Curtiss-Wright Corp (CW) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Curtiss-Wright second-quarter 2015 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Jim Ryan, Director of Investor Relations. Sir, please go ahead.

Thank you, Michelle, and good morning, everyone. Welcome to Curtiss-Wright's second-quarter 2015 earnings conference call. Joining me on the call today are Dave Adams, our Chairman and Chief Executive Officer, and Glenn Tynan, our Vice President and Chief Financial Officer.

Our call today is being webcast and the press release, as well as a copy of today's financial presentation, are available for download through the investor relations section of our Company website at www.curtisswright.com. A replay of this call also can be found on the website.

Please note today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on Management's current expectations and are not guarantees of future performance. Forward-looking statements always involve risks and uncertainties, and we 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 the presentation and will be available on the Company's website.

Finally, our discussions today of current and future results, except for cash flow, are on a continuing operations basis, which excludes all previously announced divestitures. In addition, any references to organic growth exclude the effects of foreign currency translation, acquisitions, and divestitures unless otherwise noted.

Now I'd like to turn the call over to Dave to get things started. Dave?

Thank you, Jim, and good morning, everyone.

For our agenda today I'll begin with a brief update, followed by Glenn who will provide an in-depth review of our second-quarter financial performance, along with updates to our 2015 guidance. Then I'll return to provide some additional commentary on the status of our AP1000 and margin expansion programs before we wrap up and open the call for questions.

We reported $0.83 in earnings per share in the second quarter, which exceeded our expectations, despite the fact that we had higher costs in the power segment associated with the AP1000 program. As discussed on the prior earnings call, we expected to incur costs relative to the completion of the engineering and endurance testing on the AP1000 program in the first half of the year, the majority of which would be in the second quarter.

We also recorded additional costs in the quarter relative to final modifications to our reactor coolant pumps. Excluding those costs, our overall operating results demonstrated solid improvement year over year as we continued to leverage the critical mass of One Curtiss-Wright to drive operating margin expansion.

For example, our second-quarter results included a 520 basis point margin increase in our defense segment and a 30 basis point gain in the commercial/industrial segment, despite a small drop in sales. Although we have experienced some headwinds in our industrial businesses based on the continued low oil price environment, our outlook in the industrial markets remains cautiously optimistic.

Additionally, it is worth highlighting that we repurchased $50 million worth of stock in the second quarter, continuing our commitment to steady share repurchases.

[Overall], we remain confident and on track for a solid performance in 2015. We anticipate continued margin improvement during the second half of 2015, and are maintaining our current full-year diluted EPS guidance of $3.80 to $3.90.

Now I'd like to turn the call over to Glenn to provide a more thorough review of our quarterly performance.

Thank you, Dave, and good morning, everyone.

I'll begin with a review of our second-quarter sales by end market, where higher overall sales in defense were more than offset by a decline in overall sales in our commercial market.

In the defense markets sales increased 9% overall and 11% organically, which excludes FX and acquisitions. Leading the way was ground defense, which increased 37% over the prior year, as we continued to benefit from strong international demand for our Turret Drive stabilization systems. We are currently supporting several new foreign ground defense programs and recently announced the receipt of a sizeable production order on the UK Scout program.

In aerospace defense, higher sales of our ISR-related embedded computing products, most notably for the Joint Strike Fighter and Global Hawk UAB programs, were partially offset by lower helicopter sales.

In naval defense, higher quarter sales driven by the Block IV build Virginia-class submarines were essentially offset by lower aircraft carrier revenues.

In the commercial markets sales decreased 11% overall and 8% organically. As expected, one of the major drivers were lower revenues on the AP1000 program in the power generation market, based primarily on lower domestic production.

Within the nuclear aftermarket business we continued to experience lower sales to existing domestic operating reactors based on ongoing deferred spending on plant maintenance and upgrades.

In the commercial aerospace market the decline in sales was primarily driven by lower sales of avionics and flight test equipment, while OEM sales were essentially flat year over year, as most production levels remained unchanged from 2014.

And, finally, sales in the general industrial market declined 10% overall in the quarter. Our results reflect the widespread impact of lower oil prices on our industrial businesses, though nearly half the decline was due to unfavorable foreign currency translation.

In industrial valves, despite a pickup in our MRO business, we continued to experience lower sales related to timing on international oil and gas projects. In industrial vehicles, our results included higher sales of products for medium and heavy-duty commercial vehicles that were more than offset by lower sales of products for hybrid and off-highway vehicles.

Moving on, I will discuss the key drivers of our second-quarter operating income and margin performance.

