Curtiss-Wright Corporation (CW) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Curtiss-Wright First Quarter 2016 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 call is being recorded. I would now like to introduce your host for today's conference, Mr. Jim Ryan, Senior Director of Investor Relations. Sir, you may begin.

Thank you, Tamera, 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 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. 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 revenue 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 program and our capital allocation strategy before we move on to Q&A. First quarter EPS was $0.73 topped our expectation, 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 quarter 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 would 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 for our defense markets and a 10% decline in sales to our commercial markets. Both are expected to represent the low point for the year from a quarterly perspective. Staring in defense, we experienced lower demand for embedded computing products 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, Air Bus elected ship wing forming on the A320 programs 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 product primarily on the Boeing 737 Program. In Power Generation, our performance primarily reflects the $10 million sales benefit from the onetime Progress Energy AP1000 plant termination in 2015, which 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, but we're encouraged by the recent signs of recovery and industry fundamental, 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 markets. 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'll 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 margin. 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're 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 yearend. Our performance was also impacted by the Airbus ship and wing forming 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 COTS products and higher sales of our lower margin system 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 onetime 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've moved the significant expenditures related to the testing and design modifications for our AP1000 RCPs. In the prior year period, we spend $4 million in testing cost, 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 cost, 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 onetime 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're comparing 2016 guidance pro forma 2015 results, which excludes the onetime AP1000 fee from both sales and operating income within the power segment incurred overall. In short, we remain firm on our guidance with the exception of higher free cash flow, which I'll 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 14% to 14.2%. And finally we're maintaining our 2016 guidance for diluted earnings per share to range between $4 and $4.15, which represents 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 onetime benefit for the transition between the development and a production contract for turret drive stabilization systems. This resulted in a $4 million benefit to our margin and sales in 2015, which will not recur in 2015. In addition and as previously noted, we expect approximately $2 million in restructuring cost during the second quarter in this segment. In the Power segment, our second quarter 2015 results included $11 million in testing and design cost, relative to the completion of the engineering and endurance testing on the AP1000 program. As a result, we expect our second quarter 2015 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've 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've not made any adjustments to our end market sales guidance. So our 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'll find the complete 2016 end market sales outlook and waterfall chart based our guidance. Next 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 quarter 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 advanced cash payment related to the new China AP1000 order, which generated a large reduction in receivables in the first quarter. To receive this payment drove a reduction in our working capital as a percent of sales during the first quarter. In addition, we received $20 million related to the unwinding of 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 remain flat through 2015. However, we anticipate that the pace of capital expenditures will ramp up beginning in the second quarter, concluding planned facility consolidations. Based on a 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 would 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've built some strong momentum. As a remainder, we achieved the 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're 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 8 RCPs to China under the original 2007 order or 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 8 RCPs in China have been installed thus far. We're making preparations to complete shipment of the remaining 8 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 U.S 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 U.S. 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 a previous call we discussed the near term opportunity within China, which could be quite large for Curtiss-Wright over the next 8 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 the gross nuclear needs for decades to come. In addition at some point later in the year, we expect to host an investor event that are planned outside of Pittsburg 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 maintain top quartile status compared to our peer group, which coincidently in 14.1% in the midpoint of our 2016 guidance range. As previously discussed, one of the key drivers in 2016 will be facility consolidations. As Glenn noted earlier, these efforts are underway within our commercial-industrial segment and 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 site 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 evidence 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 10B51 plan and as a result, we repurchased $25 million in the first quarter. We're 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 topline, which we intend to accomplish through a combination of internal growth and strategic acquisitions. We're prudent investments internally to grow the business. However, in order to grow Curtiss-Wright we may widen the size and scale of potential acquisition types. So while we've previously limited our guidance to sub $100 million bolt-ons, we're also looking at potentially larger transactions. This doesn’t mean that we're going to run out at a fourth leg to the stool. Our interest is principally to build on 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're 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 topline 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 headwind 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 increasing 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're 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 financial results to drive long term value for our stockholders. At this time I would like to open up today’s conference call for questions.

