Curtiss-Wright Corp (CW) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Curtiss-Wright 2012 financial results conference call. At this time all participants are in a listen only mode. Later we will have a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Martin Benante. Sir, you may begin.

Thank you, Mary, and good morning, everyone. Welcome to our fourth-quarter and full-year 2012 earnings conference call. Joining me on the call today is Mr. Dave Adams, our President and Chief Operating Officer, and Mr. Glenn Tynan, our Chief Financial Officer.

Curtiss-Wright delivered a solid fourth-quarter performance to round out what was a challenging 2012, as our fourth-quarter operating income adjusted for acquisitions and restructuring charges in the service technology segment, grew 38% on a 7% increase in sales. I'm also pleased to report that our full-year earnings per share was $2.08 and we met our full-year expectations, excluding the dilution from our recent acquisitions which, as a reminder, was not included in our guidance.

Our results reflect numerous positives including the benefit from our segment restructuring actions, significantly improved profitability from or 2011 acquisition Acra due to significant operational improvements implemented in our control segment and several new acquisitions in the mix, providing a transformational impact to our markets, technologies, and product breadth. Moving forward, we will continue to take actions to improve our operation efficiency to better position our business for the future, beginning with our expectation for solid profitable growth for 2013.

Now I'd like to turn the call over to Glenn Tynan.

Thank you, Marty. Our call today is being webcast, 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 also can be found on the website.

Please note today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. Forward-looking statements always involve risks and uncertainties and we detail those risks and uncertainties in our public filings with the SEC. In addition, certain non-GAAP financial measures will be discussed on the call today. A reconciliation is available in the earnings release and at the end of this presentation, and will be available on the Company's website. For our agenda today, I will provide you an overview of Curtiss-Wright's 2012 performance and 2013 financial outlook, followed by Dave who will provide some color on our recent acquisitions before turning it back to Marty who will discuss our strategic markets and outlook, and then open the call for questions.

As Marty mentioned, despite a few curve balls thrown our way this past year, we concluded 2012 with some key positives that impacted our fourth-quarter and full-year results. In flow control, our power generation business produced solid sales growth due to continued global after market demand, as well solid US new build revenues and higher revenues from our China AP1000 technology transfer contract. Additionally, fourth-quarter profitability was strong and provides momentum heading into 2013.

In the control segment, we benefited from a strong performance from our Acra Controls acquisition due to the implementation of significant operational improvements. Controls also experienced solid margin improvement following the restructuring initiatives that were implemented in early 2012 and benefited second-half results as expected. Adding to this performance was yet another solid year of growth in the commercial aerospace OEM business. The surface technology segment produced strong growth in sales and profitability in 2012, excluding the effects of our planned restructuring action. As a reminder, our fourth-quarter results were impacted by the remaining $6 million of the total $12 million restructuring charges reported in 2012. And now that we have completed these actions, we expect solid margin expansion in future years as a result.

Moving to our end markets, defense sales decreased 6% overall, somewhat due to softening demand in the second half of 2012 fueled by the ongoing uncertainty related to potential cuts in defense spending. Full-year results were also impacted by the third-quarter 2012 labor strike that shifted the achievement of milestones on certain Naval programs into 2013. The overall decline in defense was partially driven by lower orders from the primes in particular on Army platforms, as well as the completion of production on the Tow Improved Target Acquisition system, or ITAS program, lower V22 and Abram sales, and the decline on the Triton UAB program due to the conclusion of the development phase of this program. This softness was somewhat offset by improved helicopter sales, most notably on the Blackhawk and Super Stallion programs, solid sales of thermal spray coatings to various aerospace customers, as well as higher ground defense sales to international customers. Overall, the aerospace and ground defense markets decreased 1% and 10% respectively in 2012.

On the Navy side, despite increased production of pumps and valves on the CVN 79 Ford class aircraft carrier program, we experienced an overall reduction in the Naval defense market, specifically on the Virginia class submarine program primarily due to the shifting of the milestones to 2013 due to the aforementioned strike, as well as completion of production on the AAG and EMALS programs. This led to a 7% overall decline in Naval defense sales in 2012.

