Circor International Inc (CIR) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the CIRCOR International third quarter 2008 earnings conference call. Today's call will be recorded. At this time, all participants have been placed in a listen-only mode. The floor will be open to questions following the presentation. I'll now turn the call over to your host, Mr. Curhan McCann from the Company's investor relations firm. Please go ahead, sir.

Thank you very much and good afternoon, everyone. Welcome to CIRCOR International's third quarter 2008 earnings conference call. Our objectives today are to review the Company's performance and provide an updated outlook on 2008 with Bill Higgins, the Company's President and CEO and Fred Burditt, the Company's CFO. After their comments, we'll then go to Q&A. But before we start, two administrative items.

First, the slides to which we'll be referring today are available on CIRCOR's website at www.circor.come, under the link quarterly earnings on the investors page. Second, today's discussion contains forward-looking statements that identify future expectations. These expectations are subject to know and unknown risks, uncertainties and other factors.

For a full discussion of these factors, we advise you to read about them in the Company's 2007 Form 10-K which can also be viewed on the Company's website. Of course, actual results could differ materially from those anticipated or implied by today's remarks. I will now turn the call over to Bill Higgins, CEO for CIRCOR.

Good afternoon, everyone. Recognizing these are uncertain times, let me add a process note here. We're going to -- we'll go through our financials as we normally do. Then I'll add some color -- highlights around our end markets, and at the end describe how and why CIRCOR is positioned to perform well in these end markets.

As you saw in our earnings press release last evening, we had a great third quarter, exceeding our guidance with fully diluted earnings per share of $1.16. Revenues and margins were up significantly compared to the third quarter 2007 and up sequentially compared to the second quarter of 2008. Most notably, third quarter operating margins expanded for the fourth consecutive quarter and reached record levels for CIRCOR at 13.9%.

The Company received orders totaling $164 million during the third quarter of 2008, down 12% from the third quarter of '07. 10% of this drop is due to the backlog revaluation from currency changes. Our backlog ended the third quarter at $402 million, 2% over the third quarter of 2007, but down 10% from the second quarter of 2008. These reductions were driven entirely by the energy segment which I will explain during this segment's discussion in a few minutes.

Revenues for the third quarter were $209 million, compared to $164 million in the third quarter of 2007 which is an increase of 27% with approximately 3% due to foreign exchange and 1% due to acquisitions. This revenue growth combined with other factors drove operating income of $29 million in the third quarter, compared with $12.7 million in Q3 of '07. Excluding special charges of $2.1 million in the third quarter of 2007, operating income grew 95%. We had record operating margins at 13.9% in the third quarter, compared to 9.1% in the third quarter of 2007; if you exclude special charges, 13.3% in the second quarter of 2008. A very strong quarter for virtually all of CIRCOR. Now I will turn the presentation over to Fred.

Thanks, Bill. I will be referring to our presentation slides, starting with slide number three, financial results, which shows consolidated results for CIRCOR. As Bill outlined, we had another great quarter with strong year-over-year revenue growth and record operating margins.

For the quarter, the consolidated revenues increased 27%; 22% organic, 4% currency, 1% from acquisitions. Organically by segment -- instrumentation of thermal fluid controls grew 11% and energy grew 35% in the third quarter versus last year. Thermal fluid controls acquisition of Motor Technologies contributed 1% growth to that segment.

Consolidated operating income grew 128% over the same period last year hitting $29 million. $2.1 million or 17% of the change can be attributed to a reduction in special charges. This put us at a record 13.9% operating margin with contributions from both segments. Instrumentation and thermal fluid came in at 17.9%, up 80 basis points from last year and energy at 23.2% was 570 basis points up. We will elaborate later when Bill discusses the segments.

Regarding diluted earnings per share, the $1.16 for the quarter was up 87% versus $0.62 last year and $1.08 in the second quarter of 2008. The $0.62 from the third quarter 2007 includes special charges of $0.09 per share for retirement agreements with the prior CEO and CFO. It also included in other income and expense, a $0.06 gain on the sale of a small unrelated business.

