Curtiss-Wright Corp (CW) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Curtiss-Wright first-quarter 2016 financial results conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Jim Ryan, Senior Director, Investor Relations. Sir, you may begin.

Thank you, Tamara, and good morning, everyone. Welcome to Curtiss-Wright's first-quarter 2016 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 this presentation and will be available on the Company's website. You also will find some additional charts on sales by end market at the end of this presentation.

Finally, our discussion today of current and future results, except for cash flow, are on a continuing operations basis, which excludes all previously announced (technical difficulty). 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. Good morning, everyone. For our agenda today, I'll begin with the key highlights for the first quarter 2016, followed by Glenn, who will provide a more thorough review of our quarterly financial performance, along with updates to our 2016 guidance. Then, I'll return to provide some additional commentary on the AP1000 and margin expansion programs and our capital allocation strategy, before we move on to Q&A.

First-quarter EPS of $0.73 topped our expectations, despite the challenging conditions within our industrial markets. First-quarter sales, as expected, were primarily impacted by the combination of slower economic growth and depressed oil prices, driving weaker demand and lower profitability compared to the prior year. Despite the difficult environment for some of our industrial businesses, we are increasing our guidance for free cash flow and maintaining the remainder of our full-year guidance. We are confident that the diversity of our end markets, our growing backlog, and the benefits of our ongoing margin improvement initiatives will allow us to mitigate this industrial weakness in 2016, as we did in 2015.

Looking ahead, we expect to see continued sequential improvement throughout the year. Underscoring our focus on capital management, we were extremely pleased with our strong first-quarter free cash flow, generating free cash flow conversion of nearly 190%. Our results include the initial cash advance payment on the new AP1000 order, as well as the unwinding of our interest rate swap agreements. As I mentioned, we raised our free cash flow guidance for the year with the midpoint now at $300 million or $6.50 per share.

Now I'd like to turn the call over to Glenn to provide a more thorough review of our first-quarter performance and updates to our 2016 financial outlook.

Thank you, Dave, and good morning, everyone. I will begin with a review of our first-quarter end-market sales, which, for the most part, were in line with our expectations.

Overall, we experienced a 4% decline in sales to our defense markets and a 10% decline in sales to our commercial markets. Both are expected to represent the low point from for the year from a quarterly perspective.

Starting in defense, we experienced lower demand for embedded computing product within the aerospace defense market due to timing on production on several aircraft and helicopter programs.

Embedded computing sales are expected to sequentially improve as we progress through the year. In naval defense, we recorded a net increase in submarine revenues, reflecting the initial ramp-up on the new Ohio replacement submarine program. This increase was partially offset by reduced revenues on the Virginia-class submarine program due to production timing, as well as lower CVN-79 aircraft carrier revenues as production is nearing completion. Finally, sales in ground defense were up slightly.

Moving on to the commercial markets, I will begin with commercial aerospace, where sales were flat in the first quarter. As previously discussed, Airbus elected to shift wingforming on the A320 program to a supplier in South Korea, resulting in lower revenues in 2016. Most of this decline will be in the first half, with the largest impact in the first quarter, where A320 sales declined approximately $5 million from the prior-year period. Offsetting that decrease were higher sales of actuation systems and sensors and controls products, primarily on the Boeing 737 format.

In power generation, our performance primarily reflects the $10 million sales benefit from a one-time Progress Energy AP1000 plant termination in 2015 that did not recur in 2016. In addition and as expected, improved production revenues on the AP1000 program were partially offset by reduced demand in the nuclear aftermarket business.

And finally, in the general industrial market, sales decreased 15% overall, led by continued declines in the energy markets and weaker global economic conditions. Our first-quarter performance, as expected, reflects lower sales of our severe service industrial valves, principally to the oil and gas market. While we are encouraged by the recent signs of recovery in industry fundamentals, we remain cautiously optimistic about the remainder of 2016 and expect modest sequential improvement in industrial valve sales over the course of the year.

Moving to industrial vehicles, on-highway sales were generally flat in the first quarter, as lower Class 8 truck revenues were offset by increased medium and hybrid revenues.

Off-highway sales continue to be negatively impacted by weakness in the global agricultural market. Elsewhere, the balance of our more economically sensitive general industrial businesses were relatively flat, as improved surface treatment revenues were offset by a reduction in industrial automation sales.

Next I will discuss the key drivers of our first-quarter operating income and margin performance. As expected, the commercial industrial segment produced lower year-over-year operating income and margins. The primary driver of this reduced performance was lower sales and the associated lower overhead absorption in our industrial valves and surface treatment businesses.

In addition and as noted on the prior call, we are taking proactive cost reduction actions in this segment, including several facility consolidations. As a result, the first quarter includes a $3 million restructuring charge. As Dave will discuss in more detail later in the call, these upfront restructuring cost are expected to produce incremental savings before year end.

Our performance was also impacted by the Airbus shift in wingforming on the A320 program. We expect this impact to steadily decline sequentially over the balance of this year.