The commercial/industrial segment produced operating margin improvement in the second quarter, despite lower sales, due to a combination of mix and FX. FX negatively impacted segment sales by $12 million and operating income by $1 million.

Overall, segment operating income was essentially flat on a 3% decline in sales, resulting in operating margin improvement of 30 basis points to 14.9%. This performance was driven by higher profitability in industrial vehicles despite the lower sales due to ongoing operational and margin improvement initiatives, partially offset by lower profitability in surface treatment services and industrial valves, a sizeable portion of which was due to unfavorable FX.

It is worth noting that on a year-to-date basis the commercial/industrial segment has produced a solid 100 basis point margin expansion, as this segment remains focused on aggressively mitigating costs, given the current macro environment.

In the defense segment, operating income was up 35% and operating margin was up 520 basis points to 20.4%. Operating income included a $3 million favorable impact of FX. Excluding that impact, organic operating income grew 21% on a 5% increase in organic sales, resulting in an organic operating margin improvement of 240 basis points to 17.6%. This strong performance was driven by continued solid growth in our embedded computing business, as well as the benefits of a newly signed international ground defense contract which generated a solid contribution to operating margin in the quarter.

Next, in the power segment which, as expected, was impacted by costs relative to the engineering and endurance testing on the AP1000 program. In addition, now that the design has been finalized we accrued costs for final modifications to all 32 pumps currently in process for both China and domestic reactors. Total costs for AP1000 were $11 million in the second quarter. We expect that the significant expenditures related to design modifications are now behind us.

Overall, segment operating margin was down for the quarter accordingly. However, we expect profitability in both the new build and aftermarket nuclear businesses to significantly improve in the second half of 2015.

In summary, overall Curtiss-Wright operating income declined 9% in the second quarter which led to a 70 basis point decline in margin to 12%. On a year-to-date basis, operating income increased 4% compared to the prior-year period, while operating margin increased 70 basis points to 12.7%, further indicating the resilience of our business model and the benefits of our diversified industrial strategy.

Moving on to our financial outlook, beginning with our end market sales, I'll start with our defense markets. Now that we are half way through 2015, the adjustments shown on the slides reflects better clarity regarding the specific programs on which our COTS embedded computing products are used.

In the back half of 2015 we now expect a greater percentage will be applicable to aerospace rather than ground defense. And as a result, we made a few modifications to each of those end markets. Overall defense market guidance remains unchanged and is expected to grow between 2% and 4%.

Moving on to the commercial markets, like many other companies we are experiencing the direct and indirect impact of lower energy prices, particularly in some of our industrial businesses. While our overall exposure to oil and gas was significantly reduced as a result of our divestiture activity, our remaining exposure to international large projects continues to dampen our results, as these projects continue to move to the right. During the first half of 2015, decline in project sales outweighed higher MRO sales. However, we expect this trend to reverse in the back half of the year.

Reduced energy prices have not only affected our industrial valves product sold to oil and gas and petrochemical customers, [but] also some of our on- and off-highway vehicle products, including those for hybrid and agriculture vehicles. Adding to this mix is general economic uncertainty and somewhat slower than anticipated global GDP rates. As a result, we felt it prudent to reduce our full-year general industrial end market guidance from 5% to 9% down to 0 to 4%.

On a positive note, there are areas within our general industrial end market that continue to look solid for Curtiss-Wright, including increasing demand for our industrial vehicle products and services for the North American trucking and construction industries and our MRO valves that are sold to global oil and gas and chemical customers. These industries continue to forecast solid growth in the second half of 2015.

To sum up, and as a result of the aforementioned tweaks to our end markets, we now expect overall Curtiss-Wright 2015 sales growth of 1% to 3%.

Next, we're happy to share a new slide with you, the 2015 end market sales waterfall. Beginning with total sales, you can follow the split between commercial and defense markets in the blue boxes, which then filter down a layer to the six major end markets where we provide revenue guidance in the gray boxes. We felt this slide would help to provide a clearer picture of our 2015 end market breakdown, most notably within the power generation and general industrial markets.

In power generation, approximately two-thirds of our projected 2015 revenues are based on aftermarket sales to existing operating reactors. Nearly 20% is for new build, which relates to revenues on the AP1000 program, as well as other new-build opportunities globally. Finally, the nonnuclear piece relates to surface treatment services on industrial gas turbines, as well as analytical testing for the fossil power generation industry.

In general industrial, the valve and vehicle businesses each represent approximately one-third of our total general industrial sales. Industrial valves are split two-thirds to the oil and gas and one-third to the chemical and petrochemical industries. Oil and gas is further broken down as 75% MRO sales and 24% large projects.