Thank you. [Operator Instructions] And our first question comes from the line of Kristine Liwag with Bank of America. Your line is now open.

Hey guys. Good morning.

Hi Kristine.

With the advanced payment of $55 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 through the contract?

Kristine, 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 -- the answer to the second one, we don't have an updated schedule. We do -- I think we have said we're planning a nuclear event in our -- at the Chatsworth facility and we will have that detail at that time. It's pretty complicated, there is probably hundreds of milestones in this particular contract and scheduling that out over a five-six year period is pretty big task, but they're working on it and we expect to have it when we see sometime in the summer I think hopefully.

Okay. That would be great. I look forward to that. And then I know in the past you've discussed the technology sharing agreement that you have with the Chinese RCP supplier. I was wondering what does 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 you're responsibilities are?

We've made the agreement Kristine back in 2007 that we would transfer the technology of them -- we had to pull the pump on the AP1000, which we did and that means in essence providing the drawings and what is necessary to build and they would obviously have to manufacture their own assembly instructions, that's what they think to actually manufacture and then arrive at their own -- some of their suppliers and supply chain and so forth. So we have delivered the technology in terms of the joint package and we have people in place and country to assist should they need it. I will add that we don't get many calls that are outlined for assistance and that's just from whatever fact of the matter that's what is ongoing. And in terms of their ability to actually manufacture, they haven't yet manufactured one or 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, but should they need that and that's the crux of our agreement was to give them the capability. Our relationship with the 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 a 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 and the support and they look forward to this being a very, very long relationship and that's exactly what we want. I think I said on the last call, we certainly have to be celebrating the award of that contract that we're looking to be one of the suppliers on other AP1000 needs for a long, long time and if they're able to build it in country, it's 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 netting as it worked and not deviate outside of that. Like I said, I am not going to acquire a fourth leg of the stool. We are interested in proprietary technology, obviously very complementary to whatever we do and 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 our specific technologies run by our six Vice Presidents. But it's certainly something that we can leverage from a manufacturing or a technology perspective. High end sensors are always of interest, niche valves the defense side. C4ISR 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 whatever we've achieved so far because it took us a while to what we called as self imposed earning derived to acquire larger acquisitions and we feel that we’ve earned that right. We 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.

Thanks Kristine.

Thank you. And our next question comes from the line of Myles Walton with Deutsche Bank. Your line is now open.

Thanks. Good morning.

Hi Myles.

Hey, Glenn. I am going to start with you, you talked about the sequential improvement implied in the aerospace defense sub segment given that comps get tougher. Obviously we don’t have details into the 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.

Yeah, they do clearly in the defense segment overall, not only aerospace events. It's another story of the weaker first half and the second half as they traditionally have done and they're a big driver of our sequential activity. In our Defense segment, particularly the embedded computing business which is a big part of the aerospace defense market, it's all ongoing programs. These are programs that we're on a couple of big ones across the fighter jets, joint straight rider for sure that you know [indiscernible] military sales. At least and what we're seeing for the rest of the year, our continuing follow-on orders on existing programs it's really timing and one of the way that business is 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 ground for the remainder of the year.

Okay. And then I was 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 rounding up or rounding down, but you’ll have sequential improvement, but barely is kind of the implied number.

We will have some sequence. We're expecting some sequential improvement quarter to quarter.

On the EPS front?

Yeah, absolutely.

Okay. Great. So obviously this is a strong cash flow performance but I don’t know which consecutive quarter this is a reason the cash flow guidance, but keep it up, but the question I have for you was on that 20% targeted working capital goal. And obviously you got this moving parts with working capital this year as result of AP1000 order and is that the 22.6% you're talking about this year and the target and the target, the notional target still there is 20%. Is that an 18 tied target or is that kind of a aspirational we want to get there because that’s where top quartile is.