In the defense segment, operating income was down 7%, while operating margin was up 10 basis points to 16%. Segment operating income included a $2 million favorable FX impact. The organic decline was driven by a combination of lower sales and the associated lower overhead absorption, as well as a less-favorable sales mix due to lower sales of our higher-margin [Cox] products and higher sales of our lower-margin systems solutions.

Next, in the power segment, operating income was down 25% and operating margin decreased 260 basis points to 11.9%. As a reminder, in the first quarter of 2015, operating income included a $7 million benefit related to the Progress Energy termination. Excluding this one-time benefit, segment operating income improved 17%, while operating margin was up 180 basis points. This performance reflects improved profitability on the AP1000 program, particularly now that we have moved beyond the significant expenditures related to the testing and design modifications for our AP1000 RCPs.

In the prior-year period we spent $4 million in testing costs, which did not recur this year. The benefits on the AP1000 program more than offset reduced profitability in the nuclear aftermarket business, due to the lower first-quarter sales. We also experienced significantly lower corporate costs, due primarily to lower pension expense resulting from the $145 million contribution made in the first quarter of 2015.

In summary, overall first-quarter operating income decreased 21%, which led to a 190-basis-point decrease in margin, to 11.4%. However, 2015 included the net benefit from the one-time Progress termination, which represented a 100-basis-point improvement to the prior-year results. Excluding that impact, operating income declined 13%, while operating margin only decreased 90 basis points.

Moving on to our 2016 guidance, for the sake of proper comparison when reviewing growth rates for 2016, we are comparing 2016 guidance to pro forma 2015 results, which excludes the one-time AP1000 fee from both sales and operating income within the power segment and Curtiss-Wright overall. In short, we remain firm on our guidance with the exception of higher free cash flow, which I will address in a few minutes.

For 2016, we continue to expect full-year consolidated sales to be approximately $2.2 billion and range from up 1% to down 1% compared to pro forma 2015. We expect operating income to grow 5% to 8% and operating margin to expand 70 to 90 basis points, to a range of 14% to 14.2%. And finally, we are maintaining our 2016 guidance for diluted earnings per share to range between $4 and $4.15, which represent EPS growth of 7% to 11% over pro forma 2015 results.

A few reminders as we look ahead to the second quarter. In the defense segment, our second-quarter 2015 results included a one-time benefit for the transition between the development and a production contract for our turret drive stabilization systems. This resulted in a $4 million benefit to our margin and sales in 2015, which will not recur in 2016. In addition and as previously noted, we expect approximately $2 million in restructuring costs during the second quarter in this segment.

In the power segment, our second-quarter 2015 results included $11 million in testing and design costs relative to the completion of the engineering and endurance testing on the AP1000 program. As a result, we expect our second-quarter 2016 power segment results to demonstrate strong improvement year over year.

We continue to expect sequential quarterly improvement in our diluted EPS, with the first quarter being the lowest and the fourth quarter being the strongest, as we have done historically. As noted earlier, our first-quarter EPS results exceeded our expectations, and this was primarily due to sales pulling forward from the second quarter. For purposes of your quarterly modeling, we continue to expect approximately 35% of our full-year EPS to be in the first half of the year and 65% in the second half.

Lastly, we have not made any adjustments to our end-market sales guidance, where overall defense sales are expected to grow between 2% and 4%, while overall commercial sales are expected to decline 1% to 3% from our pro forma 2015 results. In the appendix, you will find the complete 2016 end-market sales outlook and waterfall chart based on our guidance.

Next to our cash flow, where we were off to a strong start in 2016. First-quarter free cash flow was $61 million, and one of the highest first quarters in recent history. As a result, free cash flow conversion was nearly 190%. As we mentioned on the last call, we anticipated the receipt of an advance cash payment related to the new China AP1000 quarter order, which generated a large reduction in receivables in the first quarter. To receive this payment drove the reduction in our working capital as percent of sales during the first quarter.

In addition, we received $20 million related to the unwinding of our interest-rate swaps in the first quarter. We initially put these swaps in place in 2012 and 2013, generating an economic benefit of $28 million since inception, and a total benefit of $48 million as a result of opportunistically unwinding the swaps when we did.

Meanwhile, capital expenditures of $9 million remained flat to 2015. However, we anticipate that the pace of capital expenditures will ramp up beginning in the second quarter, including planned facility consolidations. Based on the solid first-quarter performance, we are increasing our full-year free cash flow guidance by $10 million, to a new range of $290 million to $310 million, up 7% to 14% compared with 2015, with an expected conversion rate of 158% to 163%. Furthermore, we now expect our free cash flow per share to range from $6.30 to $6.75, a 10% to 18% increase over 2015.

And finally, we expect our working capital as a percentage of sales to decline from 25.4% in 2015 down to 23.6% in 2016, a 180-basis-point improvement, as we continue towards our long-term goal of top-quartile performance.

Now I'd like to turn the call back over to Dave to conclude our prepared remarks. Dave?