Industrial vehicle product sales are primarily to on-highway commercial vehicles and, to a lesser extent, off-highway agriculture and construction, as well as medical mobility markets. The surface treatment services include laser and shot peening, analytical services, and coatings for automotive, construction, medical, and various industrial markets. The final category is for industrial sensors and industrial electric actuation equipment.

Overall, we are pleased with our current market diversification, and we hope this additional level of visibility will aid in your understanding of our end markets.

Continuing with our financial outlook by segment, the bulk of the end market guidance changes are in the general industrial market and we have revised our expectations within the commercial/industrial segment accordingly. We have trimmed our [current] segment sales growth rate from 3% to 5% down to 1% to 2% to reflect the changes noted earlier. We also reduced the operating income associated with the lower sales; however, we bumped up margins slightly to a new range of 14.9% to 15%, as we are mitigating costs to offset some of the slowdown in our industrial markets.

In the defense segment we continue experience strong international demand for our Turret Drive stabilization systems, and there also appears to be renewed interest in funding to maintain and upgrade existing domestic ground defense platforms, from which we would benefit. However, at this time we are maintaining our current sales and profitability expectations for this segment.

Sales in the power segment will primarily be influenced by the AP1000 program, and our expectations for nearly flat sales growth remains unchanged at this time. And now that we've incurred the costs related to the AP1000 program in the first half of the year, we expect this segment to benefit from increased production and the new China order in the second half.

Overall, we continue to expect a strong second half of the year, with our operating results following a similar trajectory as we have done historically. We remain on track to achieve 7% to 10% growth in total operating income and 70 to 80 basis points in operating margin expansion to a range of 13.3% to 13.4%.

Moving on, we have updated some of our nonoperational guidance expectations, as indicated, due to better than expected first-half results for interest expense and effective tax rate. These adjustments help offset the reduction in segment operating income guidance noted earlier.

And, as Dave noted, our 2015 guidance for diluted earnings per share remains at a range of $3.80 to $3.90, which represents double-digit EPS growth over 2014.

Next, to our cash flow. As a reminder and as noted on our previous conference call, we made a $145 million pension contribution that significantly impacted our first-quarter reported cash flow results. We anticipate that this action will significantly lower our pension expense and eliminate the need for further cash contributions over the next five years.

Our second-quarter adjusted free cash flow was $28 million lower than the prior year, due primarily to lower deferred revenues, as the prior year included significant advance payments related to naval defense awards.

Despite the lower first-half performance, we are reiterating our free cash flow position for full-year 2015, as we continue to expect an adjusted free cash flow level similar to our very strong 2014 results.

Now I'd like to turn the call back over to Dave to provide an update on our operating margin improvement initiatives and future outlook. Dave?

Thank you, Glenn.

I'd like to spend a few minutes on the drivers of further operating margin expansion and our goal to reach and maintain upper-quartile performance versus our peer group. We've come a long way in the past 18 months as we've reshaped Curtiss-Wright through significant organizational realignment and raised the bar by setting new and transparent financial targets.

We also completed several divestitures of noncore and underperforming assets which most recently included the sale of our downstream oil and gas business in the second quarter and our engineered packaging business early in the third quarter. Outside of a few small surface treatment facilities, our pruning actions have essentially been completed and are fully reflected in our results and current guidance.

We're pleased to complete the sale of these businesses, which now allows the management team to increase their focus on the future. As we've stated, we're aiming to reach and then maintain our position in the upper quartile of our peer group, with the ultimate goal of being at or near the top.

We're focused on improving margins and our return on invested capital by driving synergies and producing significant cost savings, and I'm very confident that we'll reach our goals. At the halfway mark, we're right on track with our operating margin expansion plans. Similar to last year, we will provide an update on all of our initiatives on our February call, when we have 2015 actuals and our guidance for 2016.

Regarding an update to our long-term operating margin guidance, we're not prepared to provide a new target at this time. As the AP1000 program is quite significant to our future growth rates, we need to finalize the pending China order before fully resetting long-term expectations for margin growth. So, for the time being, we remain committed to meeting, and exceeding, the 14.2% upper quartile, or 75th percentile target.

Next, I'd like to provide an update on the AP1000 program. Overall, we continue to make progress in the production of our first-of-a-kind reactor coolant pump, or RCP, supporting the AP1000 nuclear program. We have successfully completed the engineering and endurance testing phase and are now working with our customer and the Chinese as we evaluate the results of those tests. We expect to begin deliveries of our RCPs to China in the latter half of the third quarter.