In addition, 2007 included a $0.06 benefit from the UK lowering its statutory tax rate and a benefit of $0.06 for a German tax law change. Both recorded as reductions in income tax expense. There were no special charges recorded in the third quarter 2008.

Free cash flow for the third quarter was down $12.6 million year-over-year as strong earnings improvement was offset primarily by growth in accounts receivable associated with the 27% revenue growth. Year-to-date free cash flow was strong at $24.1 million versus $11.5 million for the first three quarters of 2007. I will now turn to slide four, net income EPS, which lists the P&L in more detail. Since we will discuss the segment operating income, excluding asbestos related costs later, I will add color on the other categories.

First, asbestos related costs. During the third quarter, our expense for asbestos related to settlement and defense costs net of insurance was $3.8 million, compared to third quarter of 2007 of $1.9 million. The increase is due primarily to the change in our insurance coverage. As we explained in our prior Q2 call, we had exhausted from an accounting perspective as distinguished from cash, our primary layer of insurance covering indemnity expense. And therefore in the third quarter as opposed to prior periods, we no longer benefited from a 71% contribution from those insurers.

On the other hand, defense costs did continue to have offsetting insurance recoverables in the third quarter. However, the rate of defense coverage was reduced to 63% versus the prior 71% because one of the primary insurance carriers has reached their coverage limit and therefore will no longer be sharing in defense costs. I encourage you to read our most recent SEC forms 10-K and 10-Q for further information relates to our Leslie asbestos litigation. I covered special charges in a prior slide so I will skip that.

Corporate expenses increased slightly by $0.1 million from wage inflation, partially offset by favorable timing of health benefits. Regarding net interest expense, it was lower in the third quarter of 2008 by $0.9 million, primarily because we have paid down a good portion of revolving credit facilities since the third quarter of 2007. Total debt was $22.5 million at the end of September 2008, compared to $42.1 million at the end of September 2007. In addition, interest income was up from increased cash, cash equivalents, and investments.

Other non-operating income for Q3 2008 is down $1.5 million ,due primarily to the $1.6 million gain on the sale of a small unrelated business recorded in third quarter 2007. The remaining change is due to foreign exchange gains and losses. Regarding income tax expense, the increase is due to the rise in pretax income, plus a 10-basis-point increase in the rate to 32.3%, primarily attributable to the increased earnings in higher tax jurisdictions. In addition, as mentioned earlier, 2007 third quarter income tax included a $1.2 million benefit from the UK lowering its statutory tax rate and the German tax law change.

Now cash flow. Cash flow from operations and free cash flow, as mentioned earlier, was down in third quarter versus prior year as strong earnings improvement was offset primarily by growth in accounts receivable associated with the 27% revenue growth. However, on a year-to-date basis to last year, we were up $12.6 million or 109%. This increase is a result of $51.1 million of net income versus $27.8 last year, partially consumed by an increase in working capital centered around trade account receivable to support the revenue growth.

In addition, capital expenditures have increased year-over-year $3.3 million, supporting multiple areas including investments to support new product and lean flow. And now Bill will speak to the segment performance in our markets.

Thanks, Fred. And now I will be referring to slide six that shows our instrumentation and thermal fluid control segment results. Overall this segment had a great quarter with good revenue, operating income and margin growth versus third quarter 2007.

Regarding orders and revenues, third quarter orders grew 13%, compared to third quarter of last year with gains in aerospace, thermal fluids, instrumentation. In addition, the segment's backlog ended the quarter at $169.6 million, a growth of 26% year-over-year. Instrumentation thermal fluid control segment revenues increased 13% with strength in most areas, including aerospace, general industrial market, energy, global HVAC. Third quarter and year-to-date FX favorably impacted our revenue by approximately 1% and 3% respectively.