Thank you, Glenn. I'll begin with a few highlights on the AP1000 program, where we continue to make solid progress on the production of our reactor coolant pumps. If you recall, a year ago at this time we were in the midst of engineering and endurance testing. Since then, we have built some strong momentum. As a reminder, we achieved a fully qualified RCP design last fall, and we began shipping RCPs to China in November. This culminated in the latest new China order, which we received on December 31, 2015.

Presently, we are in full-rate production of our RCPs and are satisfying the current needs of both the domestic and Chinese customers on the initial 2007 and 2008 orders. Since last fall, we have shipped eight RCPs to China under the original 2007 order, four arriving at each of the new AP1000 plants in Sanmen and Haiyang. On the slide, you can see the first RCP that was installed into the Sanmen 1 reactor, another proud milestone for Curtiss-Wright.

All eight RCPs in China have been installed thus far. We are making preparations to complete shipment of the remaining eight RCPs to China later this year. In addition, our domestic customer requested that we begin shipment of RCPs to the Vogtle plant site in Georgia, and the first RCP arrived at that site in mid-April. We now expect to complete shipment of the next three US RCPs in the coming months, and then we will continue with the remaining eight China RCP shipments as previously noted. Recall that revenues on the original China order will be fully recognized by the end of 2016 and by the end of 2017 on the US order.

Regarding the newest China order, we received a sizable advanced cash payment in the first quarter, as Glenn noted. Long-lead material procurement has begun and is expected to take approximately 18 months, followed by manufacturing activities to support the expected ramp-up in production, principally beginning in 2017.

On the previous call, we discussed the near-term opportunity within China, which could be quite large for Curtiss-Wright over the next eight to 10 years, with a potential opportunity of up to 88 RCPs. In addition, Westinghouse continues to work with India to establish an agreement on the first phase of AP1000 development with a potential for six reactors. That would represent 24 Curtiss-Wright-designed RCPs.

Based on public data, this represents only a fraction of the potential opportunity in India, where the AP1000 is likely to play a significant role. As we have said before, it is important to emphasize that Curtiss-Wright has the only fully qualified, tested, delivered and now-installed AP1000 reactor coolant pump in the world. We look forward to continued support of the world's nuclear needs for decades to come.

In addition, at some point later in the year we expect to host an investor event at our plant outside of Pittsburgh to showcase our reactor coolant pumps and other nuclear technologies. So stay tuned for an invite to that event in the coming months.

Next, a review of our strategic margin drivers. Thus far we remain on track with our operating margin improvement initiatives for 2016. As you are aware, our goal is to maintain top-quartile status compared to our peer group, which, coincidentally, is 14.1%, in the midpoint of our 2016 guidance range.

As previously discussed, one of the key drivers of 2016 will be facility consolidations. As Glenn noted earlier, these efforts are underway within our commercial industrial segment, the most significant of which is the consolidation of eight businesses into one new, state-of-the-art facility. In total, we expect to incur approximately $6 million in upfront costs in 2016 to support all of our restructuring initiatives, which should generate approximately $10 million in future annualized savings.

We expect these actions to produce solid segment margin expansion, as we begin to recognize incremental savings in the second half of this year. Through these and other initiatives, we will continue to focus on long-term opportunities to reduce our costs and improve our margins. Furthermore, we have good line of sight to achieve these expected savings and remain in the top quartile compared to our peers.

Next, to capital allocation: Curtiss-Wright is focused on continuing to generate strong free cash flow, as evidenced by our 2016 performance and outlook. We remain committed to maintaining a balanced capital allocation strategy between operational requirements, returning capital to our shareholders, and strategic acquisitions. We expect to repurchase at least $100 million in stock this year via a 10b5-1 plan, and as a result we've repurchased $25 million in the first quarter. We are also maintaining a steady dividend payout. Together, this return of capital reflects our continued commitment to our shareholders.

On the previous call, I discussed our dedication to, and focus on, growing the top line, which we intend to accomplish through a combination of internal growth and strategic acquisitions. We are making prudent investments internally to grow the business. However, in order to grow Curtiss-Wright, we may widen the size and the scale of potential acquisition targets.

So while we had previously limited our guidance to sub-$100 million bolt-ons, we are also looking at potentially larger transactions. This doesn't mean that we are going to run out and add a fourth leg to the stool. Our interest is principally to build on the existing portfolio with complementary acquisitions to further strengthen our competitive positioning. We will, however, be increasingly selective to find a suitable strategic fit and pay a fair price for an attractive business that will closely align with our margin expansion and other financial objectives.

I will continue to remind you that we are fully committed to achieving top-quartile status compared to our peers for all of our metrics, particularly operating margin and ROIC. Finally, we believe this long-term focus on growing the top line to supplement our ongoing margin expansion initiatives will continue to expand shareholder value.