Regarding our next AP1000 order, we anticipate contract negotiations to resume once we begin shipping pumps and remain hopeful for the order by the end of the third quarter. Longer term, the demand from China remains strong, based on the anticipated use of nuclear power as part of its future energy mix and subsequent expansion of its nuclear reactor footprint. Curtiss-Wright is expected to play a key long-term role in support of this industry expansion.

Next, to capital allocation. Curtiss-Wright remains committed to keeping a fair balance between return of capital to shareholders, operational requirements, and strategic acquisitions. We remain committed to repurchasing at least $200 million in stock this year through steady repurchases under a 10b5-1 plan as we continue to reward our shareholders.

In the second quarter we repurchased $50 million in stock, bringing the total through yesterday's trading to more than $100 million thus far in 2015. Early in the month we announced the expansion of our share repurchase program by $100 million, up to the $300 million that was authorized by our board of directors last September.

So for this year you can expect us to repurchase the remaining $100 million under the $200 million 10b5-1 plan, as well as the potential for additional opportunistic purchases up to another $100 million based on the recent expansion and market conditions.

While we have announced only one acquisition year to date, we have a solid pipeline of candidates we're pursuing. Keep in mind that we've raised the bar for the types of businesses we're looking to acquire, focusing for now on smaller companies that can contribute to our long-term profitability expectations, so they cannot be dilutive to overall CW. Further down the road we would expect to also explore some potentially larger deals to bolster our top-line growth projections.

As a reminder, our use of capital for operational needs includes ongoing CapEx requirements, as well as the $145 million pension payment made this year.

In addition, we will continue to invest in our business to drive long-term organic growth. We are confident that the progress we're making to more efficiently manage working capital and improve cash flow will benefit our shareholders over the long run.

In summary, we're looking forward to a strong second half and continue to expect another solid year in 2015. We're particularly pleased with the strength we're experiencing in our defense markets. We expect at least 70 basis points in operating margin expansion and double-digit EPS growth in 2015, led by our operating margin improvement initiatives supporting the One Curtiss-Wright vision.

Finally, our continued focus on margin expansion and free cash flow generation will drive Curtiss-Wright to upper-quartile performance versus our peers for all of our financial metrics, and in turn is expected to drive strong shareholder returns for years to come.

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

Thank you. (Operator Instructions) Kristine Liwag; Bank of America.

With your updated sales outlook for general industrial of 0 to 4%, what are you assuming for sales growth in the oil and gas MRO versus large projects?

We don't have that right at our fingertips here, Kristine, at this point, at this time.

Sure. And then, for the M&A pieces that you mentioned, with the focus on smaller companies in the near term and then maybe larger ones later on, can you provide any sort of color on capabilities that you want to add or perhaps end markets that you want to enter?

Yes. That's a great question, something that we look at from a strategic standpoint very often. As I indicated, we have a pretty strong pipeline filled with opportunities. And they range from -- there's some pretty large ones to the smaller ones. And the strategic bolt-ons that I've been talking about for the last two years now are sub-$100 million. That has been sort of the upper limit that we wanted to look at on a company-by-company basis.

And the areas in which we have a lot of interest are, in particular, defense. I'm not shying away from that whatsoever. There's some great plays that complement what we want to move forward with in the strategic standpoint. In particular, the C4ISR area has been of interest to us and continues. Some of the UAB markets, you know, we're very well grounded in the Global Hawk and others. And with what we have we're able to acquire other companies that might have, let's say, bolt-on technologies that one plus one would equal three. So those tend to be smaller range.

Now, as we look in other areas of the business, I still like the industrial side. We've continued to look at other areas of the vehicle that own the cab, as it were. That's sort of a little watch word that we use internally from a strategic perspective, saying whatever we can help the end user or our customer in terms of their efficiency and in terms of buying and/or operating a big rig, for example.

If we could provide a whole host of electronics and/or components that go in that cab instead of them, our customer, having to go out and source those independently and we would be on cutting edge from a technical perspective, then we feel that's a real niche filler that our customers are really looking for. So, I look for that industrial side as being something of interest.

Those two are the primary areas. I've also made clear that we do like, and continue to like, the nuclear aftermarket. It's steady-Eddie-type business. Granted it's a little bit down right now, and that's going to change at some point in time. And we have a good host of products that will fill the need when those become a revitalized part of a market. And so, in those three areas, that's an area we have interest in.

Now, relative to bigger transactions, as I indicated in my narrative on the front half here, it's really an area of interest to us to get to the point that we said we would get to, and that was achieving upper quartile against our peer-type margins, op margins. And I said two years ago once we did that then we will have earned the right to grow this company with different mindset in terms of the margin expectations of those that are acquired.

