Good day, everyone, and welcome to the Curtiss-Wright Second Quarter 2012 Financial Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Martin Benante. Please go ahead.

Well, thank you, Kim, and good morning, everyone. Welcome to our second quarter 2012 earnings conference call. Joining me on the call today is Mr. Glenn Tynan, our CFO. Last night, we announced our second quarter results, where we reported solid sales growth of 4%, led by a strong performance in our Metal Treatment segment and the benefit of our recent acquisitions, as well as diluted earnings per share up $0.48, which met the high end of our revised guidance. We expected that our second quarter operating results would be negatively impacted by several factors, including $8 million in restructuring charges, as well as an additional investment of nearly $6 million on the AP1000 program. Excluding these charges, operating income in the second quarter increased 10%, while our diluted earnings per share increased 5% from the previous prior year period. Overall, we continue to reposition Curtiss-Wright for improved operating income growth and margin expansion in the latter half of 2012 and beyond. In addition, we made an adjustment to our full year 2012 sales outlook, which includes site reductions to our outlook in some of our defense and commercial businesses based on changing market conditions. However, based on the solid outlook for most of our end markets and the inherent diversification of our business model, we remain optimistic for continued solid financial performance in sales and operating income in 2012. Now I'll turn the meeting over to Glenn.

Thank you, Marty. Our call today is being webcast and the press release, as well as the 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 can also be found on the website. Please note today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. Forward-looking statements always involve risks and uncertainties, and we detail those risks and uncertainties in our public filings with the SEC. In addition, certain non-GAAP financial measures will be discussed on the call today. A reconciliation is available in the earnings release and at the end of this presentation and will be available on the company's website. For our agenda today, I will provide you with an overview of Curtiss-Wright's 2012 second quarter performance along with updates to our guidance, followed by Marty who will discuss our strategic markets and outlook, and then we will open the call for questions. As Marty indicated, we experienced solid sales growth in the second quarter of 2012, driven by growth in all 3 of our segments, as well as acquisitions. Our results reflect growth in all of our commercial markets, led by a 21% increase in commercial aerospace based upon our position as a key supplier to both Boeing and Airbus. We also experienced a solid gain in power generation due to higher revenues on AP1000 projects in both China and the U.S. and an improvement in our oil and gas market due to the continued rebound in MRO-related sales. In our defense market, solid gains in the aerospace defense were more than offset by…

Thank you, Glenn. As we have discussed thus far, we have repositioned Curtiss-Wright for improved profitability in the latter half of 2012 and beyond. We are aggressively focused on restructuring and cost reductions to ensure future growth and profitability for our business. Looking ahead to the remainder of 2012, despite reducing our top line sales expectations, we remain well positioned overall, with sales growth forecasted across both our defense and commercial markets. In addition, we continue to expect that are profits will grow faster than our sales. Next, I'd like to focus on the key impacts to some of our core markets followed by some additional color supporting our confidence of obtaining our 2012 financial goals. I'll begin in commercial aerospace, which continues to be the leading growth driver among our diverse end markets. Year-to-date, sales in this market have grown 27% compared to 2011, benefiting from production rate increases across numerous Boeing and Airbus platforms, as well as new sales being generated by our emergent operations facility in support of the Boeing 787 program. In addition, we have seen the benefit of Metal Treatment's recent expansion into more highly technical areas of thermal spray coatings and analytical services. Our continued solid growth in this market was led by our support of the Boeing 737 and 787 platforms as they prepare to ramp up to higher production levels in 2013 and also on the 747-8, as it is currently ramping from 1.5 ship-sets to 2 airplanes per month build rate. We also expect solid growth in support of key Airbus platforms. Overall, we continue to expect that the OEM cycle will remain robust for several more years. And as a result, our growth outlook in this market remains strong. Staying within our commercial markets, an update in oil and gas,…

[Operator Instructions] Our first question today is from Steve Levenson from Stifel, Nicolaus.

It's nice to see that your restructuring actions are having an impact. I'm just curious, do you feel that there are any holes you're going to be looking to fill through acquisitions? Or are future acquisitions -- just planning for expansion, the way you've been doing in the past?

Right now, we have a few companies that we are -- we're hopeful to be able to close before the end of the year. Most of them are in the sensor product area. And that's not a whole. That's more of an expansion of capabilities.