In summary, we continue to expect another strong year in 2016. While the uncertain economic environment is driving some topline headwinds in our industrial businesses, we anticipate progressive improvement over the course of 2016. We are making great strides in our various initiatives supporting the one Curtiss-Wright vision, which will continue to positively impact our results.

All of these factors give us confidence in producing solid operating margin expansion in 2016, up to a range of 14% to 14.2%, as well as strong free cash flow generation. Additionally, we are maintaining our continued commitment to return capital to shareholders through steady share repurchases and a steady dividend. We look forward to continuing to deliver on our strategy, producing solid financial results that drive long-term value for our stockholders.

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

(Operator Instructions) Kristine Liwag, Bank of America.

With the advanced payment of $65 million in the quarter, does this mean that there won't be more cash received for the AP1000 order for the rest of the year? And also, do you have an update regarding your expected cadence of cash for the AP1000 order through the contract?

We don't have an updated schedule yet, and so I can't even -- I can't answer the first one, because we don't have -- to answer the second one, we don't have an updated schedule. We do -- I think we have said we are planning a nuclear event in our -- at the Cheswick facility, and we will have that detail at that time.

It's pretty complicated; there's probably hundreds of milestones in this particular contract, and scheduling that out over a five-, six-year period is a pretty big task. But they're working on it, and we expect to have it when we see you sometime in the summer, I think, hopefully.

I look forward to that. And then, I know in the past you have discussed the technology sharing agreement that you have with the Chinese RCP supplier. I was wondering, what does that agreement actually entail in practice? And what kind of -- what are you required to give them, and how quickly do you think they can build their own, depending on what your responsibilities are?

Well, we had made the agreement back in 2007 that we would transfer the technology of the ultimate reactor coolant pump on the AP1000, which we did. And that means, in essence, providing the drawings and whatever's necessary to build. They would obviously have to manufacture their own assembly instructions, that sort of thing, to actually manufacture it and then arrive at their own -- some of their own suppliers and supply chain and so forth. But we have delivered the technology in terms of the drawing package. And we have people in place in-country to assist should they need it. I will add that we don't get many calls to that line for assistance, and that's just from whatever practical matter that, that's what is ongoing.

And in terms of their ability to actually manufacture, they haven't yet manufactured one, nor have they tested one at this point, and we don't know when that will occur. But like I said, we do stand ready to help them out should they need that, and that's the crux of our agreement, was to give them the capability. Our relationship with the strong Chinese is very strong. We continue, obviously, to talk with them on a regular basis, with folks in-country and visits over there. And on our most recent trip, one of our executives came back and was telling us that basically they very much respect our relationship, they appreciate the help that we've given them, the support, and that they look forward to this being a very, very long relationship.

That's exactly what we want. I think I said on the last call, or certainly after we were celebrating the award of that contract, that we're looking to be one of the suppliers on all their AP1000 need for a long, long time. And if they're able to build it in-country, so much the better for them. That's great, but we look to be here in the long haul.

Great. And lastly, if I could squeeze one more, for the larger M&A that you mentioned, is there a particular end market that you find more attractive at this time? Is it commercial aerospace, defense, industrials or anything else within your existing portfolio?

You said the right thing at the end there, Kristine, within our existing portfolio; we want to stay the course, stick to the knitting, as it were, and not deviate outside of that. Like I said, I'm not going to acquire a fourth leg of the stool.

We are interested in proprietary technology, obviously very complementary to whatever we do in whatever segment that it might fall into. Ideally it would be fantastic if I could find an acquisition that had pieces of interest to all of our specific technologies run by our six Vice Presidents. But it's certainly something we can leverage from a manufacturing or technology perspective.

High-end sensors are always of interest. Niche valves, the defense side -- C4ISR, I've talked about those for a while -- even some of the services businesses. So we have a fairly defined approach to what we're looking for, and something with definitely the high metrics that we've established for ourselves, so that it would not be dilutive to where we've achieved so far, because it took us a while to what we call a self-imposed earning the right to acquire larger acquisitions. And we feel that we've earned that right, we've demonstrated our capability to consolidate, integrate, and get to that top-quartile performance level, and we will do so with whichever acquisitions we pursue.

Thank you very much, that's very helpful.

Myles Walton, Deutsche Bank.

Glenn, I'm going to start with you. Could you talk about the sequential improvement implied in the aerospace defense subsegment, given the comps get tougher? Obviously we don't have details into sub-sub-segments, but just seeing the declines this quarter and then has to turn around pretty handsomely to kind of make that 1% to 3% growth for the full year on tougher comps.

Yes, I mean, they do clearly in the defense segment overall -- not only aerospace defense; it's another story -- the weaker first half and the big second half is, as they traditionally have done, a very big driver of our sequential activity.

In our defense segment and particularly the embedded computing business, which is a big, big part of the aerospace defense market, it's all ongoing programs. These are programs that we are on -- a couple of the big ones across the fighter jets, Joint Strike Fighter for sure that you know, RAFs, [this with our] military sales, all -- at least from what we're seeing for the rest of the year, are continuing follow-on orders on existing programs. It's really timing, and it's kind of the way that business has always run historically. They have pretty good visibility on that stuff, so we feel pretty good about the embedded computing business, which is in aerospace defense, as well as ground, for the remainder of the year.