Well we first went down as top quartile journey. It was a five-year journey and operating margin happened quicker than we were at the top quartile now. Working capital is a longer journey. We've said that from the day one. So, we're still watching for that. That’s our goal. We're making some good headwinds this year and by '18, I’d say, that’s what we said originally so I would probably stick with that right now, but I would say, that's reasonable.

Okay, okay and Dave, the bread box size of these acquisitions, you're talking about last quarter, we're talking and the conversation was more around a sub $100 million deal. What size of bread box you were talking about in terms of the opportunity you guys are comfortable with and you think you've earned in terms of a creditability to go out and look at.

Myles if we had our drivers -- if we can actually pick and choose and be so selective, which we obviously can, it's very opportunistic, but if we could, it would be greater than 100 or around $1 billion, its anywhere in that range. Not afraid to go out and do a big deal. They're obviously much harder to find at that level, but certainly 200-plus is a sweet spot for us. I think we do exceptionally well with anything that we acquired at this point.

Okay. And then only one last clean-up 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 you're backing in right now.

Yeah, right now really we're going to say that it’s a 13 point average that we use to do the share count. So there is still some 15 higher share counts trickling through our calculation. We agree it's probably going to lower, but there is a lot of estimates in that or option exercises, grants, forfeitures etcetera. So, I think we will part with that at the end of the second quarter, but it will most likely come down. We'll guide them a lower number.

Okay.

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

Okay.

Yep.

Thanks guys.

Thank you, Myles.

Thank you. And our next question comes from the line of Sam Pearlstein with Wells Fargo. Your line is now open.

Good morning.

Good morning, Sam.

I guess if I could, just first ask a question on the commercial industrial margin, even if I ex 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. How much of that I guess is baked in or what do you need to happen to go there?

Yeah, they have a gradual, the gradual sales increase. So sequentially that’s going to help them. They do have lower overhead absorption in the first half of the year and little higher overhead absorption in the second half of the year. They also will have with average 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. Those are the main pieces of what's going to happen at times out here.

Okay. Is there any change in the end market? I know that 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 does it turn positive?

Well, I’ll pick one, if you start going through our industrial balance, again it's been impacted pretty much similarly as everybody else in the industry with lower oil prices and so on. So the heels of a weak first half that 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 pretty close to stabilizing and we're expecting a modest recovery as most analysts saw beginning in the second half of the year, but I'll remind you they were down and about 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 counting year-over-year, we will improve as the year goes. Commercial Aerospace is steady across border. You have a 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 offset each other on-highway off-highway throughout the year. It’s 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 we said is their typical pattern and again they have line of sight good percentages in their backlog already, but we feel pretty good about that. Nuclear aftermarket similar again, they're in line with the industry and has been impacted by the deferred spending due to lower natural gas prices and heavy regulatory requirements. So 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 and we're expecting some gradual albeit modest improvement sequentially this year in that business and they've 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 AB1000 again its very backend loaded as domestic revenue is a good and steady throughout the year, but the bulk of the new orders is going to occur in the fourth quarter some of it is there, but most are going to kind of skews that half to half.

Okay. Thank you, and then 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 benchmarking perspective. We said at pretty high bar because like I said before, we really don’t want to come up with a dilutive position to really like to try to stay accretive in year one and that we will maintain our top quartile position. Once we acquire something depending on what it is what size and so forth, the revenue impact it might have obviously first year it might take us down a little but with good plans to come back up but it's just nothing short of that through we're really looking at.

Okay. That’s great. Thank you.

Thanks Sam.

Thank you. And our next question comes from the line of Michael Ciarmoli with KeyBanc Capital Markets. Your line is now open.

Hey, good morning guys. Thanks for taking my questions.

Good morning Mike.

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

So, historically we've been comfortable of anything below debt to EBITDA three larger deal we might have to loosen that a little bit it's pretty conservative. We impose from a debt, net debt to cap, so composed limitation of 45% that we used throughout the last 15 years of 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 and I think we have plenty of dry powder and capacity to do a larger deal, but so….

Okay. No that’s fair. Just on I think you talked about the new AP1000 China 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 20 percentage plus range. Is that still how we should be thinking about that order?