It sounds good. The other thing is on the commercial aerospace sales, how far ahead of build rates do your shipments typically run just because there is more expected upward breaks in build rates. And I'm just curious, which are the largest couple of programs?

We normally get a 3-month window from Boeing for going up and more -- I think more or less, 9 months or 6 months for coming down. And our biggest programs are 737. We have about 150,000 per ship-set. And obviously, there are 35 going to 38. And then when you look at the 787, we have about 525,000 on that airplane. Right now, that's at 4 months, is going to end up the year at 5. We're projecting 6 and 7 through the end of next year and getting into the 10 come 2014. Obviously, Boeing is looking at trying to get it to 10 by the end of the year, but our outlook is based on, basically our outlook.

And on ground defense, I know you mentioned that some of the -- that's part of the reason for the change in guidance. Are those things that you think are just moving [ph] or are those funds that are likely not to be appropriated ultimately?

Oh, there is actually the -- some of the modernization programs that we had counted on to have some sales at the latter half of the year, even though they've been funded, have not -- we have not received contracts from, particularly in the Abrams and the Bradley. And they're looking at increasing that funding again in 2013. So it's just basically a timing error, a timing item. But also, we expressed a while ago that ground defense was going down. And that's one of the reasons why we are restructuring in the controls businesses both in the embedded computing area and also in our sensor product. That's also in anticipation of some of the sequestioned [ph] actions that may be taken. So we've already really started planning for that to take place.

Moving on, we'll hear from Myles Walton from Deutsche Bank.

So to start off with Motion Control, you lowered the sales forecast, but the EBIT forecast remained intact. And that's implying a 16% plus type margin for the back half of the year. And a couple of questions on that. One is, is ForEx significantly more benefit than it has been the first half? Is it mix? And kind of what sales came out of the mix? The $40 million, $30 million you took out of the forecast, were those incredibly low-margin sales that you were taking out?

No. As a matter fact, it's ground defense and we've done -- our profits are limited by government contracting. And it's also some general industrial, plus sales of sensor products in Europe, which is a little soft. But one of the -- if you go through Motion Control, we have a lot of confidence in Motion Control getting there. First, you have an increase in sales of almost $40 million in the second half and that accounts for about 1/3 or more of the increase in profitability. The restructuring accounts for another $5 million, but one of their biggest, aside from increased volume, is their supply chain management, which we expect an $8 million improvement in the second half of next year. A lot of that has to do with reduced purchase price. We put up our new facility in Mexico and the improvement for the Boeing overflow, and that's producing profitability, our company in Mexico and some cost-reduction of buying out of China and also in Europe. So that's one of the bigger hits. And you can only take credit for that profitability as they enter into inventory and then come out. So that's one of the, I think, the biggest change that takes place beside volumes going -- increasing their profitability.

Myles, the restructuring is about 100 basis points to the margin, and the SCM is about 200 basis points in the margin in the second half of the year.

Supply chain management, that's SCM?

Yes.

And so then -- I guess the other question, a follow-on to that, is what's the sustainability of that kind of new run rate into 2013? Obviously, I'm not going to -- I'm not looking to annualize the second half because I know the seasonality of the business but just...

Yes. Like we just said, we think that we can -- we're going to be in the 14%, possibly 15%. It's going to come down to where is the defense going to go. And I think that from a standpoint of doing our restructuring, hopefully, we've taken a lot of that into account. So we should hit the ground running in a lot of the other restructuring as far as our 2 Mexican plants are concerned and also our companies that we have in China. So we think that we're going to be in pretty good shape as far as that's concerned depending on the volume out of defense. And realistically, let me just point that again also. If there was to be some reduction in JSF, that's built in the same plant that we've build Boeing, which is going up. So it would be a matter of hiring less people.

Okay. The other side, on flow, if you strip out this year's charges and restructuring but also strip out last year's second quarter charge on AP1000, which I think was $2.8 million, but you can correct me. It looks like margins are actually down 150 basis points kind of the underlying margin mix. Is that right? And given volumes were slightly up, is that mix? Is it something else?

It's mix.

Okay. So then why does it improve in the second half -- because the mix has significantly improved?

No. What happened in the second half is they have $80 million, almost $90 million of increased sales. They also have their restructuring, and we don't have the AP1000 charges that were $7 million in the first half.

I guess I'm looking more on a year-on-year basis, last year second half versus this year's second half.