Okay. And then, I was trying to tie out the 35% of earnings EPS in the first half, and it wouldn't look like you would have sequential EPS improvement, so maybe you're kind of rounding up or rounding down, but you'll have sequential improvement that barely is kind of the implied number?

We will have some -- we are expecting some sequential improvement, quarter to quarter.

On the EPS line?

Yes, absolutely.

Okay. Great. And so, obviously, strong, strong cash flow performance and -- I don't know what consecutive quarter this is of raising the cash flow guidance, but keep it up. The question I had for you was on that 20% targeted working capital goal, and obviously you got -- there's moving parts with working capital this year as a result of the AP1000 order. And is the 23.6% you're talking about this year, and the target, the notional target still out there is 20% -- is that an '18 tied target or is that kind of an aspirational, we want to get there because that's where top quartile is?

Well, you know, when we first went down this top-quartile journey, it was a five-year journey. And operating margin happened quicker than -- as you know, we are at the top quartile now. Working capital is a longer journey; we've said that from day one. So, we're still marching toward it. That's our goal. We're making some good headway this year, and if it's by 2018, that's what we said originally, so I'd probably stick with that, right now. I probably would say, that's reasonable.

Okay, okay. And Dave, the breadbox size of these acquisitions, you're talking about? I think last quarter we were talking, the conversation was more around the sub-$100 million deals. What size of breadbox are you talking about in terms of the opportunity you guys are comfortable with and you think you've earned in terms of credibility to go out and look at?

I tell you, Miles, if we had our druthers, if we could actually pick and choose and to be so selective -- which we obviously cannot; it's very opportunistic -- but if we could, it would be greater than $100 million and under or around $1 billion. It's anywhere in that range. I'm not afraid to go out and do a big deal. They are obviously much harder to find at that level, but certainly $200 million-plus is a sweet spot for us. I think we do exceptionally well with anything that we acquired at this point.

Okay. And the only one last cleanup was the share count. So, I think 46 was what was implied, but it seems like it's going to be nicely below that. And so, what share count are you baking in right now?

Yes, I mean, we are -- right now -- you've got to understand, it's a 13-point average that we used to do the share count. So there's still some 15 higher share counts trickling through our calculations.

We agree it's probably going to be lower, but there's a lot of estimates in that for option exercises, grants, forfeitures, etc. So we took a look, I think (multiple speakers) --

45?

I think we will take a harder look at that at the end of the second quarter, but it will most likely come down. We'll guide to a lower number.

Okay.

We're probably going to end up -- and then to offset that, we probably will need to increase our guidance a little bit, but we ought to take a look at it on the interest expense, due to the unwind. So they kind of offset, but it's still early in the year, so we're going to hold the numbers for now.

Okay, great. Thanks, guys.

Sam Pearlstein, Wells Fargo.

I guess if I could just first ask a question on the commercial industrial margin, even if I X out that restructuring, it looks like it's still about a 12% margin. So I'm just wondering, how do you get from there to a full year of 14.6%, 14.8%? You know, how much of that I guess is baked in, or what do you need to happen to get there?

Yes, I mean, they have a gradual -- well, I mean, a gradual sales increase, so sequentially that's going to help them. They do have lower overhead absorption in the first half of the year, higher overhead absorption in the second half of the year. They also will have -- what they have is restructuring in the first half, and they're going to have restructuring benefit in the second half. That's going to aid to their profitability. They do have some mix issues, but that's not going to be the driver. So those are the main pieces of what's going to happen, how it times out here.

Okay. Is there any change in the end market? I know the end-market percentages haven't changed, but in terms of just organic growth across the three segments was negative in the quarter, which obviously makes it harder on the margins. But just do we see that turn positive in any of the segments? Or when does it turn positive?

Well, you know, I'll pick one -- if you start going through each piece, industrial valves, again, has been impacted pretty much similarly to everybody else in the industry, with lower oil prices and so on. So it's on the heels of a weak first half -- second half of last year, we have a weaker first half and it gradually improves throughout the rest of the year. We do think that the destocking has pretty much troughed or is closed to stabilizing, and we are expecting a modest recovery, as most analysts are, beginning in the second half of the year.

But a reminder -- they were down in about the 30% in the first quarter, and we expect them to be down about 15% for the year. So obviously we're going to improve -- even though we're still going to be down year over year, we will improve as the year goes.

Commercial aerospace is kind of steady across the board. You have -- the phenomenon there is you have the Airbus A320 hitting us negatively in the first quarter, and then pretty much dwindling down to nothing by the fourth quarter. So that sequentially is going to improve. The vehicles kind of offset each other -- on-highway, off-highway throughout the year. I mean, it's kind of flat for most of the year, so that's going to stay that way. So that's kind of the commercial industrial segment.

