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Curtiss-Wright Corp. (NYSE:CW)

Q4 2008 Earnings Call

February 18, 2009; 10:00 am ET

Executives

Martin Benante - Chairman & Chief Executive Officer

Glen Tynan - Chief Financial Officer

Analysts

Myles Walton - Oppenheimer & Company

Chris Donaghey - SunTrust Robinson Humphrey

Karl Oehlschlaeger - Macquarie Capital

Tyler Hojo - Sidoti & Co.

Steve Levenson - Stifel Nicolaus

Eric Hugel - Stephens

Operator

Good day, everyone and welcome to the Curtiss-Wright 2008 financial results conference call. As a reminder, today’s call is being recorded. At this time, I would like to turn the conference over to the Chairman and Chief Executive Officer, Mr. Martin R. Benante. Please go ahead, sir.

Martin Benante

Thank you, Christina and good morning everyone. Welcome to our 2008 year-end earnings conference call. Joining me on the call today is Mr. Glen Tynan, our CFO who will begin our forum today.

Glenn Tynan

Thank you, Marty. If you do not have a copy of the earnings release that was issued yesterday, please call Ms. Deborah Torrey at 973-597-4712 and she will be happy to email or fax a copy to you.

Before we begin, please note that we will make certain forward-looking statements on today’s call such as statements about the company’s competence and strategies or expectations about the results of operations, future contracts or market opportunities. While we believe that our operating plans are based on reasonable assumptions, we cannot guarantee that we will meet any expectations that might arise from these forward-looking statements or their underlying assumptions.

Such forward-looking statements are made pursuant to the Safe Harbor provisions of the Security Reform Act of 1995 and involve risks and uncertainties that may produce results or achievements that are materially different from those expressed or implied during this discussion. Such risks and uncertainties include those factors that generally affect the business of aerospace, defense, electronics, marine or industrial companies.

Please refer to our SEC filings under the Securities Exchange Act of 1934, as amended, for a more thorough discussion of risks and uncertainties as well as further information relating to our business.

For our agenda today, I will provide an overview of Curtiss-Wright’s fourth quarter 2008 operating performance and then Marty will discuss our strategic markets and 2009 outlook. After the formal remarks, Marty will open the call for questions.

Curtiss-Wright had consolidated sales of $508 million during the fourth quarter of 2008, an increase of 2% over the fourth quarter of 2007. Our fourth quarter sales growth was led by our Flow Control segment which achieved 8% growth offset by sales decline in our Motion Control, and Metal Treatment segment sales of 3% and 6% respectively.

In our Flow Control segment, sales of $274 million generated sales growth of 8%, all of which was organic, and primarily related to revenues from our AP1000 reactor coolant pumps, which are being constructed for new nuclear power plants in China and the United States.

The growth in our power generation market was partially offset by weaker demand in our oil and gas segment, in particular, for our secondary processing equipment, which was down 22% in the quarter, due to our customer’s restricted access to capital and reduced demand for petroleum products in general.

In our Motion Control segment, fourth quarter sales of $173 million were 3% lower than the comparable period in 2007. Lower sales in this segment were primarily caused by the Boeing strike, expanded delays in new commercial aerospace programs, unfavorable foreign currency translation of $6 million, and the divestiture of our repair and overhaul business earlier in the year.

Excluding the divestiture and negative FX impact, sales were up 2%. This sales increase was primarily due to the incremental sales from our 2008 acquisition of $16 million, offset by the negative impact of the Boeing strike and extended delays on the Boeing 787 and Eclipse programs.

Fourth quarter sales in our Metal Treatment segment of $61 million decreased 6% from the prior year, all of which was related to the negative impact of foreign currency translation of $5 million in the fourth quarter. Excluding foreign currency, our Metal Treatment business generated a sales increase of 1% during the fourth quarter. Increased sales to the commercial aerospace market were offset partially by lower sales to the automotive market.

Our consolidated operating income of $61 million in the fourth quarter of 2008 was essentially flat as compared to the prior year period. Our Flow Control and Motion Control segments generated organic growth of 12% and 11% respectively, which were mostly offset by a 13% decline in our Metal Treatment segment.

Our consolidated operating margin of 11.9% decreased 40 basis points in the fourth quarter, 2008, as compared to the prior year, due primarily to higher corporate and other expenses including $1.4 million of foreign exchange losses, related to our acquisition of VMetro, higher pension expense and higher medical costs.

Segment margins actually improved 40 basis points to 14.1% for the quarter. Flow Control’s fourth quarter operating income increased 12% over the prior year, all of which was organic. Higher sales, improved profitability on several long-term contracts and lower AP1000 design costs all contributed to the operating income improvement.

