Curtiss-Wright Corp (CW) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2006 Curtiss-Wright Corporation earnings conference call. Good day, ladies and gentlemen, and welcome to the third quarter 2006 Curtiss-Wright conference call. My name is [Carol], and I will your coordinator for today. [OPERATOR INSTRUCTIONS]. I would now like to turn the call over to Mr. Martin Benante. Please proceed, sir.

Thank you, Carol, and good morning, everyone. Welcome to our 2006 third quarter earnings conference call. Joining me today is Mr. Glenn Tynan, our CFO, who will begin our forum today.

Thank you, Marty. If you do not have a copy of the earnings release which was issued yesterday, please call Ms. Debra Tory at 973-597-4712, and she will be able to e-mail or fax a copy to you and add you to the Curtiss-Wright distribution list for all future price Lee releases.

Before we begin, please note that we will make certain forward-looking statements on today's call. Such as statements about the Company's confidence 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 statement 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, and industrial companies. Please refer to our SEC filings under the Security and Exchange Act of 1934 as appended for a more thorough row explanation of risks and uncertainties, as well as further information relating to our business.

For our agenda today, Marty will open our discussion with an overview of Curtiss-Wright's third quarter 2006 performance, and then I will review our segment performance and financial positions. And then finally Marty will conclude our discussion with an outlook for the fourth quarter and full year 2006 and then open the call for your questions. Marty?

Thank you, Glenn. I am pleased to report that in the third quarter 2006, sales increased 15% over the prior year to $312 million, including 12% organic growth. Our sales growth during the third period was driven by 20% growth in our commercial markets. In particular, oil and gas, commercial aerospace, and power generation, as well as solid growth in our defense market of nearly 10%.

Our operating income for the third quarter of 2006 of $37 million, increased 15% over the prior year. Consolidated operating margins were essentially flat as compared to to the prior year, due to negative impacts of FAS 123, extensions, and higher pension expense. Our segment margin of 12.8%, which includes the noncash FAS 123 expenses shows an improvement of 40 basis points from 2005. Our sales growth was led by 28% organic growth in our oil and gas market.

In particular, our Delta valve Coker valve continues to attract new market share due to its revolutionary design and cost-effectiveness. In addition, this market continues to have high demand, as fuel prices continue to drive increased capital spending throughout the industry. Our commercial aerospace market was up 17% in the third quarter, benefiting from improved OEM deliveries, and healthy commercial aftermarket demands. Additionally, we experienced 23% growth in our power generation market, primarily driven by increased orders from plant outages. Overall our market leadership continues to generate strong orders that provide very profitable returns.

Our defense market remains strong, driven by continued momentum in ground defense, and our embedded computing group. Our third quarter performance generated net earnings of $20 million, or $0.46 per diluted share, up 16% over the prior year. New orders increased 17% over the prior year, and our September 30th backlog of $893 million increased 11% from December 2005.

I'm extremely pleased with our third quarter performance, which was achieved despite an increase in noncash charges and several market changes which Glenn will speak about in a moment. Now I'll turn the call over to Glenn to discuss our detailed segment performance and our current financial position.

Thank you, Marty.

In our flow control segment, sales for the third quarter of $130 million were up 16% over the prior year quarter, including strong organic growth of 11%. Our top line growth was driven by continued high demand in the oil and gas market, and an uptick in orders from the power generation market for domestic plants. Operating income for flow control increased 2% compared to the prior year, resulting in a margin of 10.8% for the third quarter.

Business integration costs relative to our 2006 acquisition, higher program investments in commercial markets, and higher material costs all contributed to margin pressure during the quarter. In addition, this segment was impacted in 2006 by FAS 123 expenses that were not present in 2005.

In our motion control segment, sales of $126 million in the third quarter 2006 increased 14% over last year, and all of it was organic. Higher sales of embedded computing products, primarily to the ground defense market, and continued high demand in commercial aerospace market, offset lower sales to the military aerospace market.