Yes, exactly.

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

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

Well, I’m talking about even not to so much this year, just the longer term targets you guys…

Longer -- absolutely, as that margin becomes -- as the program ramps up in '18 and '19 primarily, '17 a little bit, but '18 and '19 each, as that project becomes bigger percentage of the power segment sales absolutely we’ll have an upward impact on the margins for sure.

Okay. And then we can expect an updated margin target when you guys did at Analyst Day now at Pittsburgh?

I don’t know about that. We’ll show you a pump.

Perfect.

Really, long term margin update, but we will see…

And then just the other one, the Aerospace losing the business to Airbus, there is obviously a lot of shuffling going around the supply chain, do you see any other additional risk out there to any of your commercial Aerospace products?

No, we actually see probably more opportunity than anything along lines of risk. I know what you're talking about. Boeing, I know there is Airbus, Michael and quote others to come in and still they can get a lower price, we see that from time to time. There is always been there 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.

Thanks Mike.

Thanks Mike.

Thank you. And our next question comes from the line of George Godfrey with CL King. Your line is now open.

Thank you. Good morning. Thank you for taking my questions.

Good morning George.

I wanted to ask about option issuance, just if -- what do you think the amount of options or equity issuance you will do this year.

I couldn’t tell you that right top of my head. We stopped these all historical options, we might be able to hear, but we stopped doing options, but generally speaking it's about million shares that usually go out in our equity plans in total per year. I couldn’t break the components down but that's probably the best metric.

I just want 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’re so desired?

We had a question on that a few minutes ago too. We realize that we’re heading in that direction, but we’re just -- there is too many variables, we're not ready to update our guidance at this point, but we probably, we will revisit that in the second quarter for sure. It's a 13.0 rolling average that you see -- you're 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 on the whole half yearend so.

Okay. And then looking out beyond this year to '17, '18 your expectation for free cash flow growth on a dollar cents staying away from buybacks or per share, would you expect that to grow at least that revenue and net income growth rates or could it be higher or lower than that and what's your thinking about how free cash flow would grow in out years relative to revenue growth?

Yes broadly we could say net income as a percent of sales will grow. If it stay 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'll also actually it could be higher, but continue to expand our margins the net income will be a higher percentage as a percentage of sales and we'll also again focusing on working capital, on our March towards top quartile over the next couple of years. So you will get some -- we expect to get some improvement out of that as well but 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 facility consolidation in the U.K. but that will probably stay pretty steady. So there will be working capital and net income and net income probably at the growth rate of plenty for any argument sake of sales maybe a little bit more as we continue to expand margins.

Okay. And then on 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 with having a lot of cash to deploy and looking for the right target? Any sense of when that type of a deal could consummate?

Well I think it's suffice 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. You're right, they do take someone 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 as sub $100 million acquisitions, but if they don’t happen, their approaches we take a look more or less midyear and/or assess whether or not we're going to get there by the end of the year or would that balance 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’re 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.

Thanks George.

Thank you. And our next question comes from the line of Jim Foung with Gabelli & Company. Your line is now open.

Hi good morning guys. Good quarter.

Good morning, Jim. Thank you.

Hi Jim.

Most of my questions have been answered, but maybe if you could just touch on the India nuclear market, it seems like it's kind of a more recent 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 would say one thing, Jim. I’m glad you asked the question because it’s been on our minds and the best -- the first answer I would give you is I am not going to make the same mistake I made five years ago and that was pocket upside every quarter right. We're going to get this next order from China. So 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're putting out an all out effort to making that happen they are in terms of working with their customers and they've got some presidential activity as well. So, from a domestic side with Indian politicians and -- so I think from their perspective they're feeling good about it, resets what we're hearing and as far as timing they're not really telling us, not selling me what that timing would or could be, but like I said, when it does happen, it's going to be great. If 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, we bought in a Champaign and all that stuff again, but I’m not going to go out on limb right now and say when that’s going to happen. I really don’t know.

