Curtiss-Wright Corp (CW) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Curtiss-Wright first-quarter 2013 financial results call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Martin Benante. Please go ahead.

Well, thank you, Kate, and good morning, everyone.

Welcome to our first-quarter 2013 earnings conference call. Joining me on the call today are Dave Adams, our President and Chief Operating Officer; and Glenn Tynan, our Vice President and Chief Financial Officer.

Curtiss-Wright delivered a strong first-quarter performance. We exceeded our initial guidance, generating $0.44 in diluted earnings per share, primarily based on operational improvements and better-than-expected results from our new acquisitions.

If you exclude the dilution from recent acquisitions, pro forma diluted earnings per share would have been $0.50 per diluted share, or nearly a 20% increase over last year.

Overall, sales and operating income results were solid, with organic operating income growing 7% on flat organic sales, producing 40 basis points in operating margin improvements year over year. These results reflect the benefits from our previously implemented restructuring and operational improvement initiatives. I look forward to continued improvements in operational efficiency that will drive Curtiss-Wright performance this year.

I'll now turn the call over to Glenn.

Thank you, Marty. Our call today is being web-cast, and the press release as well as a copy of today's financial presentation are available for download through the Investor Relation 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 expectation and are not a guarantee 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 with an overview of Curtiss-Wright's first-quarter 2013 performance and financial outlook, followed by Dave, who will provide an update on our recent acquisitions, before turning it back to Marty, who will discuss our strategic outlook and then open the call for questions.

I want to begin by providing some additional color on our first-quarter operating performance. While acquisitions were the primary driver behind improved sales growth in the quarter, they also created approximately 110 basis points in margin dilution, related primarily to purchase accounting, specifically increased amortization levels and inventory step-up that we typically experience during the first few months of ownership.

Excluding the recent acquisitions, we experienced operating-margin growth in all three segments compared to the prior year, as follows. Flow control was up 190 basis points year over year, primarily based on improved profitability and power generation, based on increased sales volumes, tied to products and services for existing operating reactors.

Controls increased 40 basis points, primarily due to the benefits of previously implemented cost-reduction initiatives within the defense business. And finally, surface technologies was up 200 basis points, based on higher sales volumes and improved absorption of fixed costs, as well as the benefits from their 2012 restructuring.

We would expect the margin-dilution from acquisitions to be less of a factor in future quarters. In addition, first-quarter new orders increased 20%, based on a combination of acquisitions, as well as organic-orders growth in our controls business.

Book-to-bill exceeded 1X overall in the quarter, and if you exclude the recent acquisitions, our book-to-bill would have been slightly higher.

Moving to our end markets, first-quarter sales in defense decreased 8% overall, primarily due to the timing of production on several naval defense platforms, as well as the winding down of production on several programs within the aerospace defense market.

The aerospace and naval defense markets decreased 10% and 7% respectively during the first quarter, which more than offset a 4% increase in ground defense.

Despite the first-quarter reduction in naval defense sales, which was due primarily to timing on the Virginia-class submarine program, we continue to expect higher sales in this end market in 2013. This growth will be supported by the ramp-up on the CVN-79 aircraft carrier program and also is based on received and anticipated new naval defense orders that Marty will address in a few minutes.

Overall, we continue to project defense-related sales to be flat to down 4% in 2013. Note that we are not including any potential specific impact for sequestration in our 2013 guidance at this time. On our next earnings call, we hope to have additional clarity on the specific sequestration-related budget cuts and any resultant impacts on our defense business, if any.

Next, I'll move on to our commercial end markets, which collectively grew 34% during the first quarter, based on strong contributions from our recent acquisitions and solid organic growth in the commercial aerospace and power-generation markets.

Within our energy markets, our after-market businesses continue to perform well. This was most evident in the power-generation market and support of existing operating reactors, where we experienced solid demand for our obsolescence solutions, as we continue to expand our install base and also for spent-fuel-management solutions.

In addition, we experienced higher AP1000 program revenues, as the ramp-up on the domestic program more than offset the winding down on the China program.

In the oil and gas market, we expect the solid first-quarter momentum to continue throughout 2013, based on our acquisitions, as well as improved US-refinery-related MRO demand, supporting ongoing maintenance needs.

Elsewhere in commercial aerospace, we continue to expect that the OEM cycle will remain healthy for several more years, with Curtiss-Wright benefitting from continued production-rate increases across numerous Boeing and Airbus platforms, and increased support from our emergent operations facility, supporting the Boeing 787 program.