Defense sales, it's their typical pattern, and again, they have line of sight, but good percentages in their backlog with us already, but we feel pretty good about that.

Nuclear aftermarket, similar, again, in line with the industry. They've been impacted by deferred spending due to lower natural gas prices and heavy regulatory requirements, so that many of the operators have been deferring their spending, as well as lower outages this year -- one of the lowest outage years we've had in probably years. But they, too, are expecting -- we're expecting some gradual, albeit modest, improvement sequentially this year in that business, and they have line of sight of some -- many, many projects, but their key high-probability projects are what we're expecting to see support that growth for the rest of the year.

And on the AP1000, again, it's very backend loaded as domestic revenues are good and steady throughout the year, but the bulk of the new orders can occur in the fourth quarter -- some in the third, but most in the fourth. So that kind of skews that half and half, that side of the business.

Okay, thank you. And if I can just follow up on the whole acquisition question, has anything changed in terms of ROIC or hurdle rates, or your view of accretion, anything in terms of the metrics we should think about when you come up and find an acquisition?

No, we haven't changed any of our guidelines internally. It's still a high bar. We have, from a benchmarking perspective, we set a pretty high bar, because like I said before, we really don't want to come up with a dilutive position. We'd really like to stay accretive in year one, and we will maintain our top-quartile position. Once we acquire something, depending on what it is, what size and so forth, and the revenue and what impact it might have, obviously, first year it might take us down a little bit, but with quick plans to come back up. But it's just, nothing short of that, we're really looking at.

Okay, that's great; thank you.

Michael Ciarmoli, KeyBanc Capital Markets.

Maybe just to close the loop on the M&A and those last metrics, how are you guys looking at, for a prospective larger deal, any of your debt to cap kind of targets that you have or debt to EBITDA targets that are out there?

Well, I mean, historically we've been comfortable with anything below debt to EBITDA of 3. You know, with a larger deal, we might have to loosen that a little bit; it's pretty conservative.

We impose from a net debt to cap a self-imposed limitation of 45% that we've used throughout the last 15 years of serial acquiring and stayed comfortably within that, although our debt covenants, I will say, is 60%. So those were the two, from a leverage standpoint, the two metrics we would look at, and I think we have plenty of dry powder and capacity to do a larger deal. But, so.

Okay, that's fair. Just on -- I think you talked about the new AP1000 China, it's starting to hit more in the fourth quarter. Can you give us any color on the margin profile? I know you had talked originally, maybe it was later last year, sort of a 20%-ish-plus range. Is that still how we should be thinking about that order?

Yes, exactly.

So, in that context, if we look at your margin targets that have been out there, which have been established pre-China order, should -- this order would seemingly apply some upward pressure to that long-term operating margin target you guys have?

Yes, but just to be clear, the new order was in our guidance.

Well, I'm talking about even not so much this year, just the longer-term targets you guys (multiple speakers).

Oh, longer than that, absolutely. As that margin becomes, as the program ramps up in 2018 and 2019 primarily, 2017 a little bit, but 2018 and 2019 it peaks, as that project becomes a bigger percentage of the power segment sales, absolutely it will have an upward impact on the margins, for sure.

Okay, so then we can expect an updated margin target when you guys do that analyst day in Pittsburgh?

Oh, I don't know about that; we'll show you a pump.

Perfect.

We can't give long-term margin updates yet, but we will see.

And then just the other one, the aerospace, losing the business to Airbus, there's obviously a lot of shuffling going around in the supply chain. Do you see any other additional risks out there to any of your commercial aerospace products?

No, we actually see probably more opportunity than anything along the lines of risk. I know what you're talking about, where Boeing and others, Airbus, might go out and quote others to come in and see if they can get a lower price. We see that from time to time. There's always been that sort of pressure. But we've also been the benefactor of going out and being able to pick up some contracts as a result of that shopping, so to speak.

Got it, got it. That's all I had, guys. Great, thanks.

George Godfrey, CL King.

Thank you for taking my questions. I wanted to ask about option issuance. Just if -- what do you think the amount of options or equity issuance you'll do this year?

I couldn't tell you that right off the top of my head. I mean, we haven't -- we've stopped -- these are all historical options that we've [planned that were here] but we stopped doing options. But generally speaking, it's about 1 million shares that usually go out in our equity plans in total per year.

Okay.

I couldn't break the components down, but that's probably the best metric to use.

Well, I just wanted to dig in a little bit more on the share count. If I look at where it is in Q1, we allocate for equity programs, equity compensation. You still have 75 million remaining on the share buyback, and your free cash flow is so strong. It seems like we have a lot of flexibility there to bring down the share count if you so desired.

Yes, yes, no, we had a question on that a few minutes ago, too. I mean, we realize that we are heading in that direction, but we're just -- there's too many variables. We're not ready to update our guidance at this point. But we probably, we will revisit that the second quarter, for sure. It's a 13-point rolling average that you see, still dragging through the higher levels of 15 until they wean off, and we'll have a better view at the end of the second quarter. We'll have a whole half-year in, so.