Overall operating margin for the fourth quarter was 14.2%, a 60 basis point improvement over the prior year quarter. FX adjusted margin was 13.8% in the fourth quarter, up 20 basis points from the prior year quarter. In addition, this segment is participating in several next generation programs such as the CVN78, which generates a drag on margins in the short-term but should lead to healthy growth and increased profitability in the future.

In our Motion Control segment, fourth quarter operating income of $22 million was 4% higher than the prior year period. Organic operating income growth was 11%, which was partially offset by an incremental operating loss of $1 million, from our 2008 acquisition.

Overall, operating margin improved 90 basis points to 12.8% versus 11.9% in the prior year. However, foreign currency translation had a $5 million favorable impact on this segment’s operating income in the fourth quarter. Excluding the FX impact, Motion Control’s operating income was down 20% from the prior year quarter and operating margin was approximately 10%, down over 200 basis points from the prior year.

Motion Control’s operating income was negatively impacted by the divestiture of its commercial aerospace overhaul and repair business earlier in the year, the impact of the Boeing strike, delays in the new programs, and operating loss at newly acquired VMetro, as well as a bad debt write-off related to the Eclipse bankruptcy and costs related to the cancellation of a development contract.

In Metal Treatment, operating income declined $1.6 million in the fourth quarter of 2008 as compared to the prior year period, primarily due to significant headwinds from lower sales to the automotive market. In addition, Metal Treatment had $2 million of unfavorable foreign currency translation during the fourth quarter, resulting from the strengthening dollar’s impact on its European shop cleaning operation. Excluding the FX, Metal Treatment’s operating income and margin were essentially flat with prior year.

Consolidated net earnings of $35 million or $0.76 per diluted share in the fourth quarter were 9% lower than the prior year, due mainly to a higher effective tax rate of 35% versus 28.4% in the prior year quarter. In the fourth quarter of 2007, net earnings benefited from a lower effective tax rate due to changes in various foreign tax laws. New orders received in 2008 were $2.2 billion, up nearly 20% year-over-year, of which 13% was organic.

We ended the year with a backlog of $1.7 billion, up nearly 30% from year-end 2007, of which 28% was organic. Our new orders yielded a strong book-to-bill ratio of 1.2 for the year with all three segments at or above one.

Now, I will review our liquidity and financial position. In 2008, our free cash flow, defined as cash flow from operations less capital expenditures, was $76 million for the year. Our cash flow from operations was up $40 million from the prior year, but was offset by higher capital expenditures of approximately $40 million, related primarily to the new manufacturing facility in Cheswick, the AP1000 nuclear power program.

Depreciation and amortization was approximately $74 million in 2008, and capital expenditures were approximately $104 million. Our balance sheet remains strong with $61 million in cash, working capital of $352 million, and total debt outstanding of $517 million for a net debt to book capitalization of 32%.

Now let me turn to our pension plan performance in 2008. The overall equity market performance significantly affected our pension plan’s funded status. Our 2009 expense for the Curtiss-Wright domestic plan is expected to be $10.3 million, an increase of $2.3 million from 2008.

Approximately $1.1 million of this increase is due to a settlement charge associated with the retirement of an executive officer. In addition, the CWEMD pension plan is now 78% funded on a financial accounting basis, down from 124% funding at the end of 2007. This resulted in a negative equity adjustment of approximately $80 million as of year-end.

This accounting adjustment will not impact our ability to pay dividends or comply with our debt covenants. In addition, while we are not required to make a cash contribution to the pension plan in 2009, we do currently expect to make an estimated $20 million cash contribution in 2010. I will now turn the call over to Marty to discuss our strategic market performance and full year guidance. Marty?

Martin Benante

Thank you, Glen. This is certainly been a challenging year for us in many fronts and I am proud of our 2008 performance overall. We achieved double-digit sales, and operating income growth due to strong demand for our unique, high performance products in our highly diversified markets. For the full year 2008, our defense businesses generated healthy organic growth of 5%, and our commercial markets achieved 7% organic growth.

Our defense market growth was driven by aerospace and ground defense markets with 8% and 18% respectively, which was partially offset by stable revenues from our naval defense market, which was down slightly from the prior year. While the changes in administration may cloud the outlook for some long-term military programs, we are confident that the demand for our defense products will continue to be healthy as Congress looks to refurbish and replenish the current forces.

Our diversified exposure to nearly every jet fighter, military helicopter, ground vehicle, and nuclear Navy program ensures that we are not materially exposed to any single line item in the defense budget. While some programs for Curtiss-Wright are potentially ending, approaching the end of their production, such as the VBG1000, we look forward to next generation programs, such as the F35, Global Hawk and P88, which are just at the beginning of their production cycles.