Next, we will move to our commercial end markets which collectively grew 11% in 2012. Our growth was driven by yet another strong performance in the commercial aerospace market which serves 26% in the fourth-quarter and was up a strong 21% for the full year, 18% of which was organic. We continue to benefit from the ramp-up in the commercial aerospace market, experiencing strong growth across all major Boeing and Airbus platforms, as well as higher sales to the regional jet and commercial helicopter markets. Our results also reflect the strong contribution for peening services supporting Rolls Royce and other global aerospace manufacturing customers.

Within our energy markets, we experienced a solid 13% gain in power generation, while the oil and gas market increased 5%. Power generation sales we're driven by increased AP1000 project revenues related to new reactor construction in the US and higher sales related to the China AP1000 technology transfer contract, and continued strong after market sales supporting existing nuclear reactors. Within the oil and gas market, overall growth was led by continued strong global demand for our MRO products, new sales from our acquisition of Cimarron, and solid sales of thermal spray coatings. However, that growth was partially offset by lower demand in our international large projects business.

Finally, the general industrial market sales rose 1% overall, with mixed results across our segments. The surface technologies segment experienced increased sales of our highly technical analytical services, specifically for the testing of medical devices, as well as improving conditions in our domestic automotive market. Within the control segment, sales benefited from our fourth-quarter acquisitions, while the flow control segment experienced softer HVAC sales.

Let me now cover our 2013 guidance. We expect total sales growth of 18% to 20% which reflects solid growth across all three segments and is primarily based on the contribution from our new acquisitions. The combined sales from these new acquisitions, including the pending close of the Phoenix Group, are expected to be approximately $400 million in 2013. In addition, our profitability will reflect the purchase accounting and asset step up costs related to the completion of these transactions, primarily in the first-quarter, which as a result will negatively impact our margin expansion in 2013.

Overall, 2013 operating performance is expected to be strong with approximately 45% growth in operating income and 150 to 170 basis points in margin expansion to a range of 9.2% to 9.4%. This guidance also includes 70 basis points and expected acquisition margin dilution so excluding that impact, total Curtiss-Wright operating margin would actually range from approximately 9.9% to 10.1%, or 220 to 240 basis point margin improvement.

As for our segment guidance starting with flow control, our sales guidance is based on strong new orders and increased demand, mainly in the energy and Naval defense markets, primarily from the aircraft carrier program along with the benefit of recent acquisitions. Furthermore, we expect improvement in the oil and gas business, primarily due to the acquisition of Cimarron and increased fracking demand. Our guidance also includes a decrease of $20 million based on a recent contract cancellation from a key customer in the HVAC industry who elected to bring this work in-house. We are also expecting to see solid improvements in flow controls overall profitability as we move past the one-time items experienced in 2012.

Overall segment guidance reflects higher operating income and approximately 170 basis points to 180 basis point improvement in operating margin to a range of 8.9% to 9% to 2013. However, excluding approximately 70 basis points in acquisition margin dilution, operating margin would range from 9.6% to 9.7%. Our sales guidance in controls reflects the solid demand expected in the commercial aerospace market in 2013 and a tremendous move in our general industrial market as our new acquisitions will bring expanded growth in the industrial sensors and controls systems markets. This improvement will be somewhat offset by expected weakness in the defense markets as we await clarification on defense spending cuts.

Growth and segment profitability will be limited in 2013 as we expect the initial dilution from our late 2012 acquisitions to somewhat offset the strong operational improvements and benefits from our cost reduction and restructuring initiatives. As a result, we expect controls operating margins to be nearly flat with 2012 and to range from 11.8% to 12% in 2013. However, excluding approximately 160 basis points in acquisition margin dilution, operating margin would range from 13.4% to 13.6%.

And finally in our surface technology segment, the improved outlook reflects growth across all other markets which, as a result, leads to higher operating income and operating margin in 2013. Furthermore, we expect this segment to produce significant margin expansion in 2013 as we move past the 2012 restructuring actions and begin to realize the resultant benefits. So starting with the base margin of 14.4% for 2012, that excludes restructuring charges, we are targeting an increase of approximately 210 to 220 basis points in operational improvements to arrange a 16.5% to 16.6% in 2013. However, excluding approximately 40 basis points in acquisition margin dilution, operating margin would range from 16.9% to 17%.