The segment's operating margin for third quarter 2008 was 7.9%, compared to 7.1% in the third quarter 2007 and 10.9% second quarter 2008. Adjusted operating margins which remove the impact of asbestos-related and special charges from all periods for the third quarter 2008 was 12.3%, compared with 9.3% in 2007, a 300-basis-point improvement. These gains came primarily from higher unit volume, favorable product mix, customer price increases, improved productivity through lean and efficiencies, as well as the Motor Technologies Incorporated acquisition which Fred -- just to add to what Fred said, acquired by our aerospace group or business. The increases were part offset by general inflation and continued increases in raw material costs.

Our lean productivity and plant consolidation activities continue within this segment. For example, we're combining a facility in our Spartanburg, South Carolina plant, which we have mentioned before -- completing that at the end of this year in the December/January timeframe. We have also exited a small distribution facility in the UK in the third quarter and consolidated into other existing European locations. We have now sustained adjusted operating margins at 12% range for three consecutive quarters in this segment.

Now if I move on to slide number seven, our energy product segment. Energy segment orders declined 35% in the third quarter 2008 compared to the same quarter in '07 and declined 35% compared to the second quarter 2008. Currency revaluation of the Euro-denominated backlog contributed to 15% of this or $14.6 million of the energy segment's order decline. The remaining order drop in the energy segment of $18.7 million is primarily the result of lower bookings for large projects in the Middle East. And these bookings are the direct result of a short-term selective quoting approach to -- where we've targeted large product in the Middle East and implemented this to -- able the supply chain to alleviate past due deliveries caused by capacity constraints in the supply chain.

The level of Middle East inquiries remains high. We have quotes outstanding on several new large projects. Energy segment orders in North America remain stronger in the third quarter of 2008.

Regarding revenues, at $112.4 million, were up 42% with FX accounting for 7% of this. The organic revenue increases were driven by all areas, large international projects, standard products sold through distribution, and fabricated systems in North America. Although gas and oil prices have dropped dramatically over the past few weeks, through the third quarter and into October, we have not seen deterioration in our sales activities. Backlog ended the quarter at $232 million, compared with $260.6 million in the third quarter 2007, a decrease of 11% year-over-year. As I mentioned, the change was primarily driven by capacity constraints in the supply chain and consequently, the order change for large Middle East projects.

As for profitability, this segment's operating margin reached another record level at 23.2% during the third quarter 2008, compared to 17.4% for the third quarter 2007 and 20.4% for the second quarter 2008. Consistent with the second quarter of 2008, margins benefited from a very favorable mix on large international oil and gas projects, increased unit volume as partially offset by material cost inflation and unfavorable currency impacts from China sourcing as the RMBs continue to appreciate versus the US dollar in the quarter. Year-to-date third quarter operating margins were 20.2%, compared to 15.4% for the same period last year. And during this period in 2008, we've had significant shipments of the world's largest LNG facility in Qatar which has favorably impacted our margin mix.

Now let's turn to slide number eight which shows our 2008 business assumptions. Before I do that, let me had highlights on our end markets. We are frequently surveying our customers and our sales channels to try and get the best real-time market intelligence that we can.

If I walk through them, our largest end markets in energy, large projects in the Middle East, we're still seeing a lot -- expectations of long-term demand for oil and gas demand to still grow worldwide. Saudi Aramco, one of our largest customers, sees growth through 2015. In fact, looking for -- moving from 91 million barrels a day to over 117 million barrels per day in the 2030 range. We have multiple bids outstanding in large Middle East projects. As I mentioned earlier, activity there has been strong.

End markets in North America, orders have been strong through the quarter -- through Q3 as well as so far through October. We haven't seen any cancellations or slowdown in our North American energy demand. With lower gas pricing and production outstripping demand, we anticipate, like the market does, correction in 2009 but so far we haven't seen it.

In our process end markets, we haven't seen a significant reduction or cancellations to date, although there's an expectation with capital constraints and the general economic slowdown will likely impact this market. We have seen some reduced spending in commercial construction side of the markets, especially in the Northeast US, as well as in general industries that would affect our thermal fluids and instrumentation products.

In aerospace, the larger portion of our aerospace business is military and defense. We have strong backlog and growing orders in these areas. I'm happy to say we have recently been awarded the follow-on contract for the Boeing Chinook CH-47 helicopter program. The booking of that order occurred in the fourth quarter so that will be in our numbers when we end the year. We'll end the year with a strong order backlog in aerospace.