In addition, we are committed to supporting far militaries as well as the continued development of future combat systems. In 2009, we expect our overall defense budget to grow mid-single digits, similar to 2008. As you know, by now, we take a long-term view of the defense market, positioning ourselves on development programs several years in advance of production and it is the intimate knowledge of those programs and requirements that drives our confidence in our technologies and future performance.

In our commercial market, the new construction Renaissance for nuclear power plants generated organic growth of nearly 50% in 2008 as we ramped up production of our first reactor coolant pump for the AP1000 reactors in China and the U.S. In addition to the flagship orders for our reactor coolant pump, we are beginning to see initial orders for many of our other technologies that will support new plant constructions here in the United States and abroad.

These advanced orders signal commitment of utilities, construction of new nuclear power plants and we are extremely pleased to be at the forefront of this renaissance. We expect to see double-digit growth in this market in 2009. Completing our energy portfolio, our oil and gas market experienced a 4% organic sales decline year-over-year due primarily to delay in capital spending that began during the fourth quarter as a result of severe credit tightening and volatility in crude markets.

It is not just the price of crude oil or spreads which drives demand for our advanced technology, but also the impacts in our gas and oil business are the unprecedented price swings that create market uncertainty, as well as lower overall demand for energy products. While the energy markets supply demand dynamics appear to be more volatile than ever as we begin 2009, the large picture remains the same.

Energy needs will continue to increase and efforts to adjust both environmental concerns and domestic independence will drive demand for advanced technology. Curtiss-Wright industrial leading products provide unparalleled safety through automated technology and also increase operational efficiency and limit emissions. Taking workers out of harm’s way, providing the most reliable and reduced environmental emissions, are profound values, which drives our customers to our products, in global many refining and petrochemical production.

While the oil and gas market is experiencing tough conditions, we will certainly feel this pinch again in 2009. We feel as a cyclical phenomenon and will remain committed to producing advanced technologies for this market, such as our recently introduced isolation valve and cutting tools that complement our Coker valves and offer our customers a complete system solution.

In commercial aerospace, the aggregate impact of the Boeing strike and continued delays on new programs dampens full year results to essentially flat year-over-year performance. Fortunately, Curtiss-Wright is accustomed to swings in any one market. Redeployment of resources and other programs help to mitigate the impact of our financial performance in 2008, while enabling us to continue to support our customers in a timely fashion.

The outlook remains uncertain for commercial aerospace, but we expect 2009 to be in line with 2008 and due to our market diversification strategy, we are prepared to weather future business cycles in this market.

Finally, our general industrial market, excluding automobile, remains stable in 2008. As expected, we began to experience the impact of the global economic slowdown during the fourth quarter. Most significantly, in our automotive market, which declined 34% in the quarter due to lower customer demand and customer inventory reduction programs market wide. For the full year 2008, automotive was down 14%, and we expect this trend to continue in 2009.

Complimenting our organic growth, our disciplined acquisition program provided the addition of three new businesses in 2008. Parylene Coating Services, Mechetronics and VMetro. In addition, we made substantial investments in our ongoing, in support of new programs, such as the AP1000, [inaudible] pumping systems, high speed motors, CVN78, [Inaudible], Boeing 787, and 747-8 and a number of future combat system programs.

Despite substantial weakness in the global economy, we remain confident in our ability to generate increased sales, operating income, and earnings per share in 2009 due to the continuous demand for our superior technologies, which deliver profound life cycle benefits to our customers and are key positioned in long-term programs. To conclude our remarks today, I would like to review our guidance for the full year of 2009. We expect revenues in the range of $1.89 billion to $1.93 billion, which equates to 3% to 5% pipeline growth.

Operating income in the range of $210 million to $217 million or 5% to 9% and fully diluted earnings per share in the range of $2.48 to $2.58, this equates to 1% to 5% growth in 2009. We have begun an aggressive cost control campaign throughout all of our businesses, including operation efficiency improvement, for lean initiatives and factory rationalizations.

We are taking the necessary steps to remain strong and competitive during this period of global economic weakness. At this time, I would like to open up the conference call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Myles Walton - Oppenheimer & Co.

Myles Walton - Oppenheimer & Co.

I was hoping you could provide, thanks for the color by market. I was wondering if you could do quickly the same thing in terms of your 2009 outlook by segment, first off.

Martin Benante

On the revenue side, Flow Control between 990 and 1.10 billion, Motion Control, 650 to 665 and Metal Treatment, 250 to 255. However, I do have to point out that those ranges include reallocation of our end-all business from the Motion Control segment to the Flow Control segment and that’s approximately $45 million in annual sales.

Myles Walton - Oppenheimer & Co.