Okay. And then looking out beyond this year, to 2017 and 2018, your expectation for free cash flow growth on a dollar sense, staying away from buybacks or per share -- would you expect that to grow at least at revenue or net income growth rates? Or could it be higher, lower than that? What's your thinking about how free cash flow would grow in out years relative to revenue growth?

Yes, I mean, broadly you could say, net income as a percent of sales will grow if it stays steady, of course, which will be part of the free cash flow. And we are going to continue to be focusing on, so that's going to be -- that's going to provide whatever that modest growth rate is. We're also -- actually, could be even higher as we continue to expand our margins, the net income will be a higher percentage as a percent of sales. And we're also, again, focusing on working capital in our march towards top quartile over the next couple of years. So you'll get some -- we expect to get some improvement out of that as well.

In CapEx, we intend to stick around the 2%, which is top quartile. This year is a little bit of an anomaly because we have a major expenditure for facility consolidations in the UK, but that will probably stay pretty steady as we go on. So it will be working capital and net income, and net income probably at the growth rate of -- for any argument's sake -- of sales, maybe a little bit more if we continue to expand margins.

Okay. And then on the acquisitions, how active is the pipeline in terms of getting a deal closing? My experience on these things is sometimes you can be talking to companies for years before a deal can get consummated. Just where are you in terms of having a high-class problem of having a lot of cash to deploy and looking for the right target? Any sense of the timing on when that type of a deal could consummate?

Well, I think it's -- suffice it to say we have a high-class problem now of finding the right one. We've got the money to do it. We've got the strength and wherewithal to take care of it once we acquire it.

You're right; they do take -- some will take a considerable amount of time. Others opportunistically come in fairly quickly. So I would say that we're extremely active, as we have been over the last several years, at sub-$100 million acquisitions. But if they don't happen, our approach is we take a look more or less mid-year and/or assess whether or not we're going to get there by the end of the year with our balanced capital allocation strategy. And like we did last year, if we don't feel we're getting there, then we might go back more towards the share repo side. But we are not at that point yet, and it's just going to have to be the right acquisition or acquisitions that meet our criteria.

Understood. Thank you very much, and nice job on the quarter.

Jim Foung, Gabelli & Company.

Good quarter. Yes, most of my questions have been answered; maybe you can just touch on the India nuclear market. It seems like it's kind of a more recent burgeoning opportunity for you, and you mentioned potentially six reactors. Could you just talk about that in terms of timeline, when you think something like that could be contractible?

I'll say one thing, Jim: I'm glad you asked the question, because it's been on our minds. And the first answer I'll give you is, I'm not going to make the same mistake I made five years ago, and that was talking about every quarter how we were going to get this next order from China.

Right.

But I will say, though, that when that does happen, we're going to be extremely excited, because that's a nice order that they're looking at should Westinghouse be successful. And they are putting out an all-out effort to making that happen, they are, in terms of working with their customer. And I've got some presidential activity as well, so, from a domestic side with Indian politicians. And I think from their perspective, they are feeling good about it. At least that's what we're hearing.

And as far as timing, they're not really telling us, not telling me what that timing would or could be. But like I said, when it does happen, it's going to be great. We just look at it as another fantastic opportunity for furthering the AP1000 and particularly our RCPs. And we don't think that will be the end of it. I think that -- you mentioned six, and that's something that we've read about also in the papers, and that's really exciting to see that.

I know Westinghouse is working with other countries as well. So suffice it to say it's going to be a great day when that happens and we get another order, and we're popping the champagne corks and all that stuff again. But I'm not going to go out on a limb right now and say when that's going to happen; I really don't know.

Well, maybe I could just rephrase and say, if everything worked out well for you, everything were lined up, when do you think the earliest you might be able to see something like that?

I don't know. To be honest with you, Jimmy, the thing that is probably standing in the way -- and this is my hypothetical knowledge on it and my opinion only, and that is the liability issues that reside or remain in India with regard to insurance and liabilities for potential disasters, as Union Carbide experienced a long time ago.

So I'm supposing that that is what is standing in the way of a deal culminating right now, or years ago. We heard GE talk about, the CEO of GE said that he's not going to put his company at risk with liability. I read that in the paper not long ago. And I think, obviously, many other companies are doing the same thing. But until and unless they do achieve that, I think we'll see continued delay in that regard.

I know that the electricity and the power is needed desperately. Nuclear power is needed desperately and is wanted desperately in China. So I think that it's going to happen, but realistically I couldn't guess. It's all in the politicians' hands right now. If they can get through that and get through some identification, I think it could roll pretty quickly.

Very good. Well, I guess it's stay tuned on that one.

And then just one question on your margin target. I know you always compare yourselves to being at the top quartile of your peers. You've got 14.1% here, and now you're approaching that. I guess the question is, what kind of potential margins can your -- with the businesses you have today after divesting a lot of the lower-margin businesses, what's the potential margin can you get with the businesses you have today?