Well, maybe I can just rephrase and say if everything worked out well for you, everything lined out when you think the early issue might you see something like that?

I don’t know to be honest to you Jim the thing that is probably standing in the way and this is my hypothetical knowledge in my opinion only and that is the liability issues that reside or remain in India with regard to insurance and in liabilities for potential disasters as union carbide experience a long time ago. So I’m supposing that that is what’s 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 is not going to put his company at risk with liability or written down in a 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 has power has needed desperately and as 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 I guess I'll just stay tuned on that one. And the on -- just one question on your margin target, I know you always compare yourself being at the top quartile of your peer, you get 14.1% here and now that you're approaching that, and I guess could we just what kind of potential margins can you move the businesses you have today after, divesting a lot of old margin business, what's the potential margin can you get with the business you have today?

Well, again we don’t give long term margin guidance, but if you think about what we just talked a little bit earlier in the power segment if the new 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 seize, they get some more volume that, that will certainly impact there. Events, the Defense segment, they get -- the more sales they get, you see the capacity to turn that into a pretty high margin business, they're pretty high already. So I don't see that going crazy, but if they got a sales pop, that would influence that. In commercial industrial in aerospace obviously once we move pass the A320, which will this year, once that goes away, we'll be doing better there, going forward as well as ramp up some of the commercial aero plan ramp up it's going to be a commercial aero platforms and again, general industrial will improve if the economy improves and so..

I thinking of long term target and it seems like the margin expectation going forward just come from volume growth?

No the market expansion is all cost.

It's always been cost.

Cost, not sales.

Okay. All right. Thank you. That's all I have.

Thanks Jim.

Thanks Jim.

Thank you. [Operator Instructions] And our next question comes from the line of Ryan Cassil with Seaport Global Securities. Your line is now open.

Good morning. Thanks for taking my questions.

Good morning, Ryan.

Hi Ryan.

If you could just hit on industrial valves again, are you guys expecting destocking, have you seen signs that destocking is beginning to stabilize here in the second quarter and then you had easier comps in the back half or is it really the back half or you think that destocking abates a little bit?

It’s little bit -- we tell you that 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 to some degree of a guessing game. We do expect to see some each quarter sequentially getting modestly better, again going from down 30% in the first quarter to down 15% for the year. For the release we have sequential improvement there. We do expect supporting that, some modest recovery beginning more in the second half. I would say that most analysts expecting a surplus reduction and some higher prices but what we feel 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 that what I was talking about is -- 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 telling, on oil pricing I was just talking about price of oil.

Okay. Got it. Got it. So then pricing probably still under pressure you think through the year assumption at this point.

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 multiple 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 and actually our finesse with regard to what we’re searching for began back in 2013. We had put a pause on it of course as you’re aware and then we after -- 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 didn’t finessed our approach by looking more at non-fixed uppers at those that would be accretive year one with some pretty high hurdle rates that are self imposed again. And we’ve maintained those, all we’ve done now is ratchet it up the size and scope of some of those potential acquisitions, but they still have to meet the same metrics there to be accretive, they have to have the sort of margins that we’re looking for and/or better and with regard to pricing that is one of the biggest areas of 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 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 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 are little bit shorter as I indicated before.

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

Yes it’s flattish I would say overall in industrial vehicles I think overall we’re projecting it to be down 5% overall, but it’s a mixed bag in each of the categories. On-highway overall we expect it to be down 5% for the year. In heavy Class A it is going to be down, but it’s going to be offset by increases in medium and hybrids. The end result is certainly down 5% in on-highway. Off-highway we expect to be up 5% as U.S. construction is going to be up greater than the decline in the global Ag market. And then the medical mobility is projected to be up 5% taking market share from a major competitor. So we put all that together and it's down 5% for the year.

Okay. Great. Thanks for the color. Appreciate it.

Thanks Ryan.

Thanks Ryan.

Thank you. And I am showing no further questions at this time. I would like to turn the conference back over to Mr. David Adams for any closing comments.

Thanks Tamera. 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. Bye-bye.

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.