And then on the margin side?

Martin Benante

On the margin side, Flow Control between ten and a half and ten and three quarters. Motion Control around 11 and 3/4 and Metal Treatment around 17%, approximately.

Myles Walton - Oppenheimer & Co.

And two follow-ups to that, 11 3/4 in Motion Control is that helped by the movement of end-all or is that your expectation for improvement in that segment?

Martin Benante

It’s mostly improvement, but you’ve got to remember that 2008 was dampened by a whole host of different things. So, it is partially eliminating all the negative stuff they got hit with in 2008 as well as improvements.

Myles Walton - Oppenheimer & Co.

I guess assuming that VMetro returns to break-even or modest profitability and that the current peg stands where it is on a Forex basis, which is a little bit of help, is the right way of thinking?

Martin Benante

Right.

Myles Walton - Oppenheimer & Co.

And then the 17% in Metal Treatment, it looks like Forex; the translation effect of Forex is about 140 basis points in the quarter alone. Is that kind of the driver there or are you seeing facilities starting to be underutilized and kind of weighing on the margins as well?

Martin Benante

Let me just say, we did, just so we can try to explain the Forex, we did build into our guidance a blended, I’d say a hedged forecast that we received from third party banks, is built into that. So to some degree, what you’re seeing in the fourth quarter of 2008 you know is kind of built into our guidance to continue at least in the beginning of the year and then temper down throughout the year, but we did use the forecasted rates for 2009. So the answer to part of it is that and the other is just that business is volume sensitive, as you know, and as their forecast moves down in volume and part of it is just margin impact on that.

Glenn Tynan

Myles just let me add that, we had some realignment of G&A expenses, so the seventh MIC was benefited by a reduction of that. Really the 17% would be more like 16.4%. As a sanity check, we’ve gone back to previous recessions and taken a look at both the aerospace and automobile declines, which were very severe right after 9/11, 2001 and the changes in the operating margin are inline with what we’ve seen in the past.

Myles Walton - Oppenheimer & Co.

So but that declined from I guess 18 to 13.5 or so, ‘01 to ‘02, that’s not what you’re expecting right now. What drove that because it didn’t look like volume moved much when that happened. Was it just a few facilities that were underutilized that weighed heavily that won’t happen this time or maybe you can give us a little color on.

Glenn Tynan

Actually during that timeframe we acquired a lot of companies, so even though the top line remained flat, we had companies that obviously are less profitable at that time. We acquired a lot of Metal Treatment companies during that timeframe.

Myles Walton - Oppenheimer & Co.

And on that same topic of acquisition, Marty, the last downturn you got to be extremely active on the M&A side and arguably in the last couple of years, the organic growth has clearly been strong. Would you say that you’re waiting more towards getting more active in M&A or I guess maybe just give us some color on what you’re looking at for the M&A picture for the next 12 months or so.

Martin Benante

Well, I think that the amount of opportunity in the M&A area is going to increase. It’s becoming a buyer’s market. I think you’ll see that as credit starts to loosen up, you’ll see a lot more activity there. We have a healthy balance sheet. There are certain companies that we look out and see some that would be a nice fit to our portfolio, but it will be a buyer’s market and we will benefit from any acquisition we make.

Myles Walton - Oppenheimer & Co.

And then one other, on the outlook itself, in terms of how you guys roll it up and provide the outlook. I know that in November you have the strategic planning meeting. I’m just curious how much of the plan that’s in the guidance today differs from kind of what was rolled up in November?

Martin Benante

Quite a bit. We’ve gone through two iterations of it and, you know, it does change from November on and we finalized yesterday at about 3 o’clock another version.

Myles Walton - Oppenheimer & Co.

That’s why you made us wait until 7:30 for the press release, I know. Can you qualify, which of the items were the most volatile?

Martin Benante

Well, obviously the oil and gas and the automotive. Even though automotive is not as big. Those were the areas that we had or general industrial, that was the areas that we had a concern and obviously we put it in the perspective that made a lot more sense to us, based on what we’ve seen in the past.

Myles Walton - Oppenheimer & Co.

Okay. And the last one, I think I might have missed it, but what did you say for the oil and gas market in your 2009 guidance?

Martin Benante

Right now, oil and gas is down about 8% from last year.

Myles Walton - Oppenheimer & Co.

And last year was down?

Martin Benante

4%.

Operator

And our next question will come from Chris Donaghey - SunTrust Robinson Humphrey.

Chris Donaghey - SunTrust Robinson Humphrey

Marty and this hopefully won’t take too long, but I know you provided a lot of color around the markets and I was getting a little confused between what was the Q4 growth rate versus the ‘08 growth rate and what your expectations are for 2009. So I’m wondering if you could just quickly go through, say the seven major areas, aerospace defense, ground defense, naval defense. Just what the growth rates were in 2008 and what your expectations are for 2009.