And finally, our forecast for corporate and other expenses is approximately $40 million, the increase primarily due to approximately $7 million in higher pension expense compared to 2012. Marty will address our 2013 market guidance within our segments later in the call. So based on those profitability assumptions, and the significant impact that our recent acquisitions will have on our 2013 sales projections, we also wanted to provide you with some additional color on the pro forma EPS impact. This analysis includes all six of our fourth-quarter acquisitions, as well as our pending acquisition of the Phoenix Group which also is in our 2013 guidance. Starting with our reported EPS of $1.95 in 2012, we had approximately $0.58 of one-time unfavorable items that will not recur in 2013. This includes the impact of restructuring, primarily in the surface technology segment, AP1000 strategic investments and the impact of the strike at our EMD facility.

Next you see that we have about $0.15 of unfavorable items in 2013, mainly related to acquisition integration costs, the aforementioned customer contract cancellation, along with additional facility consolidations as we move our manufacturing operations to low-cost economies. In addition, due to lower interest rates, we have lowered our discount rate on our pension plan assumptions which will increase our pension expense and unfavorably impact EPS by $0.11 in 2013. Moving to our segments, we are expecting a year-over-year improvement in our acquisitions of $0.23 to $0.27, which swing from being dilutive in 2012 to accretive in 2013 as we move past our initial transaction and purchase accounting costs. It should be noted that this improvement includes the absorption of approximately $0.20 of additional interest expense due primarily to a pending debt issuance later this month.

Finally, despite our expectations for flat organic growth, we anticipate our base businesses will generate healthy margin expansion as we realize the benefits from previous restructuring and operational excellence initiatives. The end result is for diluted EPS 2013 to range from $2.70 to $2.80, with approximately 60% of our full-year EPS in the second half of the year. We expect that the first quarter will be the lowest, primarily due to higher purchase accounting costs and the majority of the impact of the HVAC customer contract cancellation, with the fourth-quarter being the largest as we have done historically. Our expectations for the first quarter of 2013 ranges from $0.34 to $0.38 per diluted share, which includes $0.08 dilution from recent acquisitions.

And finally, here are some additional financial guidance metrics for 2013. We expect our interest expense to increase to approximately $40 million, as mentioned due to the pending debt issuance later this month. Meanwhile, pension expense for the Curtiss-Wright corporate plan is expected to increase approximately $7 million to $34 million, primarily driven by a lower discount rate. And we expect our free cash flow to range from $90 million to $100 million, which puts us at a free cash flow conversion rate of approximately 65% to 70%. And finally, we expected our depreciation and amortization will range from $125 million to $130 million, while our capital expenditures are expected to be approximately $90 million to $95 million.

Now I'd like to turn the call over to Dave to review the strategic rationale behind our recent acquisitions. Dave?

Thanks, Glenn. I'm pleased to have the opportunity to speak to all of you today. As you have seen, Curtiss-Wright has been quite busy of the past few months. We've acquired six companies thus far and one more pending, Phoenix, and as Glenn mentioned, these would provide approximately $400 million in pro forma revenue in 2013. Furthermore, based on the initial transaction costs and purchase accounting adjustments, we indicated that our recent acquisitions would be dilutive in 2012 and turn accretive, primarily in the second half of 2013.

As you may know, Curtiss-Wright is focused on the acquisition of companies that bring industry-leading technologies and capabilities which are positioned for solid growth or we can further improve their operations and expand their profitability after joining Curtiss-Wright. We look for companies that can provide the right combination of balance to our market diversification, along with the ability to expand our breadth of technologies, products and services into both existing as well as high growth or emerging markets. We've openly stated our intention to further expand our sensor and control offering, while looking for opportunities to leverage our existing strengths and capabilities, and to move up the chain in our oil and gas business to expand from downstream to the mid and upstream segment. And to add smaller niche nuclear power generation companies with strong technological offerings to name a few. We believe that these recent acquisitions have done all of the above, which provide ample opportunity to continue to grow our business by further expanding our product offerings into adjacent markets and geographies.