Operating income for Motion Control increased 37% in the third quarter 2006, which equates to a 12.2% margin. This significant margin expansion is the result of a combination of our prior integration efforts, and the resolution to cost overruns experienced in 2005. In addition, this segment was also impacted in 2006 by FAS 123 expenses that were not present in 2005.

In a our Metal Treatment segment, sales for the third quarter of 2006 of $56 million increased 15% over 2005, including 9% organic growth. Higher global shot peening revenues in virtually all of our commercial markets, primarily aerospace and energy combined with strong demand from the heat business in our industrial markets contributed to this growth.

Additionally our acquisition of Allegheny Coatings boosted coating sales to the auto industry. Operating income increased 21% over the prior year, primarily as a result of the higher sales volume.

On the corporate level, we continue to have higher pension expense versus the prior year. In addition, our interest expense is also higher than the prior year, due primarily to higher average borrowing rates during 2006.

Regarding our effective tax rate, we recorded a small tax benefit in the third quarter. In addition, we expect to have another tax benefit of approximately $1.5 million in the fourth quarter. This equates to a full year nonrecurring tax benefit of approximately $5.4 million, or $0.12 per diluted share. As a result, we now expect our full year 2006 effective tax rate to be approximately 32%. We are reaffirming our full-year 2006 EPS guidance of between $1.80, and $1.90 per diluted share.

During 2006, we have had to overcome several market challenges. Primarily unfavorable foreign currency translation, material price increases, as well as the integration costs associated with our 2006 acquisition in our Flow Control segment. These market challenges are anticipated to equate to approximately $0.12 per diluted share for the year. These challenges are expected to be offset by the nonrecurring tax benefits, enabling to us to maintain our EPS guidance range.

Our free cash flow, defined as cash flow from operations less capital expenditures, was $13.4 million during the third quarter. We reaffirm our 2006 free cash flow guidance of between 65 and $70 million, however, we will most likely end up closer to the lower end of this range. Depreciation and amortization was approximately $13 million in the third quarter, and capital expenditures were approximately $11 million. Our balance sheet remains strong, with working capital of $328 million, and total debt outstanding of $391 million as of September 30th, 2006. For a total debt to book capitalization of 35%.

I will now turn the call back over to Marty. Marty?

Thank you, Glenn. Our stern third quarter performance is indicative of our accelerating growth and operational execution we anticipated in the fourth quarter to achieve our full year targets. Our top line growth is fueled by high demands in nearly all of our commercial markets, and continued strength in the defense market. In particular, our gas and oil market is benefiting from strong product performance and strategic marketing expansion.

As I mentioned in our last call, this month we completed the first scheduled maintenance on our very first Delta valve Coker valve installed in September 2001. After five years of operation, the valve functioned continuously with no maintenance requirements, as well as zero record safety incidents, and no maintenance requirements or valve initiated down time events. In addition, the completed inspection showed very little wear and tear on our internal parts. This kind of performance and reliability provides significant life cycle cost savings to our customers, and is the reason we remain a leader in this market.

We are pursuing many more avenues for growth in the oil and gas market by leveraging our significant expertise in advanced valve, motor, and pump technologies, developed over the past 50 years for critical application in the defense market. In the third quarter, we announced two important partnerships that will unite our technical expertise in creating the world's most advanced pumps and valves with market leaders in the global oil and gas industry. Both our sub C pumping system, developed with Petrogras and marketed with Cameron, and our high-speed loaders which drive dresser-in integrated compressor system unmatched performance and reliability with superior cost efficiency.

While these programs have just been launched, we are confident the continued high demand for natural resources production should result in significant market growth for us over the next few years. While the oil and capacity market continues to dominate current market demand for energy, as you well know we are well positioned for a resurgent and nuclear power demand due to its low cost and lower impact on the environment. We continue to generate strong growth in this market from domestic plant maintenance and upgrade projects.