Can't get you there. Sorry about that. I don't know. Nothing that sticks out.

Okay. I guess the last one for me, Metal Treatment, the $12 million of restructuring in 2012, what is the -- remind me and you may have mentioned that, I apologize, the payoff period for the $12 million -- for the benefits to be realized?

Two of it is really -- is cash and the pay-up is next year.

$4 million of improved.

As parts have moved across the sea, some of our United States facilities have become less profitable. But basically, what we're doing is taking the action of closing them down.

Sorry, just so I can clarify, so it's a $4 million benefit to 2013 on an annualized run rate?

That is correct.

Yes.

Okay. So at a baseline level, you would take the 2012 clearly the absence of the $12 million restructuring plus the $4 million benefit. So $16 million would be kind of your bare minimum year-on-year on a flat sale basis?

That's right.

Yes. That's right. And we said, we -- I think we've said, when we first announced it, that we expect next year, barring any other changes, to be very similar to what our guidance was originally for this year. We're going to be right back on track, which I think you just did that math.

Yes, the mid-teens and upper mid-teens.

Yes.

And moving on, we'll hear next from Michael Ciarmoli from KeyBanc Capital Markets.

Quickly on -- maybe Glenn or Marty, if you could just comment on some of the real-time trends you're seeing in some of your shorter cycle businesses. I think you mentioned that Europe was a pressure point and sort of how you're planning the second half of the year. I know you took down the revenue guidance a bit and I'm assuming you had some scenarios in there, but what sort of are your businesses telling you right now about the health of those end markets?

Right now, as far as Europe is concerned, most of our businesses were Airbus. When you really look at between the service technologies and some -- and the products that fits with Airbus, there's not really a slowdown there. We have not really been affected by the slowdown in Europe that much except for in some of the commercial items that we use our sensors in. And that's $10 million of quite a large business. So it's not really that significant.

And then what about in terms of the Metal Treatment? Obviously, that's a business, no backlog, I mean, relatively speaking [indiscernible].

Because Airbus is up -- they're up because a lot of their revenues that they have are tied to being a lot shot peening and laser peening and wing forming. The only area that they've had a little bit of depression is in the automotive sales in Europe. But obviously, automotive sales in the United States has picked up a quite bit. So it definitely has done better in auto this year compared to last year.

Okay. And then just, I mean, you've got I guess 34% general industrial exposure in there. Kind of the business trends are looking broadly across all geography is looking fairly healthy then?

They are. It's just that it's not booming growth except for commercial aerospace, but it's still growth.

Okay, fair enough. And then just if you can elaborate. I think you mentioned you've got some contingency plans for outcomes on defense here in sequestration. Can you give us a sense as to how your business would be impacted or what sort of contingency plans you're putting in place?

Well, as I said, with the contingency plan, we have -- first of all, most of the restructuring we're doing in controls is in the embedded computing and in sensors, which we obviously sell a lot of in embedded computing products to the government. So one of the reasons why we did restructuring this year was to take into account that we're going to have reduced government sales one way or the other next year. The other is when we put up our plant in Mexico for the overflow of a Boeing if JSF were to be cut down as I indicated before, it's the same build -- the same plant we build the Boeing product. So we would just hire less people than we had anticipated for next year if the JSF doesn't pick up. So those are basically contingency. But obviously, until we understand what it is, it's very hard for us to predict what that will be. But obviously, whenever we have a reduction or a change, we react it to it very quickly, as you can see what we've done in embedded computing and the restructuring there.

And moving on, we'll hear from Yair Reiner from Oppenheimer.

I was wondering on the Flow Controls business, can you remind us of the revenue recognition dynamics around the AP1000 deliveries in the back half of the year?

Yes. I mean, the rev rec is -- on both contracts, domestic and U.S., is generally over a 5-year period. So China began in 2007 and the domestic began in 2008. And it's somewhat like a bell curve. Over that 5-year period, it ramps up, it plateaus and then winds down. So what we're seeing this year is the intersection of the 2. You got China winding down to the end and the domestic beginning to ramp up -- with the domestic, I believe, exceeding the decline in China. So that's kind of where we're at. We're beginning the new bell curve -- or ramping up the bell curve on domestic over the next year or 2.

And is that shipped -- what's accounting for the much stronger second half? I think you're estimating about a run rate of about $30 million more per quarter than you had in the first half. Or if not, what are the factors that are driving that growth in Flow Controls?