We thought it would be relevant to provide a review of the market breakdown provided in our previous full-year 2012 guidance from early November prior to the recent seven acquisitions. Later I will compare this view to our current 2013 guidance to show you the evolution of our market exposure. In particular, you will see the transition within our defense markets which, as indicated here, represented 37% of sales. We previously discussed the acquisitions of AP Services, PG Drives, and Williams Controls when we reported our third-quarter 2012 results, so I will briefly discuss the key highlights from those. AP Services extended our product breadth and enhanced our presence as a key supplier of after-market power generation services by delivering fluid sealing solutions that improve plant reliability and safety, while reducing operating and maintenance costs. We expect this business will further enhance our flow control segments reputation as one of the leading obsolescence solutions providers to the nuclear industry. In addition, we immediately added their capabilities into our market leading global distribution network.

Meanwhile, our controls team has added some new businesses which have increased our addressable market for industrial sensors and controls products and systems. PG Drives is a leader in highly engineered electronic controllers and drives serving advanced electric power, industrial and medical vehicles. This acquisition provides expansion in the industrial sensors and controls market to complement our existing aerospace sensors business. Curtiss-Wright is already well-known in joysticks and vehicle controls. With the addition of PG Drives, we will provide an expanding product offering to include many components of the overall vehicle control systems, motors, sensors, joysticks, and electronic controllers.

With Williams Controls, in addition to developing advanced sensor and controls products for specialty and off-road vehicles, it brings high-end systems capabilities serving to establish the cornerstone of our strategic expansion into a systems level provider of electronics and controls across various markets. The acquisition of Williams also provides substantial geographic expansion as it has existing world-class facilities and sales personnel in high growth, emerging markets in both China and India. Williams' state-of-the-art facility in China, and there by some of our existing facilities, presents an opportunity to potentially consolidate all of our local operations into one facility. Finally, the combination of these new acquisitions, and our existing industrial product offerings, expanded our total addressable market dramatically from approximately $300 million to $3 billion.

Our acquisition of Exlar adds to this industrial cornerstone by strengthening our existing control and actuation offering and providing leadership in electrical chemical actuation. We expect this technology to yield solid future opportunities as a plug-and-play replacement for existing hydraulic actuators. This deal further enhanced our market diversification, providing greater penetration into existing markets and also increased the presence and breadth of our product offerings and specialty markets.

In our surface technologies business, the addition of Gartner greatly strengthened our position within the highly engineered thermal spray coatings market. Gartner is one of the pioneers in the application of thermal spray protective coatings that extend the life of severe service industrial components. We expect to leverage the significant cross synergies between our existing thermal spray businesses, while also capitalizing on worldwide growth opportunities in upstream oil and gas, petrochemical and power generation markets. In addition, the services offered by Gartner build on surface technologies strategic initiative to move further up the technological chain. Furthermore, we expect increased demand as a result of offering a bundling of our highly engineered technical services in our current global base of 70 facilities and in future Greenfield facilities, including China and India.

Moving on, there is a transformation taking place within our oil and gas business as the acquisition of Cimarron expands our reach beyond Curtiss-Wright's existing downstream focus refining capabilities with a move to service the midstream and upstream oil and gas markets. Cimarron brings a solid reputation as a leading North American provider of production, processing, and separation solutions to the growing exploration and production market. This production and processing equipment performs critical tasks in the production of oil and gas are providing the link between the wellhead and transportation from the well site for commercialization. The business also presents a wonderful opportunity for Curtiss-Wright to expand into the high-growth shale oil and gas markets, as Cimarron continues to gain traction with its environmental solutions for fracking and related operations. Cimarron is a preferred supplier of this equipment, particularly for its separation solutions and emission control devices that safely remove harmful contaminants from the production process.

As a result of its solid product portfolio, Cimarron's revenue growth has out paced the industry due to its unique offering that satisfies the new environmental regulations applicable to over 30,000 existing wells. In addition, oil and gas production in the United States has surged due to the combination of fracking and horizontal drilling applications, reducing natural gas prices as well as the countries dependence on oil imports. Based on these trends and the increased use of fracking techniques, it is expected to shift the US from a net importer to a net exporter of oil and gas by the middle of the next decade.