Additionally, we are prominent in the development of generation 3 reactor designs that we anticipate will produce significant orders for international and domestic new productioNPROgrams. Our discussions with China in particular are moving along, but as you can imagine, the timing of such large products is hard to predict, and while commercial aerospace continues to generate plenty of headlines, we are quite satisfied with the study, manageable growth and cycle is generating. Not only are our core products increasing on such platforms as 737s, our recently awarded product lines are beginning to ramp up.

While we continue to evaluate and make targeted investment in new programs such as the 787, we remain sharply focused on making our existing business efficient through operational excellence programs such as Lean, Six Sigma, as well as growth global sourcing programs. These efforts contribute meaningfully to our overall profitability on an ongoing basis and keeps us in the top tier of our peer group year after year.

Finally, as we indicated to you in our initial guidance in February, our defense market remains healthy, and our solid position on key high performance platforms continues to drive revenues. In addition, the strong performance of our embedded computing group has provided significant increases in overall sales and market expansion. In the meantime, we're investing our capital in a number of internal investments, as I mentioned already, often with partners or other government funding sources to share the costs and enhance our market knowledge. While this does impact our margins in the short term, we feel these investments should provide long term opportunities and continue demand for our advanced technologies.

We are looking forward to continuing to generate strong profitable growth in 2006, and to provide our investors with superior returns. At this time, I would like to open the conference to questions.

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of Myles Walton with CIBC World Markets. Please proceed.

Thanks. Good morning.

Good morning, Myles.

I was wondering if you could just dig a little deeper into both flow control and motion control in respect to their two margins, which kind of a trading places phenomenon here in the quarter, and in particular on flow control, if you can talk about how much of an ongoing cost the integration of NPRO will will be say in the fourth quarter , and within motion control, it sound likes this is pretty sustainable in terms of performance that you have put together, so if you can just talk about the sustainability there.

Okay. Let's start with motion control first, and Myles, we'll go a little bit backwards in going through the integration costs that we indicated we had last year. That would produce better returns in the embedded computing group this year, and that's exactly what you're seeing taking place, that the profitability of the embedded computing group, which has always been in the third and fourth quarter, obviously has improved based on those integration costs that we experienced last year.

As far as motion control is concerned, there again we have an integration cost with NPRO. One of the -- we had originally thought that we would do it over a one-year period, but because of the high demand of oil products, and increased back log for 2007, it was better for us to do that integration and consolidation of and NPRO this year, so the third quarter consolidation cost was about $1.1 million, so had we not had that, our margins would have been about 11.6%, not including the stock option expense.

We do not see a lot of consolidation costs in the fourth quarter. It will be minimal. So basically the consolidation will be done this year, and the biggest impact was in the third quarter.

Okay. That's great. And then maybe one more, and then I'll get back in the queue. Marty just a question any the market for embedded computers. General Electric has made some consolidation moves here in the last year. Are you seeing anything, or do you anticipate any greater competitive pressure as GE moves further into the market, or are you not competing really with them on a head-to-head basis?

In the industrial side we don't really compete with them on the head to head basis, but on the military side, we do. I don't think that we're going to see a lot of difference because they've entered the market. We went through our internal integration of companies, and we went through that already. I think they'll have some of those pains that they're going to hit, so, we see very good things in that embedded computing market. We indicated at the beginning of the year that would grow double digits organically, and the profits would be also double digits, and that's exactly what's taken place.

All right. That's great. Thanks a lot.

Thank you, miles.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Eric Hugel of Stephens. Please proceed.

Glenn, could you address the drop off of the R&D spend in the quarter. It was abnormally low, like 2.3%. I haven't seen a level like that since second quarter of '02. Was there anything unusual in there that we should kind of account for?

Yes, Eric, actually there is one -- a couple of things. Our R&D will fluctuate from quarter to quarter, but we generally spend anywhere between 3.5 and 4, generally hover around 3% of sales in R&D spending. Now what flows through the R&D expense line to a great degree would be driven by the levels of funding and times of funding. In particular, in the third quarter, we received a pretty sizable funding from Westinghouse for AP1000 design, and that's really the anomaly in the third quarter.