Well, some of it is the AP1000 domestic, I just mentioned. And the other bigger piece is a pickup in the support of the operating reactors on the nuclear side. And then there's some increase in our non-U.S. Navy which are the helicopters -- the systems for the helicopter landing systems. Those are the 3 -- probably the big 3. They're also some -- we're expecting a couple of large orders in oil and gas as well.

Got it. And so is that kind of 3 10, 3 20 top line. Is that the new run rate going forward? Or should we expect kind of a pullback in the first half of 2013?

I'm not really going to comment on 2013 now, but they're a little skewed to the second half like they normally are. So the only thing I would say is we'll have the same type of profile next year. We -- always at this point of the year, we go through the half-half analysis for you guys because we have that phenomena in both our Motion Control and Flow Control businesses, but I can't tell you what 2013 is going to be yet.

Okay. And then just one on interest expense. It's running $6.5 million per quarter for the first half. Guidance implies that it goes up to $8 million. I don't think you've added any additional debt. What accounts for the higher expense in the back half?

Well, I will say that the first half of the year, it -- we entered into interest rate swap agreements in the beginning of the year in the first quarter and they've actually been pretty favorable for us in the first half of the year. And I have not -- we have not forecasted that into our interest expense forecast yet because it's pretty volatile. It does change from time to time. We've been lucky. It's been favorable for us for the first half, and it could be favorable again for us in the second half. We just not -- have not put -- conservatively have not put it into our guidance yet.

[Operator Instructions] Our next question comes from Tyler Hojo from Sidoti & Company.

Just a first question on the defense market, you guys are now guiding 2% to 4% growth for the year. I'm just kind of wondering, I mean, just from a backlog standpoint, how much visibility do you have into that and how much needs to be both booked and shipped in the back half of the year to kind of meet that growth objective.

It's very little. Most of our backlog -- most of the defense is in backlog. You have embedded computing and some sensors. But for larger programs, especially what we're projecting for Flow Control, are already in backlog.

Okay. When you say most, I mean, could you narrow that down a little bit?

Really, we don't have exactly like that, Tyler, but we're -- 70% of our second half sales overall is in backlog and it's a much higher percentage in the defense because they are long-term contracts. Most of that 30% we don't have is in the commercial businesses like general industrial and those businesses. So it's well north of the 70%. That's about all I can say.

Okay, very helpful. And then I was also wondering, you've kind of revised your power generation forecast for 2012. Last we spoke 3 months ago, I think you were indicating about 1/3 of that was going to come from new build. It seems like that would have shifted with your updated guidance here, but perhaps you could speak to that a little bit.

There is 2 things. One of the shifts is -- we're seeing a little bit of slowdown for spares out of -- from the current operating reactors to get ready to put into Tier 1 recommendations that the NRC have come out as the result of the Fukushima crisis. If you remember, I talked about the double-edged sword that when we get more revenue but it may tighten up the purse strings of the current -- recurrent spares. And we also have slightly lower China AP1000. What happened is when we originally expected that we would have new pumps ready for shipment by the middle of June, end of May, middle of June, and we ended up having a problem where we risk released some parts, that were later determined by the ASME, which is a third-party inspector for China and Westinghouse on our pumps, indicating we needed to perform some inspections that we wouldn't normally do on other pumps that we build and we ended up having to go through and cut off 5 stator jackets and had to do additional assembly and testing. That's one of the reasons for the charge. But what happened is we expect to get less shipments out the door out of our pump company because of that delay. And that's how why we have lower sales on the power generation side.

And then just lastly, you mentioned in your prepared remarks that you anticipated, I think, a ramp-up in the super vessel business in the back half of the year. Just curious, I mean, are those orders in hand? And if not, what kind of lead times do you need on them?

We do have backlogs there. The thing is that lead times are about a year. But again, when you take a look at some of the vessel possibilities that are out there, tens of millions of dollars. And we're looking to maybe get additional sales of $10 million in the back half of the year for both vessels and from our DeltaValve products. So it's not just super vessels.

And that does conclude our conference -- our Q&A session today. Gentlemen, I'll turn the conference back over to you.

Okay, great. Well, thank you, everybody, for joining us today. We look forward to speaking with you again in our third quarter earnings call. Thank you very much. Have a good one.

Bye-bye.

Thank you. That does conclude our conference for today. Thank you all for your participation.