We do see some softness as we know that commercial airlines have parked all their aircraft during the year. We expect commercial spares and repair sales. However, for the group to be relatively flat because we have significant product on the A320 and 737 next generation aircraft platforms which are seeing significant flight hours right now. We should see the corresponding aftermarket that comes with that -- be somewhat of an offset to the older legacy aircraft that have been parked. Overall bookings in aerospace are at all-time levels. As I said, we have strong military and spares business.

Business aviation looks fairly strong ending the year and going into next year. And in general we have -- with improved marketing, sales, engineering teams in our aerospace group, we have been winning new platforms which should ensure future volume going out. We've won new programs on the Gulfstream aircraft as well as just announced some new wins in Europe, through our French business on the Lear Jet aircraft as well.

Other markets, HVAC, steam-related markets, we're seeing a little softness there with slowdown in commercial construction. We've seen projects in New York City, for example that been canceled, as well as expecting a slowdown in major upgrades. What else here?

On the power side, spending levels -- power generation remain fairly consistent with recent past what we've seen so far. We are watching closely for possible project delays. I haven't seen those yet. Chemical and refining, it depends on the general market. We're seeing tendencies to delay spending there. We'll watch that closely as we go forward. Our maritime, which is primarily Navy businesses, I believe we're beginning more of longer term up cycle; a modest one at that but an up-cycle due to the new aircraft program that we won most recently.

With that as a background, this expectations we have on slide eight for revenue and margins in 2008. For revenue assumptions which excludes the impact of currency fluctuations, we are narrowing our range on expectations for the instrumentation thermal fluid control segments to 9% to 10%, and raising the energy segment to 20% to 21%. Regarding adjusted operating margins, which exclude special and asbestos-related charges, we have narrowed the ranges, but they are in line with the projections we had on the last call. Corporate expense guidance remains unchanged at $20 million to $21 million.

Tax rate has decreased 100 basis point due to the renewal of the US R&D credit. We anticipate having another strong performance in the third quarter with earnings per share before special charges at $0.82 to $0.94 which compares to $0.60 in the fourth quarter of 2007. This guidance for the fourth quarter includes a $0.09 reduction as a result of recent foreign currency devaluations against the dollar since the end of the third quarter. Please remember as you look at this, as in the past, asbestos-related charges are not included in special charges.

Before we open up the phone to the final topic area, I'd like to -- as we acknowledge the times we're in here, is address why we're better positioned -- why CIRCOR is better positioned and prepared to face uncertainty to perform well in our markets going forward. Let me take a few minutes to elaborate on that. I'd welcome feedback from everybody afterward if this is the amount of right of information. We wanted to share as much as possible of our thinking here.

Let me share a vision of why CIRCOR is better prepared than we've ever been for the uncertainty in today's market. I will stress three points and give a few examples. First of all, we have a great balance sheet. A little debt, and we've improved cash generation. Over the past 18 months, we didn't acquire any sizable acquisitions because we stuck to our financial models and our discipline. We did, however, buy a few smaller companies.

Two in aerospace that we were able to purchase at good prices, integrate quickly, deploy lean manufacturing on day one, and immediately improve operating profitability. Regarding larger deals, although we had the financial wherewithal, we didn't pay up for bigger deals at auctions as multiples became inflated. We demonstrating sound cash stewardship and more importantly, positioning us to be able to acquire companies going forward at more rash rational multiples where we can earn return for our shareholders. Another beneficial consequence of this lull in acquisition activity, it has allowed our operating teams and business leadership to focus on improving our internal operations and build the core competencies we need to be stronger going forward. Which brings me to my second point of why CIRCOR is better prepared for uncertain markets.

The second point is that CIRCOR is truly a company in transition. We're going through a transformation that starts with much more competent leadership in place. This is our people strategy.