And that's exactly where we plan to head. At some point we'll look for other opportunities that -- we're not going to overpay if we can help it. And we are certainly going to -- we have a different measure by which we look at acquisitions now. They have to meet a certain bench. And so, those things all add up into our grand strategy to continue to grow this company.

Great. And final question from me -- as you think about power, as in your delivery of the AP1000, how are you thinking about the cadence of long-term growth in that segment? And is there a normalized margin that you're looking at to target?

Yes, we've said as soon as we get the order, Kristine, because we're still negotiating right now. So, as far -- I could at least tell you what we put in our guidance this year, which was $13 million in sales and $3 million in operating profit as our estimate for this year, as a gauge. But until we get the order, we're not going to be able to -- when we get the order we'll be able to share all of that with you. But we can't do that right now since we are currently in negotiations.

Great. Thank you very much.

Michael Ciarmoli; KeyBanc Capital.

Nice margins in the quarter. Maybe just to stay on that last line of questioning real quick, there's a lot of positive commentary coming out of China, some of the big power utilities there. But the numbers you just gave, Glenn, point to a 23% operating margin on what you've baked in for AP1000. I know you've said the first pumps between kind of the blue-light-special pricing, incurring all the learning curves and costs. Is that a realistic margin that we should be thinking about, 23%? Or is something in this initial -- this first line of revenues you've put in for this year, is there something in there that's higher margin that's not sustainable?

No, I think it's -- this is an estimate our group down there came up with earlier in the year. Obviously it was in our guidance. So I'd say at this point I can't say it's anything other than their best estimate of how the contract's going to end up. But, again, we're in negotiations, so won't be able to give you that actual projection until we finalize the order.

Okay. And you still feel comfortable? I mean, it's still on the guidance this year. It sounds like you could have this -- even though resuming negotiations, but you guys still feel comfortable that this can be tied up here in this quarter?

Yes, as I indicated, Mike, the order -- and I said on the last call as well that we had anticipated that we would get through the E&E testing and we did in the end of last quarter. And that was excellent. We were very happy. So we proved out the design modifications that we had made at that point, the thrust runner bearings and so forth. The whole purpose was to go through and to really prove that we've got a 60-year-life pump.

And so everybody's happy that we did accomplish that. And now, as a result, we are doing some tweaks and we anticipate that we're going to be shipping hardware in the very near term to China. And that was always the premise with our customer, both domestic and China, that once we started shipping product it had met the requirement, which the requirement was sufficiently passing the E&E testing, then we would starting resuming negotiations.

So, yes, we're -- you've heard me say before I've been cautiously optimistic. I remain so. And third quarter is still what we're looking at to pick up an order, as I indicated. We're going to be shipping hardware pretty soon.

Got it. Just on the margins in general, I mean, your drive the margin expansion but with substantial top-line headwinds. Can you give us a sense as to what specifically is driving that improvement? Is it facility consolidation? Is it headcount? Can you give us a sense as to how you're driving this improvement, what aspect of that operating model improvement is really the contributor here maybe in this current quarter?

Yes. You know, I'm going to give you the bigger answer, not current-quarter related as much as more specific. I love the question, Mike. I honestly do. It is one that thrills me every time I get the question when I'm in one-on-ones or out with you folks. That is, to be able to speak about our continuous improvement initiatives and our margin expansion initiatives that we put in place.

They don't stop. And back in December of 2013 we came out with our playlist. We call it our Top 10. And it was like 100-and-something initiatives. But that's spread over various different business units that have different drivers. And we continue to evolve that and to improve it. We haven't gone back, which is a great part of this.

What we have created is something that we've coined The CW Way. And it's much akin to what we in the industry know as The Danaher Way, or the Toyota production-type model. And we've got this CW Way that we utilize internally. Like I said, it's an iterative process by which we go through and identify the areas that we can absolutely focus on and transform the businesses that are associated with whatever it is that we're focused on.

I'll just give you the main highlights of those on the Lean side. And Lean does talk about efficiency improvements. And it's some headcount modifications and you can't get lean without some of that. But what we do like to do is maintain as much as possible on the headcount side so that we can produce more and accomplish and accommodate the growth that we need to. And in some cases it's labor arbitrage shifting. But Lean is all about efficiency improvements, including equipment as well.

And I'll give you one example there, is that we have so far this year, through half one, we've identified and trained what we call 24 Champions of The CW Way. And we will have another 24 by the end of the year, so 48 people that are absolutely focused upon our business model, The CW Way, of producing at the highest levels of efficiency that we can possibly accommodate. And that's cutting edge or leading edge type Lean.