Furthermore, regarding the 787 program, we've not seen any deceleration in our production activity as a result of the recent [fleet] grounding, as first-quarter 2013 deliveries were up solidly, and as expected.

And finally, building on the solid first-quarter performance, our recent acquisitions of Williams, PG Drives, and Exlar will bring expanded growth to both existing and new customers within the general industrial market. This includes solid demand for various industrial sensors, controls, drives and actuation equipment, supplied to electric-powered industrial, medical, specialty, and off-road vehicles.

In summary, our overall guidance within our commercial markets remains unchanged, as we're expecting growth of 30% to 34% in 2013. You can find the complete table of our guidance by end market in the appendix, as well as in the earnings press release.

Moving on to our financial outlook, I wanted to briefly review a few items. Full-year sales growth of 18% to 20% reflects our expectations for solid growth across all three segments, and it's primarily based on the contribution from our recent acquisitions.

While we expect these acquisitions to positively contribute to operating income this year, they will be dilutive to operating margins in 2013, as expected. Consequently, we are expecting flat organic sales growth. However, we anticipate our base businesses will generate healthy margin expansion, as we realize the benefits from previous restructuring and operational-excellence initiatives. This gives us confidence in achieving solid overall margin expansion in 2013.

As for our EPS guidance, we continue to expect approximately 60% of our full-year EPS to occur in the second half of the year, with the fourth quarter being the largest, as we have generated historically.

And lastly, some additional financial-guidance metrics for 2013. Since our last call, we completed a new $500-million private-placement note offering, taking advantage of the low interest-rate environment to secure an attractive average interest rate below 4%.

As a result, our interest-expense guidance reflects this recent debt issuance, which also temporarily increases our net debt-to-capital ratio to nearly 40%. We expect this ratio to decrease throughout the year to a more normalized ratio in the low 30% range, as we repay some of the outstanding debt. Lastly, we have a $125-million higher-interest-rate note that will be paid off in September.

Overall, we remain pleased with our balanced capital structure, as it enables us to continue to expand our operations and actively pursue strategic acquisitions.

Now I'd like to turn the call over to Dave to provide some updates on our recent acquisitions. Dave?

Thanks, Glenn. As you're aware, our seven recent acquisitions have provided us with an ample opportunity to continue to grow our business by further expanding our product offerings into adjacent markets and geographies and add a tremendous market depth.

I wanted to take a few minutes to provide you with an update on our integration status for each acquisition, including completed tasks and some near-term opportunities.

In the control segment, our recent acquisitions have considerably increased our addressable market for industrial sensors and controls to complement our existing aerospace sensors-and-controls business.

I'll begin with Williams Controls, which develops advanced sensor-and-controls products and systems for specialty and off-road vehicles. As the only public company that we acquired in 2012, we secured immediate cost savings of $2.5 million by eliminating their public-company costs and integrating their sales and marketing teams within Curtiss-Wright.

Another key step was the consolidation of our existing aerospace-sensors business in China into Williams' state-of-the-art manufacturing facility. We are expecting Williams' 2013 sales to grow approximately 15% year over year, led by increasing on-road truck volumes and improving off-road equipment sales well above industry average due to their unique technical capabilities.

Looking ahead, we are focused on the integration of Williams' product lines with our existing offering, and we will continue to look for ways to build Curtiss-Wright's offering of industrial off-highway sales, which also applies to PG Drives.

We also intend to expand our industrial presence in India, using Williams' Pune facility as a base to drive future sales to a new region for Curtiss-Wright. This will further increase the worldwide penetration of our sensors and electronic throttle controls.

PG Drives is a leader in highly engineered electronic controllers and drives for advanced electronic-powered industrial and medical vehicles. Thus far, we have consolidated one of PG Drives' US sales facilities into one of our existing facilities and completed the integration of our US and UK industrial sales and marketing teams.

We will look to build on these measures with further facility consolidations and additional integration and leverage Curtiss-Wright's supply-chain management in the near future. We expect PG Drives to generate about 10% annual sales growth in 2013.

The business has experienced solid growth in the medical-mobility market, despite ongoing Medicare-related issues, as well as improved industrial market sales, as we are winning share from competitors, producing solid, sequential quarterly growth in the first quarter of 2013 in excess of the market. At this time, both Williams and PG Drives are on plan to meet 2013 targets.

Let's move on to Exlar, which expanded our existing controls-and-actuation offering. The business provides industry-leading electromechanical actuation products, designed to replace hydraulic and air-powered cylinders in electric, industrial, mechanical, as well as defense equipment. Thus far, integration has focused on lowering Exlar's cost base, increasing their competitiveness and expanding their distribution network.