Martin Benante

Okay. If you take a look at the defense as overall, we are going up about 8%. If you look at aerospace defense, that’s about an 8% growth, it’s about 12% of our total revenue. It’s going to be fueled by increases in the [inaudible] Global Hawk and especially Army helicopters. Our ground defense is up 8%, that represented about 9% of our total and again, we’re very strong sales increase in Abrams, Stryker and especially the Future Combat System. We’re a little bit down on the Bradley, that we expect to pick up in 2010 and out.

Navy defense is up 2% versus last year, it’s about 32% of our business. Strong increases in the subs and carrier programs and we’re down about $15 million drop in the destroyer program, the VVG1000. In other defense, which is 4% of our business, we actually put VMetro in there because it’s embedded computing a little bit centered around aerospace and radar and some ground, so we actually put a little bit more in the other defense category and that’s up 34%. And that will give you about an 8% increase in our defense market.

In our commercial market, we expect to be flat. Commercial aerospace, we see flat shipments to Boeing year-over-year, because last year we shipped about 305 737s and we looked at commercial aerospace from a Boeing side, surely the 737 that drives our revenues and last year because of the strike, we shipped about 305. This year, we’re anticipating shipping around 315 and we expect the beginning of the year to be at 31 ship-sets a month for the first six months, and it then goes down to about 21.5 ship-sets for the last six months and we expect Airbus to be down.

In gas and oil, looking to be down 8%, I’m sorry. That’s 16% of our business. We’re still seeing strong orders for maintenance repair for both offshore refineries for valves and electronics, from our relief valves, for our gate plug embedded fly valves. Our vessels are flat.

The main change is with delta valve is our Coker valve and they’re down because programs are being pushed to the right because of the credit issues. And it is a fact that we’ve installed our first delta valve in 2001 and very little maintenance is going to be done on our installed base, because the majority of our installed base has been out there three to four years, whereas some of our other gas and oil product lines have been very mature and out there for and have significant installed base, they have got the benefit of maintenance repair whereas the delta valve doesn’t, so we’re anticipating about $5 million in repair on the delta valve and we’re also introducing our isolation valve and cutting tools, which offset a little bit of decline in delta valve.

Commercial power is up 15% over last year and that’s a combination of both the U.S. and China AP1000 program. We also see some nice increases in our spare business and also we received $10 million last year in orders for new construction and we anticipate about $30 million this year and about $11 million increase in sales in new programs.

And in our automotive, sales were down 10%, that’s about 4% of our business and general industrial, which is about 10% of our business, we see down about 4%.

Chris Donaghey - SunTrust Robinson Humphrey

And also, with the changes that you’re expecting to see in the pension contribution, what’s the expectation for corporate pension and other for the year?

Martin Benante

Pension is about 10.3 and other is about 2.5.

Chris Donaghey - SunTrust Robinson Humphrey

And then just, as far as you can tell on the oil and gas market as a whole, what do you think needs to happen to get that back on a growth trajectory? Is it recovery in the price of oil? What are your customers telling you about that business?

Martin Benante

It’s not so much the price of oil. It’s credit. We see significant opportunity out there in new construction, but it’s the credit. So we need to see some increase in credit lines for our customers.

Operator

And our next question will come from Michael Ciarmoli - Boenning & Scattergood.

Michael Ciarmoli - Boenning & Scattergood

A little more specifically on the AP1000, if you can. Can you give us an update in terms of how many RPCs you have under contract? What’s in the backlog there? And I guess you provided that revenue forecast I guess it was on your Investor Day probably in the ‘07 timeframe. Are you still on track for roughly $75 million in revenues in ‘09, $110 million in 2010, could you just update us around the specifics there?

Martin Benante

Michael, I’m sorry, are you talking about the 2009?

Michael Ciarmoli - Boenning & Scattergood

Yes.

Martin Benante

2009, we are looking at somewhere, did you say $110 million?

Michael Ciarmoli - Boenning & Scattergood

I had $75 million for ‘09.

Martin Benante

No, we are looking at for new construction in the area of about $100 million.

Michael Ciarmoli - Boenning & Scattergood

And that’s all related to the AP1000?

Martin Benante

Well, 90 is about the AP1000 and the other 11 is about new construction for not only AP1000, but also for other new power plants throughout the world.

Michael Ciarmoli - Boenning & Scattergood

And just on the kind of new power plant, obviously these programs and reactors don’t come online fairly quickly. Are you seeing any hesitation out there or some of these potentially new projects being pushed out to the right at all?