Low-cost economies, we've got Mexico, couple of facilities. China we've got three. Pune, India we have a facility. We have so far -- roughly it reported out about almost a half a million hours in terms of offload into the foreign economies for labor arbitrage. By the beginning 2016 -- let's say by the beginning of 2017, or by the end of 2016, we'll be at a million hours. And that's considerable, considering where we started from. That contributes a very large amount to margin improvement.

And supply chain -- I sat in on a spend meeting, as we call it, the other day. It was held here in Charlotte. And this one was where we brought in our raw material suppliers on either a direct or distributor basis and filled a room full of them. And basically we opened the kimono and said -- look, here's where we're at. Here's what we're going to buy.

And this is all in line with what I've been telling you for a while. And that is, we spend $1-billion-plus and we're going to take 3% of that out. Well, 3%, you take it by one bite at a time. This was just a classic example of taking a one bite. Having all the suppliers in a room, just being straight up -- here's where we're at. Some of you will survive. Some of you will not. We need your best and finals and here's how we've got to get there as a team.

And that way we were able to input [and] place long-term contracts. And as the old ones roll off, like I've been talking about for the last year and a half, these new ones are rolling on with good margin pickups in our spend areas. That certainly contributes.

And then, lastly, the consolidation side. You mentioned consolidation. And we're all about change. If you don't change you're not staying ahead of the pack. And we are changing as a company. We continue to do so. We have had -- we launched 13 projects in this year, the beginning of this year, that were consolidation projects. And that's routine for us. Now, 13 was a pretty good-sized number for us because we had done several last year. But 13 this year -- and we're not going to complete all 13 in this year, because they'll roll into next year a little bit.

But those are the kinds of activities where -- obviously you pick up from your brick and mortar. You consolidate. You don't have a brick and mortar cost. And we look at when the lease expires and look at consolidations at that time. And then also headcount, the labor side, you go to low-cost economies.

So these are absolutely real and tangible pieces of margin expansion that I'm happy to go through on one-one-ones or when I get to conferences in more detail. But suffice it to say, they are part of us achieving at and beyond our currently stated targets. So I'm just really happy to be able to report that we're making solid progress in that regard.

That's extremely helpful. Thank you very much. I'll jump back in the queue.

Myles Walton; Deutsche Bank.

Just a quick question first on the working capital. Looks like working capital as a percent of sales is actually expanding a little bit. And, Glenn, as you calculate it on your metric, what does it look like? Is the path still to get to 30% by year end?

Yes.

Looks like if you got to 30% by year end you'd actually be well in advance of the guidance.

Yes. I mean, when we include deferred revenues, which is what we do, besides primary working capital, we're at 26.5% in June. That's down 0.5% from the prior year end. Our forecast now is to get down to 23% in 2015. However, we have tasked all of our business units to achieve a 10% reduction beyond that. That's what we're striving for. If we were to do that -- of course we won't, probably won't, do all of it. But if we were to accomplish that, that would get us down to about 21% versus our goal of the upper quartile of 20%.

So we're clearly making some -- we're expecting to make some pretty significant progress in the second half of this year.

Okay. So the only adjustment you're doing is the deferred revenue?

Yes. That's it.

Okay. And then the other one is really on the power segment, particularly the second-half margin run rate implied of 14% or so. How much should we interpret that as the go-forward run rate?

And then, secondarily, I think we all understand the absence of the AP1000, the $3 million OI from the China shipments are kind of what you're counting on. But is there also a pickup in aftermarket in the nuclear markets? And is that in your backlog, or is that more of a risk than an opportunity?

No, the second half you hit a couple. Obviously it's influenced by the new order, which is -- at least we're estimating it to be fairly profitable for us and a positive impact on the margin, of course. We are expecting domestic production and the aftermarket business to pick up in the second half of the year. The aftermarket business had some pretty good order intake in the first -- primarily in the first quarter, but also in the second quarter. So those are of course coming out of backlog. So the combination of that -- but I think the new order, it's a fairly heavy influence on that margin the second half of the year.

And the 14%, how much -- should I think about that as the run rate for that business into 2016?

Again, we can't really go into this. We're back to that conundrum of, one, we don't have 2016 projected yet and, two, until we really get the order that's still an estimate of what they think is going to happen this year. But we'll remain and see what actuals are once we get the contract. And hopefully the next quarter we'll be able to spell all this out for you, because I know you guys really need this to look to the future, so we'll (multiple speakers) --

We're looking as forward to telling you as you are to getting the answer.

Exactly, yes.

Sounds good. I'll let it go there. Thanks.