We now have world-class general management and operational leadership across CIRCOR. We have recruited lean and Six Sigma experts from the best of the best. Our people strategy has been to build a leadership organization. It's capable of not only running a much bigger company than we are today, but a leadership organization that's capable and knows how to transform a company from end-to-end. And this is exactly what we want to have going into uncertain times.

Leadership that knows how to deal with change, not chaotic or reactive but aggressive forward-looking change that's well executed and positions us stronger in our existing markets to capture market share or strength and ability to grow in new markets. Point of fact, both segments and most businesses in each segment have shown significant year-over-year improvement in both the top and the bottom line at the same time across the Company. This is a direct result of the great leadership we have.

The third fundamental reason why I believe CIRCOR is better positioned for uncertain times is the operational excellence we are demonstrating in nearly all of our business units. Every business, in fact, every site in CIRCOR, regardless of the market served, whether it's energy, commercial, industry, military, aerospace, you name it. Every one of our operations has improved. In addition to having leadership and people that are leading change, we have been building an operational capability on both the shop floor and the front and back office environments through our lean efforts that make us stronger, faster, more efficient. We have taught our employees how to change and we are using the tools of lean and Six Sigma to build a stronger set of core business processes, both operational and administrative.

Let me give you example of why this makes us stronger in our markets and better able to weather changes. I will speak specifically to our short-cycle North American oil and gas business, primarily located in -- headquartered out of Oklahoma. As you consider our energy segment, it consists of both the longer cycle project business and shorter cycle product business. As demand changes in our longer cycle project business, both up or down, we are able to see those changes coming well ahead of time and deal with them accordingly.

Furthermore, our project businesses often come with cash advances from our customers, which further mitigates financial risk. Our short cycle business in North American product businesses where we would expect to see a market change first and fast. Our strategy here is to redesign our production processes to be more responsive. And we have been working on that.

We have been reengineering the entire supply chain, starting with our new lean manufacturing plant in China that we built a couple years ago and have been improving as we go -- through our operations in Oklahoma. The China plant is an efficient low-cost production plant that often now ships directly to our customers. Case in point, last year when the North American market slowed down in second half due to the inventory buildup, we were quickly able to ramp down our production in China with much greater responsiveness to the drop in demand and better control of our inventory and costs, Conversely when the market took off at the end of the first quarter this year, we're able to respond more quick well ramp-up in production to meet rapid rise in demand. We have a more responsive supply chain capability than we ever have in the past.

In addition to China, our Oklahoma operations -- redesigned our production process to reduce lead time significantly to be more responsive to the changes in demand. Our goal over time is to -- build to order system. We are going to need time to do that.

One that's synchronized with customer demand. This requires a completely new production approach. Specifically, we are working on one of our largest product lines now that's begun this transformation to a lean flow customer pull system where so far we have been able to reduce lead times by more than 25%. The increase in responsiveness has enabled this product line already to take market share from slower manufacturers. We're responding faster and capturing share when the call comes. We're doing it more cost effectively with a better production -- better control of inventory. It's a direct result of the leadership we put in place as well as the application of lean and operational excellence.

We are still early at this. This type of project bodes well for future cycles, whether up or down. Over the last three years, we worked hard across all of CIRCOR to develop leadership, organizational capability and operational processes and disciplines in the core competencies that position us well with relative strength in our existing markets and enables to us grow and continue to improve. With that, we'd like to open up the lines for any questions that you might have.

Thank you. (OPERATOR INSTRUCTIONS.) We'll go to Charlie Brady with BMO Capital Markets.

Hi. Thanks, good morning, guys. With respect to the shipments in the LNG job into Qatar, how far out do those shipments go? Obviously that's been a pretty good boost to the margin and you have been above 20% now in energy for a couple quarters. Which is what I would argue is probably above a long term sustainable rate, but obvious getting a good benefit from those shipments. How much longer should we count on that happening?

Charlie, we'll still see some of that -- continuation of some of that business into the fourth quarter. That's the lion's share of the rest of that large contract.

With regard to the margins on instrumentation and your guidance for '08 of 10% to 12%. In order to get to the bottom end of range at 10%, it implies a pretty Draconian margin assumption in fourth quarter. Is there something I'm missing there or is it just conservatism maybe on your part in regard to the range of the margin?