And how much was that?

That was --

Roughly?

North of a million and --

Million and a half around?

Yeah, I don't really have the exact number. It was a good number.

So that would be basically an offset, because you -- if I remember right, you spent some money last quarter on Westinghouse.

Yep.

And now you've got the money, and that's sort of an offset to monies that you actually spent.

Yep, that's correct.

So net net if you averaged it out, last quarter was high, and this quarter was abnormal low.

Right. Our R&D spending doesn't really change. Again what you'll see fluctuate through the P&L will be directly correlative to funding levels.

Great. I was hoping that was your answer, because that would have brought up other questions.

Let me answer are the other questions it might have brought up, give you the business side of it. We have not -- in fact, we encourage all of our companies to develop products from an internal basis. The motion control for the first nine months put out 180 new projects, new programs with new products. If you take look at all of the recent announcements on the pumping system, our joint venture with Cameron, our new motor technology with -- actually it's our old technology, just packaged in a different way, with Dresser-Rand, and remember the control-ride draw mechanism you saw we had our presentation in EMV, we're actually shipping that 40,000 pound rector head control drive mechanism today. So we don't discourage R&D spending. We are putting out more products this year than we've ever put out before.

Great.

In also happens that some of the new programs that we have, the sub pumping station was actually purchased by Petrogras before it was even developed, and the same thing is true of the motor technology, so you're starting to see some of those -- and those products are at reduced margins. You're starting to see some of those margins impact flow control, but it's dollars well spent today for what we think the market potential -- we think the market potential of both the sub C pumping station in a few years will be about 25 to $50 million, and also the high-speed motor compressor would have the same market size for us in the same time frame. So it's, I think, money very well spent today for future gains tomorrow.

Great. Marty, can you address, or Glenn, can we go through the segments, I guess, sort of in terms of where you're looking for right now in terms of sales and margins? Could you sort of just update those numbers?

Eric, I don't think we have any -- any changes to our previous guidance right now for sales. And/or margins. I mean, we'll be close to where we said on both flow control and motion control. We're going to -- obviously we've got some things to overcome, but we're still expecting to be -- round the same --

So you think even with motion control is where -- and in flow control -- even just to make your 11.5% range, that would imply you can do about 15, 15.3 in the fourth quarter? you think that's doable? I've never seen margins that high.

I think we're going to be closer to the 11% range, a little higher on flow control. Motion control in and around the same thing. they have the big FX thing to get over, and FAS 123, so it's going to be hard to get higher than that.

So about 11% in both motion and flow, and you're still comfortable you're at the upper end of the 18 to 20% range in metal treatment?

Yes.

Great. Okay. Thanks a lot guys.

Let me just say one thing. When you look at year to year to year.

Yes.

As we indicated in our -- I guess our first quarter, when we went through our guidance in the way things would work its way out, we said we would have a lot -- we would have a lower first quarter, or first half this year than last year.

Yes.

Which we did. And we would have a better third quarter than we've had, and that's exactly what took place. If you look at where we are right now through nine months, and you look two years back, the amount of sales that we're required to ship is about 29%, and the amount of profit that we have to make is about one third, and that's exactly where we were in 2004 and 2005.

Okay. Actually, I have one more question. I was reading something with regards to embedded computers, with regards to, I guess, European environmental laws regarding lead, using lead solder, and I guess sort of impacting potentially the business, because you're not going to be able to use lead solder in Europe anymore, and that might cause problems for using commercial off the shelf, because the replacement, or whatever you use in place of lead is not especially reliable?

Right.

Can you sort of talk about what the implications for that are?

There's very little implication for us. We're able to solder with very many different materials. We've already qualified products that do not have lead soldering, so we don't see thats a a problem for us.

Great. Thanks a lot, guys. Good quarter.

Thanks a lot.

Your next question comes from the line of Chris Donaghey with SunTrust. Please proceed.