Finally, our pending acquisition of Phoenix Group teams a leading international designer and manufacturer of high-performance severe service valves and valve systems with our current solid domestic offering of valve for refining, petrochemical and nuclear markets. We expect this business to provide market diversification to be a highly complementary product portfolios, with limited overlap in products. Additionally, there are significant opportunities for global expansion and cross-selling as it provides an entree for our products into key geographies such as Western Europe, China, India, and Russia, while providing Phoenix access to North American customers. I am pleased to report that just last week we received the required regulatory approvals and expect to close on this transaction on February 28.

In summary, our strategy of growing through niche acquisitions to complement our subsequent organic growth has positioned us for tremendous future opportunities to expand our sales and profitability. We also continue to expand our global footprint with international sales now representing 30% of our total business. The chart shown here provides the pro forma 2013 market breakdown which, as you can see, displays a very diversified and balanced portfolio that is more equally weighted across our defense, energy, and commercial industrial markets. Of particular note is the decrease in total defense exposure from 37% of 2012 sales to 30% of 2013 sales, reflecting the impact of our recent acquisitions. Finally, based on our strategic plans looking out to 2017, we would expect to see an even larger weighting to commercial, leveraging our expectations for continued solid growth in the markets we serve.

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

Thank you, Dave. As you've heard today, so far, we are taking the necessary steps to position Curtiss-Wright for strong, profitable growth through internal operational improvements and expanded opportunities with new technologies and markets as we continue to expand our global offerings of products and services. Next I'd like to focus on some key impacts to our core end markets, followed by some additional color supporting our confidence in obtaining our long-term financial goals.

I'll begin in commercial aerospace which continues to be one of the leading growth drivers among our diverse end markets. As we are benefiting from continued production rate increases across numerous Boeing and Airbus platforms, and a resurgent in growth in the regional jet market, we expect this momentum to continue into 2013. Curtiss-Wright is well positioned for increased sales supported by multi-year production up cycles in commercials aerospace markets for our critical structures, electronic components and sensors, and various surface treatment services. Overall, we continue to expect the OEM cycle will remain healthy for several more years and we are projecting sales in the commercial aerospace market to grow 7% to 11% in 2013.

Next, an update in the general industrial market which has greatly expanded over the course of the past few months, primarily through the acquisitions of PG Drives, Williams Controls, and Exlar in our control segment, which we expect to be key drivers of our 2013 sales. This includes solid demand for various industrial sensors, controls, drives, and actuation equipment supplied to the electrical powered industrial, medical, specialty and off-road vehicles. In our service technologies segment, we expect solid growth for our highly technical coatings and peening services to domestic and international automobile customers, as well as higher analytical services to the medical market. As a reminder, as worldwide economic conditions improve, we would expect overall stronger demand in sales volume for our surface treatment technologies, leading to improved margin growth over time.

Finally, sales to the commercial HVAC market within our flow control segment are expected to be lower. As Glenn noted earlier, one of our large customers recently canceled their contract with Curtiss-Wright after electing to bring all their work in-house to improve the absorption in their own factory. Despite that impact, we are projecting sales in the general industrial market to grow 66% to 70% in 2013, primarily due to the benefits of acquisitions.

Next, an update in gas and oil. We expect a solid sales contribution from Cimarron in 2013 and eventually from Phoenix Group once the transaction is closed. As Dave highlighted, Cimarron's upstream oil and gas products are in high demand including production, processing, and separation solutions for the exploration and production industry. Gartner also presents us with new opportunities in the upstream market to provide thermal spray protective coatings capability. In addition, we expect to see continued growth in demand for our US refineries related MRO product offerings, supporting ongoing maintenance needs, while large projected sales are expected to be down in 2013, resulting in flat organic growth in this market. Overall, we are projecting sales in the oil and gas market to grow 70% to 74% in 2013, primarily based on new acquisitions.