Martin Benante

Well, the current programs, no, without a doubt, we’re under order and that’s in full swing and things are going very well, not only for our customers but also for ourselves. We did expect a new order in the first quarter of this year and it’s being pushed out to maybe the third quarter because of credit also.

Michael Ciarmoli - Boenning & Scattergood

Okay. Is that an international or domestic order?

Martin Benante

Domestic order.

Michael Ciarmoli - Boenning & Scattergood

And then just in terms of the, it was nice of you to outline the detail on the commercial aerospace with the moving parts of the 737 and what have you. Is that really, the slowdown in the production there, is that baking in kind of the speculation that Boeing and Airbus will cut production and then how are you factoring in 787 revenues into your commercial aerospace kind of outlook for the year and if you can also just give us an update on what your lead time is in terms of that project.

Martin Benante

Well, on the 737, we’re expecting that they’re going to cut back mid-year. In reality, we are producing that, that 21.5 ship-set a month right now. Because we had inventory that we built up during the strike. Obviously, while Boeing was on strike, we kept our workforce and continue to build 737s. So we are on a production rate right now and obviously if it was to stay at 31 longer than that, we can easily increase our production to meet that need. But that’s our forecast right now.

Michael Ciarmoli - Boenning & Scattergood

And then what about the 787 program? How do you see that ramping towards I guess the end of 2009?

Martin Benante

We are really not looking at any shipments in 2009, so really not in our plan.

Michael Ciarmoli - Boenning & Scattergood

And then last question, I’ll get out of the way here. Can you give us the backlog by segment?

Glen Tynan

Motion Controls is $575 million and Flow Controls about a little over $1.1 billion.

Michael Ciarmoli - Boenning & Scattergood

Okay. And how much of that is shippable in the next 12 months?

Glen Tynan

I don’t have that. I might figure things, but I would probably wager a guess at about 60 to 70%, a big chunk of the Flow Control backlog are the long-term nuclear contracts, so that's a chunk of it. I don't really know, but probably no more than 60.

Operator

Your next question comes from Eric Hugel - Stephens.

Eric Hugel – Stephens

Marty, on the top line guidance that you gave us, the 3% plus to 5%, how much of that is organic?

Martin Benante

We’re projecting anywhere from 0 to 3%.

Eric Hugel – Stephens

All right. Can you give us an update? I know unfortunately there’s been sort of set backs with Petrobras in terms of the deep sea pump but I guess they were supposed to test it in January. Did that ever happen?

Martin Benante

No, no. They just received funding to deploy it. They’re going to deploy it in the May time frame and start production in June or July.

Eric Hugel – Stephens

So you would get feedback sort of let’s say later on in the year and maybe orders next year? Is that sort of the time line that one should expect?

Martin Benante

Right.

Eric Hugel – Stephens

Can you update us on sort of where things stand with the laser peening right now? I guess you got your machine into Boeing on the 747-8 and then obviously the strike happened. Can you sort of give us any early feedback?

Martin Benante

Well, the laser is working fine, that’s going fine. As far as laser peening is concerned, we expect an increase of a few million dollars, anywhere between $14 million to $15 million this year and we again are working on a variety of new programs.

Eric Hugel – Stephens

I mean, you hinted a little bit on it in your comments in terms of cost cutting and all that, but in the current environment when you sort of look more strategically, I mean how do you operate differently in this kind of environment versus let’s say, an environment a year ago in terms of sort of strategically extending credit to customers, i.e. the automotive guys, so just sort of an update there.

Martin Benante

Well, from our cost reduction, we’ve already touched on cost reduction program. Out of that, a little bit differently is, starting on Thursday, myself and both Dave and the two COOs will be visiting all of our major companies to review their cost reduction program and also thank them for the efforts that they’ve done over the last few years which have been very, very good, but we’re obviously going to be looking at reducing the lead times, reducing material costs and improving manufacturing efficiencies. We will be going and visiting between now and over the next few months and also visiting our plants in China.

Eric Hugel – Stephens

Do you have material exposure to the auto company? In terms of I know its 5% of your sales, but at any one given time, given sort of where they are right now, are you pretty much cash and carry or is that a quick sort of, you don’t have much receivable there.

Martin Benante

We have similar receivables we do monitor monthly, they are paying on time and they are current, the top three. We monitor all our receivables that roll up in any way under the top three and the minute they start to go south, that may change, but right now they’re paying their bills.

Eric Hugel – Stephens

But I guess at any one time if somebody just sort of said okay “we’re going bankrupt like Chrysler” or something like that, would you have significant exposure there? I mean they might pay eventually, but you would have to wait in line with everybody else.

Martin Benante

No, we would have a couple of million dollars.