Sam Pearlstein; Wells Fargo.

Back on power one more time. So you absorbed $11 million in cost. If I look at that, that still only gets you 10% or so margin. Was there anything else one time, like restructuring or anything else in the quarter?

I'm just trying to think. No, I don't think so, Sam. Nothing seems to be popping out at this point.

Okay.

The $11 million was exciting enough.

Yes, that's true.

(Inaudible)

And can you provide a little bit more in terms of why ground defense went down and then defense aerospace went up? What actually shifted in terms of the year?

Well, I'll tell you -- here's what happened. This was in our COTS embedded computer business. And there are hundreds of programs. A customer will come and order 100 boards. Well, since they're COTS by nature, commercial off the shelf, they can be used in a variety of programs. We don't necessarily always have visibility on where those boards are being used. And as we get on in the year, that business unit got better clarity and that's really just a reclass between the two.

Okay. And then, with the lower organic growth for this year, just given what's happening in some of the markets, how do you feel about that long term 3% or 4% kind of growth rate out to 2018? Do you still reach that? Or do we just start on the lower base and then grow from here?

You know, Sam, that's the $64,000 question, isn't it? The complete industry wants to know. We feel we continue to demonstrate that we outpace our markets and our peer groups in the marketplace. And we think we do by a measure, and we see it across the board, opportunities.

You take the vehicles, on-highway, they're doing great domestically. They should come back and pick up internationally, because in China, for example, they're down a little bit. Ag worldwide is down. Not sure when that's coming back up again. But we're well positioned once it does. We have new products that we're releasing. Those new products will capture market share that's not necessarily dependent upon, let's say, a rising tide of a particular industry. It's about technology insertion.

Oil and gas prices don't help us a whole lot in terms of hybrid right now. And hybrid vehicles, they're not buying as many as they were 18 months ago, 12 months ago. That's done a little bit to us. But I'm here to tell you I think, you know, what goes around comes around. We're not going to see these oil prices forever at this level. It will switch. And so, is that going to happen before 2018? Well, I don't know. But when it does, things like that, the hybrid, which was a big headwind to us in terms of contributing to the lack of growth, we think that will come back. And we're very well positioned with some new technological inserts from a hybrid perspective, as well as the old product that we currently have.

So, I think generally we still feel optimistic. We go through these from a ground up with our individual business units each month and we talk about the possibilities and what we can do. And while it's not sure-fired guaranteed -- we're not holding anybody's head under the water to say we have to get there. We want to do the very best we can on a realistic basis. And this is what we're projecting.

So, yes, I guess, Sam, the short answer is we anticipate that we're going to continue to make this stride in this -- unless and until we see some significant changes.

And also, beside the AP1000, which is going to ramp up when we get the order, we also have the CVN navy aircraft carrier during this next couple year process that's going to ramp up and the Joint Strike Fighter build rates we expect to ramp up, as well as new commercial aerospace platforms. There's a number of different things that we see on the horizon that would give us some comfort for the long-term range.

Okay. And then, does any of that end market weakness help you in terms of the M&A in the pipeline? Have you seen any change in the multiples that either people are asking or what you think it takes to close transactions?

Yes, prices on M&A are still pretty high. But, like I said, we have a different look at a different type company. So the benchmark company today was considerably different than the benchmark company of old. And the return on invested capital, 10% by year three and by year five is 12%. So we are looking at some higher metrics. They're going to cost more to buy those kind of companies. Yes, there might be some potential little pickups, but we don't really like to buy in a down market and hope for the best. I'm looking for technologies that stand out and can complement and contribute strongly to what we've got, rather than buying something and riding out the storm.

Now, if there was just a super deal out there that was faltering because of market only, and we had something to add, yes, sure, we'd take a look at something like that. But not sure that we would execute on it, just take it on a case-by-case basis.

Okay. Thank you.

Ryan Cassil; Global Hunter Securities.

I thought it was a nice quarter and outlook, given the industrial environment, and perhaps we could focus there for a second. On the industrial valve side, it sounds like volumes are really pushing out to the right. But could you talk about whether you're seeing any pricing impact and whether there's any difference between the project and the MRO business there?

Well, I will say that -- just so we can hone in on what we're -- industrial valves is about a third of the general industrial market, around $200 million. Two-thirds of that is oil and gas, and that splits out 75% MRO and 25% project. So project is fairly small, but today we have -- or at least we expect (inaudible). So they are moving to the right.

The MRO we expect -- the way we've said this, we've said the projects are kind of looking kind of flat throughout the year. And they're actually higher than the MRO recently. But we expect a big second half for the MRO. It's going to be higher; it's going to overshadow the project business and for the year end up being up versus the projects. So projects comparison with the pricing is better on the MRO for sure than the projects, generally.