Hey, good morning, guys.

Hi, Chris, how are you doing?

I was wondering if you could walk us through the guidance for evenings for the year, again, the $1.80 to $1.90 pretty wide range now with a couple of months left, so could you talk about what moves the needle one way or the other?

Sure. As I was trying to explain in the -- where we were talking before, we have a couple of given things moving around here. FX being one of them, the level of price increases, these things we've been talking about that are going to impact us. Again, offset by the tax adjustments that we mentioned as well. So we're kind of still in that range. I know it seems a little wide, but we give ourselves a little bit of a --

Chris, we don't really see the needle moving above it or below it. We see the needle being right in the middle of it. With some good upside possibilities. We have good back log.

The only downside you could ever have right now, based on what we already have in backlog, is lack of raw material, and that's the only thing that would cause a hiccup, but we don't see that either. So there's really not much that's going to move the needle. It's going to stay in that area. And we do have, I would say, more upside potential than we have a problem.

Okay. And just to clarify on the R&D line, basically what you're saying is R&D resources were moved from internally funded R&D to a funded R&D contract for Westinghouse is the big shift there?

Well, clarify a couple of things. There are a couple of things when you look at R&D expense. From time to time where we are being reimbursed for our internal development. It will show up as a credit in R&D, so it will show up as a little bit of a distortion. The other thing that happens we refer to investments and new programs we referred to in our press release. I also want to clarify that.

In those cases, this could either relate to developmental contracts, or it could relate to low rate initial production contracts, where our engineering costs get posted up through inventory, and they flow out through cost of sales, and really affect our gross margins. So when we talk about those kinds of investments, really -- you don't really have to look at the R&D line. Those kinds of investments you see rolling out through -- , through our margins, because contracts lower margin, be and a lot of times at the low rate in initial production contracts.

But those engineering costs flow up and out through our P&L in a different way. And again what I want to reiterate is our R&D spending remains consistent. We have many, many engineers. We don't fire them each quarter and hire them back the next quarter. They're there, but they're working on these other kinds of projects that flow through our financial statements differently.

All right. That's what I assumed you had meant. and finally if you could give us on update what you're seeing on Airbus, given their continuing issues.

We -- obviously they're having problems on the A380. Right now when you look going forward, it's not going to really affect us this year. Any effect that it has is minimal, and right now we're really not projecting any A380s next year. We don't feel that -- right now I guess they're projecting four. We're projecting zero. So we don't see that as being a big problem for us.

Okay. Great. Thanks, guys.

All right.

Your next question comes from the line of Robert Stallard with Banc of America. Please proceed.

Just a few questions to follow up here. On the same line on the A380, has there been any developments on the 787?

I'm sorry?

Well, you commented about your progress on the A380. Could you give us an update on your progress on the 787 program.

The 787 program is going very well for us. We still haven't made some announcements, for some reason they're being held up, bust right now we have about 150,000 on that aircraft, and things are going well.

Okay. On on the automotive exposure you have, are you seeing any signs of weakness coming through from either the U.S. or the European market?

We see very strong sales in the European market. As we indicated in the fourth quarter, or on the fourth quarter call, we're getting more market share on the automotive side, so we actually have been able to stay even there, but there is obviously some problems with the United States automakers, but for our sales, our sales have not been affected by it.

Okay. Looking into 2007, have you got any initial thoughts for where we could see the top line and operating margin going?

Not right now, but, we always look for double, double growth in sales and double growth in -- double-digit growth in earnings per share. We feel pretty good that 2007 is going to look pretty good.

Okay. And just finally, on the cash deployment front, are you seeing any interesting acquisition opportunities out there, or are you going to take pause, given some of the deals you've been making over the last six months?

It's -- to be honest, the environment out there has changed quite a bit. There's lot of hedge fund money out there, and properties are being bid up substantially. We see some interesting properties. We've missed a couple, because of price. We're not willing to pay the multiples that I guess the hedge fund people are paying.