I think it's more of the latter which you talked about.

We're anticipating what we don't know in a sense, that there's some short cycle business that could drop off in the fourth quarter.

There's some FX effect that will hit us in that quarter, too.

Okay. With regard to the pension expense, is there any -- given the market conditions and what's gone on there, any impact to pension assets and pension expense from that?

No, there's no impact this year.

Thanks.

We'll take our next question from John [Franser] with Sidoti & Company.

Good afternoon, everyone.

John.

You talked a little about market share gains. Could you elaborate a little on what end markets you're gaining market share and who is it from, if you could?

We believe that in the energy business, we are taking some market share where our responsiveness is faster -- that would be against tier 2 and tier 3 competitors in North American short cycle business. We are winning new programs in aerospace which are upgrades to existing platforms. That would be against the typical competitors we have in the aerospace components world.

Given the changes that you have made in the instrumentation business over the past couple years, could you talk about potential margin degradation, in light of a substantially weaker economic environment in 2009?

You are talking about a volume drop?

Yes.

Like any business -- if we have a volume drop, we are going to lose leverage. Our variable leverage is somewhere around 40% in probably both of our businesses. That will be a headwind, then we'll have to work quickly to make sure we keep our inventories in line so we don't build the assets and use cash. Also so we can take out the variable costs as quickly as possible.

One of the things we've done differently this year, too -- and we are going through it now, we have a new annual planning process that is more -- advanced version of the typical budget process. We've targeted and each business has developed a set of very few, one or two or three critical initiatives in the business that would -- in our terminology, move the needle over the next three years. That would significantly reengineer our product line, launch a new product line, move the production line to a low-cost country, et cetera. In addition to that, through the planning process, we've also challenged the Organization to come up with a scenario plan for a severe drop in end markets. We're going through that analysis right now, and that will be part of our final planning process that we'll conclude in early December.

Great. You mentioned there was no drop in sales activity. Sounds like through the fourth quarter from the distributor base, but you also mentioned we had a scenario a year ago where it was sudden and unexpected. What confidence that we won't see this same scenario play out as we go through the balance of the year?

Those comments were specific to the short cycle business in our energy business in North America. This is a distribution business. By definition short cycle is hard to see through distribution under those changes. We wouldn't say there wouldn't be a drop-off there, but what we're trying to do is to position our ability to respond to that, so we're faster and more efficient in doing so.

Okay. Thank you very much.

We'll take our next question from Kevin Maczka with BB&T Capital Markets.

Bill, question on mix and pricing. I think in both units you talked about having favorable mix, favorable pricing. I'm just wondering on both counts, is there something there that might not be sustain even absent a significant decline?

The project side of the business is priced per project. Each project is a bid price competition. I'm talking about energy right now. On the energy short cycle business, we did put a price increase in earlier this year that's kicking into gear in the middle of the year, third quarter.

Will we that have pricing power going forward? Probably not. We'll test it as we go, as we have so far.

Okay. Then in terms of product mix, absent the large project stuff on the energy side. Is there something on the ITFC side that's a material mixshift that may be more one time in nature or maybe not?

I would not say there's anything that comes to mind that's material -- that we see differently in the fourth quarter. There may have -- in the third quarter, there may have been a little stronger mix on some of the systems business that we do on the instrumentation of thermal fluid side, but in general that should be minor compared to the overall mix.

Okay. Then, Fred, on FX, can you just tell us what your $0.09 hit for Q4 is based on. If it's based on where the euro exchange rate is toda. Have you done the analysis to say what that same exchange rate throughout '09 would mean to your bottom line?

Yes, Kevin. What we did is we used actually specifically October 23, as a day -- we took the rates on that day and said, all right, let's look at the fourth quarter based on those rates. That was the assumption I used when we came -- when we put together the $0.09. And, yes, we did look at next year. We don't have the exact number, but it's some where in the range of 10% or so. And, of course that will hit the first couple quarters a lot harder than the second two.