As a result, we have introduced controls' industrial sales-and-marketing teams to Exlar's wide array of products, to further increase end-market penetration and future expansion of their customer base by leveraging both controls' and flow control's global exposure.

Although a small portion of sales are currently attributed to defense, Exlar's actuation products meet the defense industry's desire for increased energy efficiency, more environmentally friendly technology, and, most importantly, increased survivability. More to come on this as we continue to grow Exlar's defense business.

Overall, we expect Exlar to generate nearly 10% annual sales growth in 2013, and so far the acquisition is tracking in line with plan.

Next, to our surface-technology segment and an update on Gartner. This acquisition greatly strengthened our position within the highly engineered thermal-spray-coatings market, as we added new technologies in new markets, serving new geographic areas and customers.

Aside from focusing on various cost-reduction initiatives, we have completed the evaluation and planning stage to open a new satellite coatings facility in Houston, Texas, to cover pipes, pump motors, and other processing equipment serving Gartner's oil and gas customers, its largest end market.

Looking ahead, we expect to leverage the significant cross synergies between Gartner and our existing thermal-spray businesses. This includes increased penetration within the energy end markets we serve, the ability for technology transfer, and insertion across existing facilities, and the potential to integrate existing Curtiss-Wright coating technologies into Gartner facilities for increased pursuit of after-market applications. Gartner is presently tracking in line to slightly above plan with year-over-year sales growth of approximately 8%.

Next, within our flow-control segment to AP Services, whose fluid-sealing solutions further extended our product breadth and enhanced our presence as a key supplier of after-market power-generation services.

Thus far, we have fully integrated AP Services into flow-control's supply chain and completed the training of the AP Services sales team to represent an existing Midwest flow-control business that previously had no direct sales force.

As is typical with similar niche nuclear after-market acquisitions, we expect to fully integrate AP Services' product line into Curtiss-Wright's market-leading global-distribution network. AP Services is currently tracking in line with plan.

Midway through the quarter, we completed the acquisition of the Phonix Group, which manufactures high-performance severe-service valves and valve systems. Although it has only been about 2 months, integration continues to progress nicely. There are significant opportunities for global expansion and cross-selling in our energy and industrial markets, as Phonix provides an entree for our products in the key geographies in Europe and Asia, while we can provide Phonix access to Curtiss-Wright's existing North American customers.

We also are evaluating several product-line synergies in the oil-and-gas and power-generation markets. We expect to have expanded details on the integration of Phonix on our next call.

Next, on to Cimarron, which brings a solid reputation as a leading provider of production, processing, and separation solutions to the upstream oil and gas market.

We've been working through various functional integrations and focusing on initial operational improvements within Cimarron's business. Thus far, Cimarron is tracking in line with plan, with 2013 revenue expected to grow approximately 14%.

One of the key integration initiatives that is already underway is in our oil and gas business. Due to Cimarron's industry-leading technical capabilities and products serving the upstream oil and gas market, they would have to make significant investment in plant capacity in order to meet the rapidly growing demand.

On the other hand, Curtiss-Wright has the capabilities and capacity to support their growth without further investment at our Cedar Crossing Texas vessels facility. Our existing facility has significant crane capability and available space that can be utilized to service Cimarron's over-capacity requirements.

This also allows us to make larger systems, which opens up a high-end segment that Cimarron was previously unable to access. This is clearly a win-win situation for Curtiss-Wright, as it also enables us to increase capacity utilization and offset some of the overhead under-absorption that we have been experiencing as a result of downstream refining market weakness.

Furthermore, while we experience a learning curve in 2013 as we transition production to Texas, we believe this integration initiative has the potential to generate additional sales for Cimarron and Curtiss-Wright in excess of $40 million, beginning as early as 2014, which would also substantially improve flow control's profitability.

This is a significant step for Curtiss-Wright as we continue to broaden our upstream product offering and stabilize our oil and gas business over the long run.

In addition, Cimarron is in a solid position to grow its emission-control-devices business. Following new Environmental Protection Agency rules governing the destruction of harmful vapors established in 2012, four of Cimarron's five emission-control-device designs passed EPA-mandated tests during the first quarter of 2013. Cimarron has one additional device that is currently being tested. Once testing is complete on the final device, Cimarron will become the first fabricator to have its devices certified to meet the new EPA standard.