With our power generation market, we expect growth in this end market in 2013, primarily from the acquisition of AP Services. As you are aware, Curtiss-Wright is a critical player in the nuclear industry supporting the construction of one of the safest and most advanced nuclear reactors in the world via the AP1000 program. Keeping to this program is our first of a kind reactor cooling pump technology. In 2012, we completed the pump construction cycle and have now shipped the first four reactor cooling pumps required for Sanmen Unit One in China, with the remaining 12 China pumps expected to ship this year. While the China program is now winding down, that decline is expected to be partially offset by the ramp-up in sales for the USA AP1000 project in Georgia and South Carolina in 2013. We also expect solid demand for thermal spray coatings in 2013, primarily on turbines for non-nuclear electric power generation.

However, after market sales are expected to be impacted by three factors. First, lower expected outages or turnarounds which will lead to a reduction of normal maintenance. Only 56 outages are planned for 2013, 8 were in '12 resulting in one of the lowest levels in recent years. Second, the current suspension of licensing under the plant life extension project. And lastly, as a result of Fukushima, with new regulations focused on safety and spent fuel solutions expected to lead to increased spending by operators in the first half of 2013 from which we expect to benefit. As a result, we are projecting sales in the power generation market to grow 3% to 7% in 2013, primarily based on new acquisitions.

In addition, as we previously stated, we expected our next AP1000 order to come from China this year. Both controlled signed a memorandum of an understanding with China's safe nuclear power technology company in 2012 to work together with localization partners for future orders of the AP1000 and reactor cooling pumps. We have just received the RFQ from these partners for multiple new build sites under consideration with Curtiss-Wright's content to be determined. We anticipate negotiations will commence in the second quarter and we should culminate the new orders this year. Finally, based on these individual commercial market expectations, we are projecting total commercial market to grow 30% to 34% in 2013.

Turning to defense, we remain hopeful that political leaders in Washington will find a budget path forward that will avoid the most drastic automatic program cuts that sequestration represents. The evolving current consensus about the aerospace defense industry is that sequestration is less likely to occur and that it's more likely that Congress will get extended continued resolutions that expires in March through the end of the government fiscal year on September 30. While this would continue funding Department of Defense programs, pending resolution of the budget negotiation that does not suggest that sequestration will not be a place. What is clear so far is that continued uncertainty associated with funding authorization has led to reduced new orders, pending resolution of sequestration and the amount of money available for funding programs. This is particularly evident in the ground defense market.

As you have seen during the past two years, we have taken very deliberate steps to both deepen and extend the applicability of our technology portfolio towards adjacent markets while reducing our total defense exposure from 37% of sales in 2012 to 30% in 2013. We take some comfort that a great deal of Curtiss-Wright's defense portfolio resides in high priority programs such as Naval defense, which we expect will show growth this year. As we show in 2012, we have already experienced lower orders within the aerospace and ground defense markets. Consequently, we at this time are projecting defense related sales to be flat to down 4% in 2013. Note, that we are not including any potential impact for sequestration in our 2013 guidance.

To sum up, our outlook for Curtiss-Wright future growth remains solid, reflecting our disciplined capital deployment strategy, combined with our commitment to return cash to shareholders through solid earnings per share dividends and share repurchases. We are active in the market early in the fourth quarter, repurchasing nearly 675,000 shares of common stock. Year to date for 2012, we repurchased 830,000 shares, paying less than $31 per share on average. We elected to take a pause as the acquisition activity started to ramp up during the fourth quarter.

Meanwhile, despite the increased acquisition activity over the past few months, our pipeline remains active and with our strong and stable balance sheet, we remain focused on strategically and profitably growing our business. I'm confident in the Company's ability to continue to deliver strong revenue and profitability growth as we execute our strategic plan. We will continue to invest in the future and build our company through strategic acquisitions and organic investments, and strategically expand our unique portfolio of highly engineered advanced technologies across our defense and commercial businesses. Overall, our continued growth in sales, along with the implementation of various cost-reductions and restructuring actions, should provide solid growth in profitability moving forward as we continue to diligently improve our operations to generate long-term shareholder value.

At this time, I'd like to open up today's conference call for questions.

(Operator Instructions)

Amit Mehrotra, Deutsche Bank.