Well, again, we don't give long-term margin guidance. But if you think about what we just talked about a little bit earlier, in the power segment, if the new joint China order will ramp up over the next couple of years, that will have a positive impact on the power margins.

In the aftermarket nuclear business, we do expect the outages to increase in 2017, 2018; not sure beyond that. That will help that business, and certainly if the deferred spending, the change in natural gas prices or the regulatory requirements cease, they'll get some more volume, that that will certainly impact there.

Defense, the defense segment, they get -- the more sales they get, you've seen their capacity to turn that into pretty high-margin business. They are pretty high already, so I don't see that going crazy, but if they got a big sales pop, that would influence that.

In commercial industrial and aerospace, have to see once we move past the A320, which will be this year. Once that goes away, we'll be doing better there and going forward, as well as ramp-ups from some of the commercial aero, planned ramp-ups from some of the commercial aero platforms. But again, general industrial will improve if the economy improves.

Well, I was thinking of your long-term target, and it seems like the margin expansion going forward is just coming from volume growth.

No, the margin expansion is all costs.

It's always been costs.

Costs, not on sales.

Okay, all right. Okay, thank you. That's very helpful.

(Operator Instructions) Ryan Cassil, Seaport Global Securities.

Thanks for taking my question. I'd like to just hit on industrial valves again. Are you guys expecting destocking or have you seen signs that destocking is beginning to stabilize here in the second quarter and then you hit easier comps in the back half? Or is it really the back half where you think that destocking abates a little bit?

[It's a little bit crazy.] We feel like it's probably more beginning in the second quarter the destocking will stabilize. Could be a trough this quarter, but as you know, it's a little bit of a -- to some degree a guessing game. We do expect to see each quarter sequentially getting modestly better, again, going from down 30% in the first quarter to down 15% for the year or whatever; at least we have sequential improvement there.

We do expect, as we look supporting that, some modest recovery beginning more in the second half. I would say that most analysts are expecting a surplus reduction and higher prices. But what we've built in is fairly modest to what you've been hearing publicly right now.

Okay, and then on pricing, you said you could actually get some pricing back in the second half. Is that the expectation? Or it will just be stabilized as well?

No, what I was talking about is the analysts are talking about reduced oil surpluses and increasing oil prices, which will fuel a recovery starting in the second half. That's what I was referring -- not our pricing; I was talking about the price of oil.

Okay, got it, got it.

Yes, sorry about that.

So that pricing probably still under pressure, you think, through the year? That's the assumption at this point.

Yes. Probably, yes.

Okay. And then lastly, just with respect to the acquisitions, the change in focus there, is that just a better -- you're seeing a better environment from a multiples perspective just generally? Are there a couple specific things you guys are looking at that are driving the change?

No, I'm not seeing a better outlook on the multiples. Actually, our finesse with regard to what we're searching for began back in 2013. We put a pause on it, of course, as you are aware. And we said it was going to be sub-$100 million acquisitions throughout that period of time. It took us roughly three years to get here. And all that while, we then finessed our approach by looking more at non-fixer-uppers as opposed to those that would be accretive year one with some pretty high hurdle rates, self-imposed, again.

And we've maintained those. All we've done now is ratcheted up the size and scope of some of those potential acquisitions. But they still have to meet the same metrics. They have to be accretive. They have to have the sort of margins that we are looking for and/or better. And with regard to pricing, that is one of the biggest areas that are issues for us -- and everybody else, of course.

The multiples are pretty high these days for acquisitions, and we will probably have to pay a little bit more than maybe we would like, but that's okay as long as they meet the criteria that we've set forth. And those are very stringent criteria. If they don't, then we're just not going to do it, and it's as simple as that.

So it's going to be interesting to continue on in this process. We've seen some properties that were pretty interesting to us, but we flush a lot down the toilet and we keep some of them active, and some of them take a long time and some a little bit shorter, as I indicated before.

Okay, great. And then lastly, just I may have missed it so I apologize, but I haven't heard anything about the industrial vehicles business. Maybe you could touch on that and just kind of the general trends there, and what we should expect for the rest of the year.

It's kind of flattish, I would say, overall in industrial vehicles. I think overall we are projecting they'd be down 5% overall, but it's a mixed bag in each of the categories. On-highway, overall we expect to be down 5% for the year. Heavy Class 8 is going to be down, but it's going to be offset by increases in medium and the hybrids. The end results is certainly down 5%. And on-highway -- off-highway, we expect to be up 5% as US construction is going to be up greater than the decline in global ag market. And then the medical mobility is projected to be up 5%, taking market share from a major competitor. But we put all that together, and it's down 5% for the year.

Okay, great; thanks for the color. I appreciate it.

Thank you. And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. David (sic) Ryan for any closing comments.

Thanks, Tamara. Thank you all for joining us today. We look forward to speaking with you again during our second-quarter 2016 earnings call. Have a great day.

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