Finally, I wanted to revisit the pro forma 2013 market breakdown that we provided on the previous call, 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.

During the first quarter, defense sales represented about 29% of our total sales, down from 38% of sales in the prior-year period. We are already experiencing the transition to a more diversified end-market portfolio, as well as improved profitability, as we shift to a higher percentage of commercial sales. Additionally, we continue to expect that our recent acquisitions will contribute approximately $400 million in sales, and putting purchase accounting aside, will provide an increased profitability in 2013.

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.

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

Well, thank you, Dave.

As you've heard so far today, we continue to position Curtiss-Wright for strong, profitable growth. We intend to accomplish this by advancing internal operational improvements, leveraging opportunity to grow its new technologies and markets, and expanding our global offering of products and services.

As Dave highlighted, integration of our seven recent acquisitions is going well. Furthermore, our approach to acquisitions requires the business-unit management team that will own the target post-acquisition to own the entire process, from due diligence through integration.

As a result, we typically have different Curtiss-Wright management teams working concurrently on integration, which minimizes our overall integration execution risk. It just so happens that we essentially have seven different teams working on integration of the seven recent acquisitions.

That said, we are still on the lookout for additional opportunities of similar size and end-market profile, namely, in upstream oil -- gas and oil, sensors, highly technical surface-treatment technologies, and niche power-generation businesses.

We also maintain a stable balance sheet and solid financial profile, along with a manageable debt-to-capitalization ratio, which provides flexibility, in terms of future transactions.

This directly supports our strategy to further balance our end-market diversification, one of the core components of our long-term plan that fuels our competitiveness and creates less overall downside risk for Curtiss-Wright.

Next, I'd like to highlight some key factors affecting our two largest end markets, starting in defense. While the continuing resolution with the [full] defense-appropriation bill for fiscal year 2013 has been enacted, which provides more clarity on the 2013 budget for the end of the government's fiscal year in September, uncertainty in defense remains, including the possibility for cuts tied to sequestration.

Our best information so far is that cuts to the Navy's ship-building plan are likely to result in the elimination of any of the fiscal 2013 ships authorized and appropriated for construction, including the [refuelling] and [complex] overhaul of CVN-72.

We are eagerly awaiting the decision from Congress regarding the President's fiscal 2014 budget request. Based on preliminary indications, the Navy's defense outlook appears to be positive, as it continues with the construction of two Virginia-class submarines per year, whereby the President's fiscal year 2012 budget requested only one Virginia-class submarine for fiscal 2014.

It also notes the potential for increased funding for surface ships and the refuelling and overhaul of the prior generation of aircraft carriers, keeping us confident in maintaining our naval defense guidance.

Already since January 1, 2013, we have received orders of approximately $100 million, most of which were planned for products in the Virginia-class submarine-construction program, CVN-71 and 72 overhaul, DDG-51 and DDG-1000 Destroyer construction programs, and the Ohio-class replacement submarine-development program.

We expect additional orders throughout 2013 for the Virginia and the DDG-51 multi-year procurement programs, and to support continued CVN-78 and 79 construction and Nimitz-class overhauls.

Meanwhile, within the aerospace and ground markets, continued uncertainty associated with funding authorization remains and continues to reflect our expectations for lower orders in 2013.

Overall, as Glenn noted, we continue to project defense-related sales to be flat to down 4% in 2013, which does not factor into any potential specific impact for a sequestration. In fact, sequestration appears to be less ominous for our naval-defense business.

Next, a few updates in power generation, starting with the AP1000 program. As you recall, in 2012 we completed the pump construction cycle and shipped the first 4 of 16 reactor coolant pumps, or RCPs, required for Sanmen Unit 1 in China.

During the first quarter, an AP1000 RCP impeller, provided to Curtiss-Wright from the supplier, was found to be defective; and we have since determined numerous impellers from the subcontractor to be defective.

As a result, we're working closely with Westinghouse and the Chinese to replace the hardware, while minimizing schedule impacts of deliveries of RCPs to plants in China.

While we previously expected the remaining 12 China pumps to be shipped this year, it is possible the final four pumps may ship in early 2014. We will provide an update once a solution has been [met], and at this time, we do not expect any additional costs to impact our business, nor should it affect the plants being built.

In addition, as we previously stated, we expect our next AP1000 order [till] from China. We have received the [RQ] for multiple new build sites under construction with Curtiss-Wright content to be determined. High-level discussions have taken place with China's state nuclear power technology company, and formal negotiations have commenced. We expect an order later this year.