Okay. Great. Fred, what was the net result of the Boeing strike on your business?

We did have some strike -- some impact, we think. Although we haven't really felt it yet. But fourth quarter, we think there will be some impact, but it's not material to the business.

Okay. Thank you.

We'll take our next question from Mike Schneider, Robert W. Baird.

Good afternoon. Guys, maybe you can just address the issue about quoting activity just being more selective at PPBSE. I'm curious, when you say supply chain, is it components from your foundries that you are having difficulty getting. And is this something that started actually in the second quarter? Because I'm looking at orders, and it looks like organically orders were down 25% last quarter and 30% this quarter. Or is this a new phenomenon that just struck this quarter?

I think it's combination of both quarters, of second quarter and third quarter. It is related to -- I'll call supply chain from an extended standpoint. Castings, forgings, actuators, parts used in large valves and large projects are scarce and capacity is tight. As the projects move forward, if the design changes, if any of the technical features, specifications change and you go back and to have change your order, you are getting pushed back out into further, longer lead times.

It has hampered our ability to deliver projects on time. We made it -- we made a determination as we looked out and we've had significant bookings that carry us into the first half of next year that the orders we're looking at are in the third and fourth quarter of next year for the project business. We made a decision based on essentially capacity constraints -- to be very careful and very selective so that we could maintain our credibility with our customers and deliver projects on schedule.

Have you seen quotes that -- or quoting activity and just the deadline for quotes being pushed out as well? Because presumably if you are having supply chain constraints, so are others. Which would seem to then just beg the question that this is unnecessary, I guess at the end.

We haven't seen the quote times pushed out. We have reduced our lead times in the interim as we're working the supply chain issues in our own factory capacity issues.

Okay. Rhe backlog number, Fred, I notice it's down 11% year-over-year. Did you -- currency reduce that figure, and by how much?

11%. The total backlog was down 1%, excluding currency.

Just on the aerospace side as well. Can you give us an update now when you look at the mix of the aerospace revenue across the different acquisitions, how much is benefiting or has benefited from the supplemental bills and just what your analysis is now given the likely change of an administration here. Also the likely demise, at some point of the supplemental budget?

There have been a couple of programs that have been cancelled. There hasn't been a direct effect on us. One program that we stand in good placement on, the CH-47, there is a rescue helicopter version of that that follows that -- in the wings and waiting to be decided upon. That would be a great program for us as it gets -- when it gets let. Hasn't yet. We don't see an immediate impact to our exact businesses. In fact, we've been growing more of our business on the airbus side as well.

Okay. Fred, just on asbestos. When you look at the sequential expense of asbestos, we're up at $3.8 million now. Sequentially, it went up by $1.8 million. Was that entirely due to the change in reimbursements thresholds and the one insurer dropping off. Or was there any acceleration of claims and average liability per claim?

As it relates to the prior year, it's primarily due to the change in insurance. As it relates to Q2, we did see some increase in the amount of claims in total accrual adjustment, but not settlements. As you know, we accrue for open claims.

Right. As we try to model this going forward, I know this is crystal ball material, but is there another -- are there thresholds coming that we should be aware of where additional insurers drop out and reach their maximums? Or another threshold coming where the reimbursement threshold comes down?

When total primary insurance is gone, yes, based on the current run rate. If you look back, two to three years.

More conceptually, Bill, have you instituted what I'll call contingency plan B and C yes at this point. Or are you just until now really more addressing the discretionary expenses and things of that nature?

Discretionary expenses, but as I mentioned one of the prior questions, we are in the heavy contingency mode now. We want to be ready to pull the trigger if we need to.

But nothing has been implemented?

No, we haven't seen the drop-off.

Thank you again.

We'll take our next question from Jimmy Kim with RBC Capital Markets.

Hi. I was just hoping to get an update on your acquisition strategy/pipeline. Are you looking to do more small deals or something bigger? Just seeing how active you are in that space.