Operator

Your next question comes from Karl Oehlschlaeger - Macquarie Capital.

Karl Oehlschlaeger - Macquarie Capital

Can you talk maybe a little bit more about the nuclear business and sort of you gave a 15% growth forecast for ’09, but how should we be thinking about maybe flush out a little more of the moving parts there. What should we be looking at more specifically in terms of projects going on in the US and also maybe talk a little bit about what’s the latest kind of content for reactor that you have on the three different ones?

Martin Benante

On the nuclear side, from just our China involvement, basically even year-over-year as we’ve explained and as time goes on, we’ve been putting in about the same amount of input on China. The nice increase is domestic. We’re increasing quite a bit from last year when we started out and also we’ll have margin improvements on the US content. The other portion is associated with our domestic.

We have quite a few plants going to fall outage which will generate repairs and engineering projects for us, but also what is significant is the new construction. We received some orders for the AP1000 in China, but also have received and will be shipping additional new content for other new construction throughout the world. Does that answer the question?

Karl Oehlschlaeger - Macquarie Capital

On the AP1000 that’s where you have a big sort of share of the content. Can you talk about if you’re willing to, what the number is with the content and dollars and then what your content in dollars in terms of the other reactors?

Glen Tynan

About $25 million to $30 million on the other reactors generally Karl; that’s if we got all of our products under reactors, but all of that will be competitive though, versus the reactor coolant pumps which are not. The total potential content on an AP1000 is about $90 million and the big difference there are the pumps, but we are starting to win content with our other products on a variety of designs, AP1000 and what not. In the United States, we are starting to win early lead time awards on new construction with our other products besides which is the content I think you’re referring to, right?

Karl Oehlschlaeger - Macquarie Capital

Right, right.

Glen Tynan

It’s around $25 million to $30 million.

Martin Benante

Except for Westinghouse, outside of our reactor coolant pumps; we also have developed another $30 million to $40 million possibility.

Operator

Your next question comes from Tyler Hojo - Sidoti & Company.

Tyler Hojo - Sidoti & Co.

In the press release you guys kind of implied that the guidance you provided was going to be a bit back half weighted and I mean obviously, historically that’s always been the case. So I mean, is it going to be a little bit more so, is that why you kind of highlighted it or could you maybe just walk us through that?

Martin Benante

Well, yes. Actually, the first quarter of this year will be significantly down from last year. We’re going to have actually lower sales than last year. Obviously our customers are adjusting their inventories as well as we are. Sales will be down. We’ll have higher unabsorbed overhead, so the overhead rates will tend to drift up in the first quarter. We’ve always talked about our government procurement phenomenon, where we get large orders in the last quarter of last year and the first quarter of this year that we don’t realize the profitability until the fourth quarter.

Also, we have amortization this year on VMetro. There’s about a $3 million absorption hit in the first quarter and then we have a $3 million gain in the fourth quarter. So you’ll see a shift just from that alone and also, we’ve had some higher development costs of the naval pumps for the receiving end that we’ll see in the first quarter, but not see it after that. We also have some severance costs that we’ve had in the first quarter that we don’t expect, that we’ll have throughout the other quarters.

If you look at our second quarter, it’s going to be some what equal percentage wise, to our second quarter last year. We’ll have higher shipments and also we have our profitability associated with the domestic AP1000 that will be up. Our third quarter, from a percentage basis as far as EPS is concerned, will be slightly higher than last year. Again, we’ll have higher shipments and also we’ll be hitting some milestones on the AP1000 for China. We’ll start testing in the third quarter and that will allow us to liquidate that portion of the contract.

In the fourth quarter, our percentage increase over last year will be about 20%, but the increase will be very much in-line with 2007. Remember 2008 was reduced based on the strike and the Eclipse bankruptcy and also if you take a look at the shipment differential between the first quarter and the last quarter, we had over $110 million in more shipments in the fourth quarter than we have in the first quarter. So first quarter will be significantly down and the next few quarters will be equivalent to last year’s ratio and the fourth quarter will be up versus last year, but very in-line with what we’ve experienced in 2007.

Tyler Hojo - Sidoti & Co.

I mean again, it says in the press release that, part of the reason for being a back half weighted year is just because of the order slide and I guess maybe if you could kind of weight the possibility that maybe those orders completely slide out of 2009 and it becomes more of a ‘10 event.

Martin Benante

Again, most of our programs are long-term and they end up within that year, within the year or so. Very seldom do we get that much slide out of the fourth quarter into the next year.

Tyler Hojo - Sidoti & Co.

Just a couple of clean-up items here; Glenn, could you provide us with the depreciation and CapEx for 2009, as well as interest expense?