Outside of China, new build activities continue to progress. In the UAE, we received new orders in the first quarter, exceeding $8 million, to support UAE's new build reactors, and have additional outstanding proposals for another $22 million, which we expect to be awarded over the next 6 to 18 months. In addition, we provided proposals in excess of $25 million for new reactors in Romania.

Elsewhere, in the operating-reactors portion of our business, we experienced strong new orders in the first quarter. Our flow-control businesses received more than $5 million in first awards from NRC orders 1, 2, and 3, related to Fukushima's response initiatives and have more than $25 million in outstanding proposals.

We also received more than $15 million in new orders, specifically tied to assisting US plant operators to solve the obsolescence issues and more than $6 million from international customers, including the UK, Sweden, Canada, Brazil, and Spain. We currently have an additional $40 million in proposals outstanding for US customers, related to our obsolescence solutions.

Finally, we continue to see strong order activity supporting plant upgrades and modifications, as well as growth in our install base, leading to a solid expansion of Curtiss-Wright content. Our longstanding expertise in this industry will provide solid growth for years to come.

I also wanted to highlight the solid operational performance within our surface-technologies business, where organic operating income grew 16% [and a] 1% increase in sales. This solid performance reflects the benefit of our 2012 restructuring effort, including the closure of some underperforming facilities and the sale of our heat-treat business -- heat-treating business, as well as continued operational improvements.

The heat-treating business was mainly an outsource type of business. It was not in line with our focus on highly engineered technologies in this segment. As a result of these efforts, our further expansion of the technological chain with the addition of Gartner, we are able to realize the benefits of improved returns and better mix in technologies for Curtiss-Wright moving forward.

Overall, I remain confident in the company's ability to continue to deliver strong revenue and profitability growth as we execute our strategic plan, based on solid organic growth, enhanced by strategic acquisitions. We will continue to integrate our recent acquisitions and improve our operations to increase profitability and generate long-term shareholder value.

Furthermore, Management is focused on margin expansion and cash-flow generation; and we have tasked all of our operational leaders to increase these two key metrics.

Finally, we expect the growth of our business to be complemented by disciplined and well-balanced capital-allocation strategy, which also includes paying down our existing debt, along with our commitments to return capital to shareholders, in the form of dividends and/or share repurchases.

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

(Operator instructions)

I'm showing our first question comes from the line of Michael Ciarmoli with KeyBanc. Your line is open.

Hey, good morning, guys. Thanks for taking the calls.

Good morning, Mike.

Hi, Mike.

Just to dig in on the [$0.06] of, I guess, acquisition-related headwinds. What's the expectation for the future quarters, and is that going to be lingering? Are these lingering expenses that will hit in 2014?

Yes, Mike. Good morning. Let me explain the $0.06. First of all, the dilution in the first quarter comes primarily from interest, because from an operating -- the interest we allocate to the acquisitions from an operating-profit standpoint, they were basically break-even, despite the accelerated amortization, backlog, and inventory [step up].

So in the first quarter, they were basically break-even from an operating-income standpoint. The acquisitions overall turned accretive -- slightly accretive in the second quarter and then significantly better in the third and fourth quarters. And I think as I told you, we expected them to generate about $0.12 of EPS after interest in 2013, and we're tracking on that, or we could probably be slightly better depending on how the rest of integration goes.

So the operating income -- again, they turn accretive beginning next quarter. From an EPS standpoint, it's slightly accretive, as well.

So (multiple speakers) be -- no additional kind of adjustments in future quarters?

No. That's correct.

And then what about -- even looking at your corporate and other kind of $41-million expense this year -- you know, you kind of called out some higher non-segment. Do any of those expenses roll off next year, or is that a good level to kind of look at?

Well, the biggest driver in there is our pension, increased pension.

Okay.

All right. So we don't really know what next year's going to be yet, but I would say -- I hope that stays level and doesn't increase any further. We significantly dropped our discount rate this year, so that's where that comes from.

Another piece of it is FX translation losses, and they swing from year to year, transaction losses with our hedging program. So we actually had losses in the first quarter of 2013. Again we, hope that doesn't reoccur.

And -- I'm just saying, the other thing is, we had some -- I won't say higher legal expenses. We actually had -- we had [lowered] an accrual last year in our legal expense, and we have normal legal expense this year. So that will probably go away.

Okay. So (multiple speakers). That's helpful --.

(multiple speakers) [the pension up] (multiple speakers).