Yes.

And I think that will happen, is there's going to be a time when I think our principals and how we run our business is better than possibly how those hedge funds are getting set up, and those businesses are going to come up for sale three or four years from now, I think, at better prices, but it's not that we're not inquisitive. I don't think for the price people are paying right now, it's not worth it.

Can we expect to see maybe a more balanced cash deployment strategy going forward, perhaps looking at share buyback or a high dividend?

We haven't looked at that right now, we don't -- we like increased dividends. We normally don't buy back shares, because we would like to have some powder for acquisitions, because they'll come up.

Okay. Thanks so much.

Your next question comes from the line of Bob Fetch, Private Investor. Please proceed.

Bob Fetch from Lord Abbett. He just touched base on acquisitions. Is that pretty much true across your selling segments, that you're finding valuations to be dearer than you would like them to be?

Yes, mostly in the flow control and motion control, the answer is yes. I think you still find good value in the metal treatment.

Yes.

The others, flow control and -- yes, we have seen that.

Okay. One thing that clearly jumps out is the balance in terms of particularly revenue performance that you reported in the third quarter. In terms of your -- some of your corporate goals and visibility looks out the next few years, you showed 14, 15% across the board here, obviously there's some acquisitions in them, as well, but how would you differentiate the potential that you believe exists in the three areas? If you can speak to that for a moment.

I think the -- we've always said -- Curtiss always has life after death of the military run up. When you look at flow control, they have the most commercial businesses where if you look at nuclear power and gas and oil, they're going to be doing very well for themselves. If you look at the military side, just for flow control, the ship building right now, especially in submarines and aircraft carriers, which can be somewhat -- can fluctuate, this year is actually the lowest year, and ship building, you actually start going up, and 2008 will be a very good year. That's a possibility of two submarines.

So flow control is very well positioned, especially in the gas and oil, which we feel is going to go on for the next few years, and nuclear power, we already see the benefits of that, and I've seen very strong growth there.

When you look at motion control, commercial aerospace is going to do well. We are very well positioned with Boeing. Boeing has -- doesn't have some of the problems that Airbus is having right now. We see them being strong until about 2010. Embedded computers are doing very well on them. We also see a very good market there. But I think that market is going to continue on, just by the nature of -- as high performance platforms get updated, electronics goes outdated, or new program enhancements, they'll do well there.

And metal treatment, as we've always said, as long as the commercial aerospace market, and there's a good general economy, they'll always keep chugging along, and we see that continuing on for the foreseeable future. And some of the new programs that we've put out, we think that will take some momentum to get there, especially the couple that we just announced.

We see very good potential for those new products, going out past the -- 2010 and beyond that time frame.

So the net net is that as you kind of walk through some of the individual pieces, that, double digit compound growth is possible for at least the next three, four years in each of those areas?

We feel very strongly that our organic growth will be in the double digit area, as it is almost this year.

Right. And in embedded computing, what would you say most differentiates you from your competitors there? Why are you winning the business you are?

I think that we've made the appropriate moves that this Company needed to do to position ourselves for the future. And that's about all I'll talk about.

Okay. And then getting back to nuclear. Have you been able to size the opportunity? I mean, I've seen some numbers thrown around, in terms of what potential revenue contribution might be per reactor to you folks.

Right.

Either a three or four, followed by zero. Are they ballpark numbers?

Yes, they are.

And I know we've been waiting for China to make their decision, but would you be represented on any reactors no matter who is the supplier?

Right now we are working with -- well, GE, definitely. Westinghouse, obviously. We're working with AREVA, and there's another player that will be coming in that's Mitsubishi, and I don't think that will have much content there, but for all intents and purposes, we'll have something on all of the prominent reactors that are there right now.

So we should just expect more of the same, you've got a business that is broadly diversified, reduces any significant business risk, and most interesting you are exposed to some meaningful long cycle businesses that are in early stages of their up cycles, or yet to begin, which really gives you some good out year visibility, as well?

That's true.