Thanks a lot. It is Amit Mehrotra here dialing in for Miles. Good morning. Marty or Glenn, first question is on guidance. Is there anything you've changed in terms of rolling up to your guidance after last year's experience, have you put a little more contingency in there? Is the 270, 280 pretty much where you see ending up if everything goes as planned?

We think we have the ability to improve on that guidance. Obviously, when you take a look at that waterfall chart that we have, we do show improvement of the organic profitability. But also you have to add on to that the one times of $0.15. $3.5 million of that, or $0.05, is the closure of the plant associated with HVAC with the contract being taken back by our customer, but the remainder of it is also plant closures and restructuring and acquisition integration of $5 million, or $0.08, and we expect that $6.5 million to generate additional profitabilities next year. And obviously our acquisitions will become more profitable next year also. So we feel good about our guidance.

Okay, just one follow-up, thanks for providing the margin dilution impact by segment. How quickly can you bring those margins up and does that really mean that we should see a significant step up in profitability levels in 2014 as those acquisitions get integrated?

We expect that. Definitely. You really have a two-pronged attack and one is obviously the improvements that we're going to put in and also we are expecting that the new acquisitions are going to be profitably improved quite a bit by next year.

Amit, it's mostly, obviously in the first quarter I think you said about $0.08 dilution in the first-quarter, another couple pennies probably in the second quarter before it turns profitable sequentially going into the second half of the year.

And could -- lastly could you just give us what the pension outlook could be in 2014 based on where the current discount rate is if you did it as of now and any planned funding as well? Thanks.

Yes. We lowered our discount rate this year. As I think I indicated, our pension went up about $7 million and that's because we lowered the discount rate 50 basis points. So the sensitivity for us is every quarter point is about $3.5 million, at least based on today's funding status. I could not really predict what's going to happen in 2014 with those rates but that's the real driver that's been changing our pension plan for a couple of years now.

Okay. All right, thanks.

The funding level -- sorry I didn't answer that question -- we expect to contribute $35 million in 2013 versus $40 million in 2012, mainly reflecting the impact of the highway bill. The pension fund stabilization bill.

Okay. Understood. Thanks a lot.

Okay, great.

Michael Ciarmoli, KeyBanc.

Good morning and thanks for taking my questions. Maybe just to follow -- I just want to make sure I'm clear, just a follow up on a mix question on the guidance. You showed the adjusted margin and you called out this $0.15, but that $0.15 is obviously in addition to all of the amortization dilution. I'm just kind get a handle on the number.

That's right. That $0.15 is basically plant closures of about $0.07 and then acquisition integration of another $0.08.

So more of --

That's why I tried to say that one of the plant closures will benefit next year and also the $5 million for the acquisition integration will also benefit next year also.

Okay perfect. And then just what are your thoughts -- what could potentially be the negative impact on the outlook if sequestration does happen? Have you guys sort of thought about the downside, potential risk to the outlook if that goes into place or programs that you have? Certainly we've seen a lot of documents come out of the different military branches of late, how are you thinking about that?

I think that on the ground defense, we've already seen a lot of downturn there. The one area that we are a little bit concerned is that there was an article written that the carrier could go from a four year production cycle to a five your production cycle, which would move some of our sales out. There are so many scenarios going back and forth, I think that's one of the reasons why people are saying let's wait and see what it is. If anything -- and we're talking about more of an impact from 2014 then we are talking about 2013.

Okay. That's fair. And then just one last one I had and then I'll jump off here. Any update on the super vessel opportunities, expectations or how we should think about maybe just ongoing costs or risks with that program?

The thing is what we did in this budget is that we basically -- even though we do expect there will be an increase -- have kept it flat or negative. So we've conservatized the super vessel. There's opportunities out there. We are getting our costs in line but that's one of the areas we just said, let's just keep it flat or a little bit down and just keep pushing the cost reduction which should prove to be beneficial in 2013.

Okay. Okay. Perfect. Thanks a lot, guys.

Thanks, Mike.

Jim Foung, Gabelli.

Hi. Good morning, Marty, Glenn. Marty, on your pro forma EPS growth chart, the $0.23 to $0.27 accretion from amortization improvement, is that for the last seven acquisitions you made?