And then last one from me, just -- the cap structure. I guess, 43% debt-to-cap, highest it's been in a while. I think you said you're going to pay down some debt later this year. What are the thoughts about that current metric? And I mean, are you current at these levels with possibly consummating more acquisitions later in the year?

We are. I think our projections do call for that to come down to the low 30s. We have a 45% self limitation that we've instituted, and we've always managed, 70 acquisitions later, under that metric. So I think we're comfortable. And again, our projection shows that metric coming down and our capacity -- cash available going up for the remainder of the year. So I'm comfortable --.

We are very comfortable.

Yes.

Okay, perfect. Thanks a lot, guys. That's all I had.

All right, Mike. Thank you.

Our next question comes from the line of Steve Levenson with Stifel. Your line is open.

Thanks. Good morning, everybody.

Good morning, Steve.

How are you?

Good, thank you. Good to see the results and the benefits of the restructuring and the acquisitions. On the commercial aerospace side, can you tell us if you're participating in Boeing's partnering-for-success program, and if so, what you see as potential obstacles this year, or if you can keep your margins where they are and what you think the potential benefits are going forward?

Steve, we do participate with Boeing in their partnership quest, and we have -- and it's an ongoing process, and we are working closely with them to identify areas of cost improvement. And I would think that we will be able to improve margins as we continue to [lean out] some of the processes and work closely with them in all areas.

We have, for example, some aspects of design improvement that we can incorporate that would reduce costs to some of the parts, and that's always an opportunity if we can get those through. So we are participating, and I would anticipate some pickup. I don't have a number at this point, but we are definitely in the process of working with them.

Okay. Thanks. If I'm correct, they don't guarantee you anything on new programs or increased content on current ones, but do you have any expectations on that? Are you hearing anything from your peers (multiple speakers) about participating, too?

Well, as a matter of fact, we are -- we did build our emergent-operations facility in support of Boeing, and this is part of that. When we provide them the capability -- almost a build-it-and-they-will-come perspective -- that they are looking at us as a more viable -- let's call it a subcontractor-vendor, in the local area. And you're right. They don't promise you an increased content or share, but you certainty get a new peek at opportunities that we would not have had prior to that.

And it gives us the opportunity to compete, and we do very well in that regard. So we anticipate picking up new top line as a result of our participation. That's the whole thing that Boeing is going after.

Got it. Thank you. And on the defense side, despite sequestration and some of the programs that have come to an end, what sort of opportunities do you see on the MRO or replacement-parts side? Is there anything beyond what you've discussed in the guidance that is potentially better?

We don't do much MRO, when it comes to the Navy -- or to defense. We have some repair capability -- not some (inaudible) we have repair capability for ground and aerospace; but we don't see much opportunity there.

What we are looking at and do see a lot of opportunity, is upgrades of some of the existing platforms that are going to be modernized out into the future, such as the [Abrams and the Bradley], where we can have significant increased content there.

That's great, thanks. Do the acquisitions contribute to that at all, or is this mostly coming from legacy operations?

It's coming from legacy operations. Basically, the acquisitions that we acquired, of the $400 million, very -- I think only about $10 million is associated with defense. It's almost all strictly commercial.

Got it. Thanks for the additional details.

Thanks, Steve.

Our next question comes from the line of Myles Walton with Deutsche Bank. Your line is open.

Thanks, good morning.

Good morning, Myles.

Dave, I think you mentioned profitability with respect to the mix, moving away from defense towards commercial and the opportunity to improve the overall profitability and profit margin of the company. If you look today, maybe use this quarter as a microcosm, or this year, is defense -- are defense margins actually below commercial, or are they above commercial?

They're slightly below. You know, on a defense basis, you know you're limited to how much you can actually charge and make on them because it's US-Government-type businesses, and some of it's sole-sourced. (inaudible), most of our business is sole-sourced, and that's what limits your profitability there.

Okay. But again, they are slightly below.

Yes.

Okay. And then Marty, you mentioned the RCP impeller issue, and I think you talked about it potentially moving out the shipments of the last [slug] of RCPs to maybe '14. You know, is -- are the Chinese willing to place an order this year? Is that delivery --?

You know, the thing is, it's better that we found the problem. The problem will be fixed. It doesn't really delay their operating the plant. They have already the ability to buy five additional new plants, of which four are designated to be AP1000, and one is designated to be an AP1400. So it's just the natural progression of them placing orders.

Now, the thing is, is we're negotiating some portions of that four plants, what our content will be. But they're committed to placing those orders.