We are active. There's -- we're very carefully active. There's two types of deals we're looking for right now. The first is very similar to the smaller acquisitions that we've done. A tuck-in or a small deal that we can integrate very quickly and improve the performance and profitability in the short term. The second type of deal that we would consider would be one that would give us an opportunity to strategically shift the business or grow a business. But we're going to be very careful looking at acquisitions in this environment until it's a lot easier to evaluate companies.

Okay. Thank you very much.

And we'll go to a follow-up from John, Sidoti & Company.

I was just looking at the cash flow expectations. You have $36 million through the first nine months, but at the high end you imply you can get $70 million. Where is that going to come from?

A lot of it will come from receivables during the fourth quarter. Probably the biggest driver and operating income, obviously.

Okay. Could you just touch base on your CapEx plans in light of the oil and gas prices? What are you looking at next year versus this year?

We have not disclosed what we're doing next year. In fact, we are currently in our current annual planning cycle, so we are just looking at all those expenses right now. We don't have actually a firm plan yet.

Okay. After Spartanburg is done, are there any other material non -- call it market-driven consolidations -- efforts that you are looking for in instrumentation? Or is everything else just based on how the economy plays out and you are done with all the material consolidations on that side of the business?

We may have some opportunities in Europe to consolidate and improve our organizational efficiency, if I can call it that. But the existing facilities in the US, we are looking at setting up and we have set up a couple of new product lines in China. From our other business units outside of energy, starting to develop the capability of manufacturing and assembling there. We'll continue to look at that. There's nothing on the table right now that's getting worked.

Thanks a lot, guys.

We'll take our next question from Alan [Metroni from Southern Life] Asset Management.

In hearing your outlooks on what you are seeing and seeing the drop in orders, it seems -- at least it seems to me that you are expecting down revenues next year versus this year, especially because the FX isn't going to help you. Certainly not in the first half. I'm just wondering if that's clear, because it seems like the -- is still using pretty solidly up revenues and up earnings. Obviously, your stock is telling us maybe that's not going to happen, but just want to understand your take on this.

We don't know that the markets are going to go down next year. We, like anyone else, are watching the markets. We're watching the capital markets. We're all watching a lot of volatility and also a lot of negative news, or at least impressions. We, like everyone else -- we're preparing that it could happen. We've seen some -- you see pieces of information that says that may be happening, but we don't have factual information that that's going to happen.

We haven't put together a forecast for next year. Most of our discussion has been focused on the fourth quarter and where our markets appear to be today.

Okay, thank you. When you do come out with a fourth quarter number in January or February, March, somewhere around there, will you give us your expectations for the full-year -- for '09?

No. We usually just give one quarter out, but we usually give guidance in generalities for the full year when it comes to growth rates and margin.

Okay. That's fair. Your competitors in your two respective businesses, are you competing with significantly larger companies or are they mostly smaller fragmented companies that you think you can pick off?

It's really all of the above, across the board. In the energy business, we're number two to Cameron, very large, very capable company. Then in our instrumentation and thermal fluid segments, we compete with medium, large, and small companies.

Just so we can pay attention to FX, if the dollar weakens from here, is that good for you or bad for you some if the dollar strengthens? How does that work? Which currency should we be paying attention to in terms of how to figure out -- how to model sales?

It's probably better for us to have more stability. We had a good mix of overseas sales. We tend to manufacture and sell in the currency where we are. We have a big interchange between the Euro and the dollar.

If you look today, we're -- about half our business is international, half our business is US business. If you take today as a beginning point, if any currency moves, it's going to balance out to some extent, one going down versus the other. It's a hard one to answer.

Just the high volatility is worse. From a planning standpoint, it makes it very difficult.

We all don't like volatility. I think we've got to live with it, unfortunately. Your volatility in currencies matches ours with stocks.

It appears we have no further questions in queue at this time.

Okay. Let me add a few closing comments here. We appreciate everyone's interest. Thank you for participating in the call. We'd love to get your feedback and if you have any questions, please feel free to contact us. Our next earnings call is expected to be February 26, 2009, at 1:00 p.m. Eastern Time. Thank you very much.

Again, we thank everyone for your participation on today's call. You may disconnect at this time.