Okay. So am I to infer you're not really seeing it on the MRO side, the pricing pressure as much?

No.

Okay. Great. And then, on the commercial vehicle side, I think one of the growth drivers has been China. And just given some of the headlines and concerns about China, is that still expected or is that part of the lower outlook in industrial generally? Any color there would be helpful.

Ryan, we've got, like I said, a couple of facilities in China, three as a matter of fact. And some for indigenous sales, some for the labor side of it, low-cost economy -- which, by the way, I wanted to mention that MRO valves benefits from. So when we do have sometimes pricing pressure, well, we do have a really nice base there in our low-cost economy to withstand some of that pressure and maintain margins, if not increase. So, we feel pretty good about that.

But in terms of the outlook, yes, we watch that with great interest. Let's say it's not a huge piece of the growth at this point, or a huge piece of the business from an overall industrial at this point. Some day I hope that it is. And because it's not, we're not seeing big, tremendous drop-off.

We were hoping for more of a robust marketplace back in 2014 that when we started to see the regulatory side become statutory with regard to some of their emissions control need. And then with 2015 we expected it to roll out a little more quickly, that hasn't happened as much as we had hoped because of obviously what's been happening over there. The need is still great. They know it. You can't help but see it. It's in front of your face when you breathe. And so that's not going to stop.

We'll see some moderate growth there, but it's going to take some time. The international vehicles, as we discussed, overseas and particularly in China, has just taken off more slowly of recent than we'd wanted. And ag, that's in the tank for now for a while anyway. But I don't see the need going away by any stretch. If anything it's probably picking up. So I just think that that's going to come back for us at some time.

Okay. Understandable. Thanks, guys. Appreciate it.

(Operator Instructions) Steve Levenson; Stifel.

Just a question on AP1000. There's been some news that some of the domestic installations are seeing some cost overruns that I guess a lot of people expected might not occur with the modular reactor. Are you getting any pushback? Or is that more on the -- are you aware, is that more on the construction side?

Yes, I was reading some of those same articles of recent. And it looks more on the construction side. Some of the projects are late, however, and overruns, I've read about those as well. But what I also read was that they are making progress. I think that there are only two that are active today -- but that they actually are making progress. And I took that as a positive out of the article.

And our position in it is that we're holding our own. So I think we're doing pretty good. But, yes, I've seen some of those same articles and I haven't gotten any more color on it than that.

Okay. That's helpful, though. And then, in terms of the stock buyback as opposed to acquisitions, is that just that you were still finishing the pruning before you start to add? Or was it a matter of valuations as opposed to the price of the stock being a better investment at the time?

Yes, we were counting our money for awhile there and after the divestures. And so then we did go in as originally for a $300 million buyback authorization. And as you know, we went out with a $200 million on a peanut butter spread. And then now, as we indicated, with the $100 million that we'll do that on an opportunistic basis.

And it wasn't in lieu of acquisitions. But it was -- if we had had acquisitions -- so we've been talking about we want this thing to be balanced. And if we had had acquisitions this year, more of them in the first half, maybe we wouldn't have done that extra $100 million.

But it is prudent. We believe in this company. We believe in the stock. And we believe that we're going to grow this business and our shareholders are going to reap the rewards of same. And so, that's why we initiated the second part of the $300 million, and that being the $100 million.

But I still remain bullish on acquisitions, be they the right ones. And it's not valuations that have scared us off, frankly. We did bid on a couple of acquisitions that -- and you just reach a point where you say -- hey, look, in an auction the last guy standing is really not the winner, although they won. But we didn't, two of these cases, want to be the last people standing. And the technologies were not worth enough to us to do that.

And we're going to stay that line, stay that course. We do believe that there are some out there that match our intent strategically, and we can really do something with. And I'll tell you, with The CW Way, with what we've got going from our process improvement, Lean, and so forth, we've got a real machine going here that once I acquire businesses, they complement what we have, we can throw them into the fold, we can consolidate, rationalize, whatever we have to do, and come out with the one plus one equals three. And that's what we're looking for. And I'm tremendously excited about being able to do that on the right ones.

Got it. It's good to stick to the plan then. I appreciate your conviction on the stock. Thanks a lot.

Thank you. I'm showing no further questions and I would like to turn the call back to Mr. David Adams, Chairman and CEO, for any further remarks.

Thank you, Michelle. And thank you all for joining us today. We look forward to speaking with you again during our third-quarter 2015 earnings call. Have a great day.

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