Okay. And how is the relationship with the organic supplier on the ground, there, that you have a licensing agreement with, in terms of their ability to pick up the manufacture of the RCP and for you to effectively be not producing the RCP for China organically at that point?

Well, the thing is that -- you know, it's -- we're always going to have some content associated with RCPs with China. The [two] subcontractors that we have in China are -- I wouldn't say they're lagging. It's not easy to go from not producing these to try to digest them, even over a five-year time frame.

So I think our content [over] the first two plants will be much greater than maybe the last two, or it could be equal in all four. We'll see how that goes.

Okay. And you also lost [one on] RCPs, so you mentioned it wouldn't be an expense item --

No.

-- for the year. Is that because you've already provisioned for it in the guidance or because (multiple speakers) --.

No, no. Because it's something that has to be covered by our subcontractor.

Okay. All right. Good deal. Thanks.

All right, Myles.

Thanks, Myles.

Our next comes from the line of Tyler Hojo with Sidoti & Company. Your line is open.

Hi. (multiple speakers). Morning. Just to follow on the last line of questioning on nuclear. It sounded like the after-market-related piece of the business did a little bit better in Q1. (Multiple speakers). Are you kind of changing your expectation within that little niche, or is that a potential offset for these pumps that could potentially slip into 2014? How are you thinking about that?

Well, first of all, let's go into the [pump set] because we are on a (multiple speakers) accounting (multiple speakers). That really doesn't cause any financial change in reality.

Okay.

But you're right. When we start looking at -- not only in after-market, but -- you know, we have, and have expressed, the amount of install base we have on other reactors other than Westinghouse; and there is a nuclear [build] cycle outside of China, and we are on those plants.

So not only is the after-market doing much better, we -- and there are a couple reasons why. Not only do we have about 20% of the OEM sales in the United States; we do provide a lot of those solutions, okay, as far as the obsolescence is concerned.

We talked in the past about the Fukushima initiatives that -- there was phase 1, 2, and 3; and we could start to see some procurement in phase 2 and more procurement in phase 3. We're starting to see that. As a matter of fact, we received the first orders, based on the Fukushima initiatives.

Next is the fact that we have other plants being built outside of China and the United States, and we're just giving you some color that as we talked about in the past -- UAE (inaudible) [Korea], a contract for a couple of new reactors; and we have about $20 million of install -- $25 million per reactor there. You're starting to see those procurements coming through, and also the one in Romania.

So I think that even though we haven't changed the guidance, I think we're going to do much better in that market space.

Okay. So maybe looking at kind of consolidated guidance as a whole, maybe you have a little bit less visibility on defense, but is the offset there nuclear predominantly?

Yes.

Okay, got it. Just --.

(Multiple speakers) not only that. Our gas and oil, quite frankly, is stable. We're running a little heavy because we have -- are introducing some new products. We expect to have some traction there. But also, as Dave mentioned, our ability to take (inaudible) -- over-[capacitized] facility that we have in Cimarron and putting it up into our Cedar Crossing facility, which is underutilized because of the down-turn in the downstream market -- that also help -- is going to help out in profitability, not only this year but very much so going forward next year.

Okay, great --.

So it's not just the nuclear. It's also in gas [and oil] stabilizing, becoming better, and the reality, with Dave's integration, between the Cimarron and the Cedar Crossing plans -- that's going to be a huge improvement for us, not only in sales but also in profitability, somewhat this year, but really it's -- a lot is going to happen next year.

Okay, great. Thanks for the additional color there. Just a quick question on CapEx. If I look at your guidance there on the high end -- I mean, you're really only expecting -- call it like a $17-million or $18-million year-over-year increase. But you've got -- I don't know, about $400 million of sales coming on line. Could you just walk us through kind of what's going on with that?

When you really look at [cat], we spent a lot of money in the past upgrading and doing some restructuring. You know, we've put two new facilities in Mexico. We upgraded our facility in Tempe, Arizona. We put in facilities in China, not only for sensors, but also for metal treatment.

So what is happening is we've built up a lot of infrastructure already. And even though we have $400 million of new businesses coming in, we aren't really seeing -- [unless] we've spent a lot of money in (inaudible) -- we don't really see spending as much money going forward.

Okay. What do you think the -- kind of the current base of business, what the maintenance CapEx would be on that?

You know, a lot of our money is not maintenance. It's actually putting facilities -- in new facilities. So I don't have that breakout (inaudible) but I (multiple speakers) --.

In 2013, Tyler, I don't think we have any big, major things in our guidance this year. That more reflects the acquisitions, offset by some of the things Marty talked about that won't recur that we've paid out last year. So the bulk of that 90 to 95 guidance is our current maintenance level now.