That's correct. It also contains the interest expense too so actually the number would've been bigger if that was the increased interest expense.

So that is the net number. So that's already going to be very positive for you, accretive for you in 2013 then.

That's what we are saying.

Okay. All right. Are there any --

Actually it will be better in 2014.

That's my next question. Were there any carryover into 2014 then that is incremental?

Yes, definitely.

Can you disclose that?

No, but it's good.

Okay. So more to come then?

That's correct.

And then the other thing I was just kind of curious, as you put out that pro forma defense exposure for 2013, what would now be 30% of the total revenues and I presume that one of the objections to try to lower that going into 2014 and 2015.

Right.

Do have a target number that you want to bring that down to? And corresponding with that, what would be the margin impact on that as you reduced your defense and grow your other businesses?

We get better returns from our commercial, so obviously you're going to start to see a pick up as you meet some more commercials. We project out through our strategic plan, just from a normal growth from where we see our markets going, we're going to be below 25%. But based on our acquisition pipeline, we are probably going to achieve that much sooner than that. And that does not say that we're not going to acquire, possibly a defense company, because at the end of sequestration it will be similar to the last cycle where there will be companies that are looking to sell. The budget is still going to be quite large and if there's a technology we like that has both commercial and defense applicability, we would buy it.

Okay.

Most -- a majority of our new acquisitions will be in the commercial area.

Right. Okay, so as you hit kind of a bottom in terms of the decline in the defense budget contraction, could be a good opportunity to then get back to increase that exposure in this business then.

Well, yes, we are always looking for people and companies with technology.

Okay. In the flip side, would you consider selling defense businesses that are slow growth or non-core?

We are doing it whether be defense or commercial, and we do have some small pieces on both sides that we are looking at.

Okay. And anything immediate?

No.

Okay. Thank you very much.

Steve Levenson, Stifel Nicolaus

Good morning, Steve.

Hello, Steve?

Please check your mute button. Tyler Hojo, Sidoti and Company.

Hi, good morning, everyone. Just only question I have really is on the power generation outlook for 2013. You've guided to 3% to 7% growth, but it sounds like if you back out acquisition it's about flat.

Actually it would be a little negative, yes.

A little negative. Okay. I'm just trying to better understand why the after market business would be down in 2013? If you could maybe just walk through that.

Not a problem. Normally the higher the amount of [allowances] or turnarounds when our plant comes down and you do maintenance, normally requires a lot of spare parts. So the fact that it is lower in 2013 and '12 will automatically reduce the spare parts that you have. The second thing is that companies -- or utilities are looking to spend less money right now on normal maintenance so they can put the improvements that they need to put in from the Fukushima regulations. If you remember, we went through that saying that we will probably be selling or providing those types of solutions in the second half of this year. And that should continue into 2014. All you're seeing is a ebb. You have some little sideways in the main curve. That's all.

Now if you were to break the guidance between OE and the after market, would the growth rates look kind of similar for the full year --

No. I'm sorry, I did not address that. I'm sorry. We actually have -- the biggest change happens to be in the OEM side, whereas China is going down by some $20 million and I think the US is going up by $4 million. Again, that's just production rates and the way they go.

Okay. Great maybe one more for me just on acquisitions, you commented on pipeline and you also commented on kind of the technologies you're interested in. But maybe you could talk about the scope of the pipeline and if you have some number of deals that you're targeting this year, that might be helpful.

Okay first of all, 2013 was a very good year because, as you know, people that we have pursued for many years finally consented because of the tax change. So it happened to be a very good year and we were very happy with what we saw. We think 2013 will be active, not as active as 2012. 2012 was a very good year. 2013, there's a lot of opportunities; however, I don't think we're going to be spending as much money this year as we did last year. A lot of them are good commercial opportunities, growing more in the sensor, nuclear and also upstream gas and oil in the fracking market.

Great. Thanks, Marty.

(Operator Instructions)

If there's no further questions, I'd like to thank everybody for joining us today. I look forward to speaking to you again during our first quarter 2013 earnings call. Thank you very much and take care.

Goodbye.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you all may disconnect at this time.