it was provided or not. If you could provide the backlog by segment.

Backlog is $1,000,000,180 billion for flow control and $535 million for control, Motion Control.

Thanks so much.

Take care, Tyler.

Next question is from Michael Ciarmoli with Key Bank Capital Markets.

Thank you for taking my questions. Glenn, the Heat Treating you sold was that one of the most profitable business units? Looking at the sales and operating income it looks to run at a very high level.

If you look at just 2012 which is a peak of all-time for them, yeah, but as I said before, as we looked at the prices they generate approximately on average about $8 million of EBIDTA from this business on average from the year. That is why we got that.

In shop and laser there are other business was the same profitability. The other thing is whether you look at the thermal spray and mechanical testing if you took out their purchase accounting they would also be quite high. Now you are getting a drag on that business from the purchasing and accounting.

That is helpful. I may have missed this. In the new guidance you provided on the operating income from continuing operation it looks like the midpoint is lowered a couple million dollars is that the function of the increase in restructuring in Motion Control or is there anything else to why that operating income number excluding Heat Treatment why that would trend lower.

Nothing sticks out, no. Nothing comes to mind.

So then just a couple more you changed a little bit the growth forecast for some of the end markets, you tweaked down oil and gas and tweaked down general industrial and you held a full year revenue growth the same. Anything specifically in general industrial that caused you to moderate that.

It was solely due to the Heat Treatment.

That is all function.

It was predominantly in general industrial. That is the only change we made.

Perfect. Two more. I know on the last quarter you talked about the H back with flow control being a good growth opportunity I think you were targeting 18%. How is that business tracking so far.

Unfortunately, I made a mistake. It wasn't 18%. It happened to be for the third and fourth quarter. It has a small growth, but it is profitability is improving quite a bit. I made a mistake when I looked at those numbers and gave you the difference between the third and fourth quarter sales compared to full year. I am glad you brought that up. Everybody else I am sure were shaking their head where did they get that growth from? We weren't lucky.

Perfect. The last one you guys are used to operating with a back end loaded year fourth quarter being heavy. How are you calibrating some of the challenges maybe that might impact Defense with a continuing resolution, lame duck Congress and sequestration out there? Would your guidance bracket that.

Obviously, you heard that our backlog is quite high. We have quite a bit of the orders in backlog booked to bill. We have a 30% go get in the book-to-bill area. There is some variability in there. We feel we can meet it. Right now everything is tracking very well to give us what we are looking for. That doesn't mean that it is going to end upper effect, quite frankly. I think we have enough of the good numbers there and how we see the quarters laying out that will get us to where we want to go.

Perfect. Thanks a lot, guys

Final question from Chris Bamman with CapStone Investment.

Good morning. Just a couple quick questions. With the guidance. Are you considering $0.48 or $0.42 to be the continuing operations.

$0.42 was the continuing operation this is the first quarter. $0.48 was reported.

The guidance is based off the $0.42.

Correct.

Then just, you know, looking at the aerospace defense market with the C4, IRS type of applications can you provide a little bit more color on what the outlook is on that with regard to timing of appropriations? I know that was a area of focus for you.

One of problems is we are not tied to any large program. Our orders are shifted because of cancellation of large orders, but we have hundreds of customers in that area. If something goes forward we are on it, if something gets reduced we are on it. We have won a lot of brand new programs there. There are various programs so it is not easy to go through what essentially moves the needle. It is just a matter of we are on every new program there is.

I think Marty mentioned one of the things we look at in that business is the design wins up 10% the first quarter from a record year last year that is encouraging and that is primarily in computing programs.

Terrific. Thank you. There are no further questions on the line at this time.

Thank you for joining us today. I look forward to speaking with everybody during the second quarter earnings call. Take care and thank you very much.