Okay, got it. And just one last quickie from me. Do you have the breakdown of backlog by segment?

Yes, I do. Okay. In flow control, it's $1.13 billion

Okay.

In controls, it's about $570 million.

Perfect. Thanks so much.

You're welcome.

(Operator instructions) Our next question comes from the line of Ken Herbert with Imperial Capital. Your line is open.

Hi, good morning.

Good morning, Ken.

Good morning.

I just wanted to -- based on your comments, Marty, in the full-year guidance, I would expect a nice step-up here sequentially from the first to the second quarter. Am I correct in maybe controls as probably being one of the biggest contributors to that from a margin standpoint, operating profit, you know, as I look sort of back into the mid-60s number for the second quarter?

Yes. I think that when you take a look at controls (inaudible) because of purchase accounting was at 5.9, and we are looking for them to go between [11, 8, and 12] which is exactly what's going to take place. Not only will they shed a lot of that purchase accounting, but they're going to also have quite a bit of new [improved] profitability going forward.

So how (multiple speakers) --.

-- really to exclude the acquisitions. They would be more in the 13.5% margin range.

So a lot of the step-up from the first to the second quarter is just the accounting and the purchase accounting going away, but maybe some of that operationally and some of the other impact of what you've done from that front?

(Multiple speakers) Exactly.

There's a couple other things, too. I mean, number one, besides just the improved -- the turn around in the acquisitions, you know, they have incremental volume of about $50 million in the last three quarters, as well, which will provide some favorable absorption. They've also done a whole bunch of different things to reduce their cost basis [just their] Mexico facility. So we're also seeing that ramping -- continuing to ramp up throughout the year, and that gives us very good savings out of that low-cost economy.

They're going to have an integration savings, specifically from the Williams acquisition, from a cost in the first quarter to savings in the second -- the rest of the year, and millions of dollars of cost reduction and benefits from the restructuring that they've done. So there's a couple other things besides just the volume that gets them to where they need to be by the end of the year. That will happen in the last three quarters.

Okay.

(multiple speakers) How'd you like for our [chat and talking] operations? (Laughter)

(multiple speakers) brought it up, but that's good.

(multiple speakers) It's a common theme among all our executives, believe me.

Just to go back to the AP1000, I think you highlighted sales in North America for new construction up in the first quarter, correct?

Yes.

And how much is that up over last year? I mean, I know obviously these programs are continuing with the percentage-of-completion process. What kind of growth to AP1000 in North America for new build are you modeling in this year?

Well, I think the way we should look at it is, if you take a look at the China and US, last year to this year, we actually are down year over year.

Yes.

And the improvement in sales is all coming from -- fall from after-market new builds and upgrades -- and also Fukushima, but -- when we get the new order, you're going to see that switch, because you're going to have -- even though it starts to ramp up, the United States will increase again next year; and then you're going to see a really nice pop coming in China toward the end of the year going into the following year. So we expect to improve profile going outward.

Okay. That's helpful. And just finally, I know obviously there's been a number of issues with the pumps as part of this initial order with China, and a lot of that to be expected as you've ramped this up. As you think about transitioning, here, to a second order -- and I know the bill of materials is going to be different -- but what are you doing, just from a risk-mitigation standpoint to maybe de-risk the subsequent order in China or elsewhere, to ideally get to better margins and what should be a very profitable line of business?

Well, the thing is that, if you take a look at the -- from a technical standpoint, we already went through a lot of the technical risk. So what happens is, if you take the technical risk and put that to the left, and you say -- the configuration should be stabilized, okay?

And the second is, obviously, if you've made hardware, you have to remake it again. That goes away. Then it comes down to rework. Your first 16 pumps, we had about 25% rework across the board from the first order. Our domestic is tracking at 7. So you're going to see that learning curve coming through and the risk mitigation going away from both a technical standpoint and a [cross] standpoint.

Okay. That's helpful. Thank you very much.

Thanks, Ken.

I'm not showing any further questions at this time. I'd like to turn the call back over to Mr. Martin Benante for closing remarks.

Well, thank you, Kate. Thank you for joining us today.

One final note before we end the call. We are excited to announce that our new Curtiss-Wright website will launch later in the second quarter, so be on the lookout in the near future. And I also look forward, as well as Dave and Glenn, to speaking with you again during our second-quarter 2013 earnings call. Thanks a lot for joining us.

Thank you.

Have a good one.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.