Glenn Tynan

D&A, $80 million; CapEx, $100 million and interest expense $31 million.

Tyler Hojo - Sidoti & Co.

On CapEx, if you had to guess, what do you think your maintenance CapEx level would be?

Glenn Tynan

In that number it’s probably 70% of that number, meaning $70 million, $75 million. The rest of it, we have some expansions planned this year and now that you know that it’s the last installment of the Cheswick building which is a small amount, about $15 million and then we have international and other expansion initiatives that are in that number. So, I’d say about 70%.

Tyler Hojo - Sidoti & Co.

Just finally, what percentages of 2008 sales were related to nuclear power? I think you provided it, I just missed it.

Martin Benante

Power was about 16% versus 18% this year.

Operator

Your next question comes from Steve Levenson - Stifel Nicolaus.

Steve Levenson - Stifel Nicolaus

Flipping back, so I hope this is not redundant any question, but you want to give us a sort of your overall on how the stimulus plan might impact Curtiss-Wright, both on the nuclear power side and on the defense side?

Martin Benante

Well, on the nuclear power side our stimulus plan which is about $1 trillion, contains about $18 billion for a loan guarantee for new construction for the nuclear power plant and obviously if that passes, that would be very good for some of the domestic reactor builders in the United States and that’s about it.

Steve Levenson - Stifel Nicolaus

On the defense side, I guess not a big impact to what you’re doing right now, but I’m curious to plant that to build the two subs a year instead of one. When might we expect to see the orders, because I would imagine it’s been a long lead time?

Martin Benante

So, we already received our orders from our valve company, which is Target Rock a multiyear procurement for the submarine. We are still in negotiations for both, our pumps, both the EPD and our large pumps from the EMD, are negotiations and we expect to get orders this year.

As far as the carrier is concerned, we already finished funding raw materials for the next carrier at Target Rock, but are also in negotiations with the government from our both EPD and EMD division, which is obviously; EMD is a lot larger than Target Rock. We’re still seeing negotiations on the severance.

Steve Levenson - Stifel Nicolaus

It seems to be a little bit of a focus on intelligence, surveillance, how is that impacting the embedded computer business. Are you seeing more coming to you? Are they looking for a less expensive sort of generic solutions?

Martin Benante

We have very, very healthy new orders in that area.

Glenn Tynan

So, the Global Hawk we make the main flight control computers and services. We prepare the Global Hawk [Inaudible].

Operator

(Operator Instructions) Your next question comes from Eric Hugel - Stephens Inc.

Eric Hugel - Stephens Inc

You’ve always in the past given a pretty balanced guidance in terms of upside versus sort of the moving risk. Given sort of the deterioration in the market, I just sort of wanted to get a sense from you, as to sort of how much have you sort of conservativized this sort of guidance, because things have sort of fallen apart in terms of the global economy, maybe not in your market per say, but in terms of the overall outlook.

Martin Benante

Well, the way we conservatize it, not only do we think that we look like a scrub of our markets, but also our cost reduction program, which we expect the benefits from and we have not included into this package and while we do expect some occurrence to take place that we can anticipate, we expect to make that up based on our cost reduction program and that’s how we conservatize. The sales may vary a little bit, but we think that we can maintain the profitability.

Eric Hugel - Stephens Inc

Do you have any sort of number, sort of the expectation or sort of what kind of cost benefits you might be able to realize through your plans in this year and next year maybe?

Martin Benante

The answer is that we are not going to disclosed that, but it’s significant and we expect that we’d maintain each part of the bit.

Operator

Your next question comes from Chris Donaghey - SunTrust Robinson Humphrey.

Chris Donaghey - SunTrust Robinson Humphrey

Just real quick it if you’re going to enter testing in Q3 for the first time, the 81,000 pump, can you just walk us through the milestone that you are looking for there and what your expectation is for when that pump should go into full rig production? Thanks.

Martin Benante

Chris, I know it starts in July, I think it could be a four month, I think full room, I don’t really remember, but obviously you will go into full rig production in 2010. We’re also producing hardware right now and as a matter of fact we intend to have an investor’s conference in June at our Cheswick facility in order to go through commercial power where we are at. We will have the valves and obviously we’ll be close to being tested and we’ll have quite a few parts being made in our new facility. So if could wait until June you can see it for yourself.

Operator

And that this time there appears to be no further questions in the queue.

Martin Benante

Okay, well I’d like to thank you for all joining us today and we look forward to speaking to you in our first quarter conference call in April. Take care.

Operator

That does conclude our teleconference for today. We like to thank you everyone for your participation and have a wonderful day.

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Source: Curtiss-Wright Corp. Q4 2008 Earnings Call Transcript
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