All right, thanks, Marty. Thank you.

Your next question is a follow-up question from the line of Myles Walton of CIBC World Markets. Please proceed.

It's getting closer. Hey, Glenn, a quick one for you. On pension, as you look out to '07, I think your mark to market date was October or September, could you give us an case case of what the pension expense looks like in see 07?

I cannot.

You cannot.

We have not gotten that number yet.

Is it safe to assume that it's done?

I don't know. Right now I thought, we were going to bring the -- we were going to obviously change the discount rate, but that's a little bit in a flux right now, but I would say it's going to be slightly down, or the same. That's probably my best guess at this point.

That's fair.

Sorry. We'll have more information the next time.

That's fair. And could you give us the bookings by segment? Do you have that, or maybe the backlog by segment, either way.

I'm sure -- sure we do.

And while you're looking for that, maybe Marty, as you look to the fourth quarter, could you give us some commentary on your anticipation for bookings? Was there any pull forward here in the third quarter, or do you anticipate any good quarter of bookings in I in the fourth?

No, we expect another good bookings in the fourth. What happens in the fourth quarter is we have most of our military, especially on the navy side, will come through, so that will be very good. Also, outages for nuclear power plants will also generate strong new orders. gas and oil has just been phenomenal. We've had either a 68 or 86% increase -- I think it's 58% over last year, and we continue to see good -- good bookings there. So we think the fourth quarter is going to be very strong from a bookings standpoint.

Hey, Myles, this is Glenn. The backlog at September 30th is about $430 million for Motion Control. $460 million for Flow Control, and a whopping $3,000 -- $3 million or metal treatment.

Okay. That's great. And so -- and then the final one for you, I guess -- I had it here. The cash flow, Glenn, in the quarter -- and maybe this is is more of a longer term question. Is there anything you can do within the structure of your business to make the cash more level throughout the year, or is it just the way that things are flowing within your business? Obviously I know that you're building probably some raw material inventories, but is there anything you're doing internally to try and maybe kind of pull that cash performance throughout the year, rather than run for the roses in the fourth quarter?

Well, there are -- yeah, there are -- that phrase, you hit it right on there are -- yeah, there are -- you hit it right on the head. I mean we constantly struggle with this. We're always negative in the beginning of the year. It's lower. It's a combination of, you know, we drive hard in the fourth quarter, and, you know, go into the first quarter, it's a lower sales. It's all our annual payments. So we start out of the gate low every year. We always try to get it quicker. This year we got hit with a variety of different things in the inventory area that we really didn't really expect. We're a little bit behind where we would love to be.

Between material price increases in general driving up your inventory, we made bulk purchases to try to mitigate that -- the price increases, and just long lead team purchases for a company like Delta valve, who is going gang busters, and they have long lead times, , they got the orders in house, so we have a lot of things, that didn't help us get to where we -- we want to be, but that's our cycle. It's almost like -- unfortunately like our sales, and we are frying to negotiate, you know, better terms constantly with -- on the government contracts, milestone billings, progress billings, things that. We have a lot of different things going on. But there are a lot of things, just like the rest of the our business that affected our -- our -- cash this year, but like I said, we expect that we're going to have a big cash fourth quarter as well.

Okay. That's great.

But there are a number of things going on.

Okay. Thanks.

Your next question sir is also a follow-up question from the line of Eric Hugel with Stephens. Please proceed.

Hey, guys. Marty, I guess you talked about, I guess in answer to one question that -- I mean, I guess it sounded like slowdown potentially in doing acquisitions, because they're getting pricier, and, you're not willing pay that much, yet you sounded very comfortable in your -- in your double digit topline earnings growth expectations. And I think maybe you hit it in regards to a -- to a portion of the business in answer to Bob's question, but should we be expecting most of this growth -- because you've been benefiting significantly in terms are of your growth, historically, from acquisition, should we be expecting sort of overall double digit sort of organic topline growth for going forward into '07? Is that -- is that doable?

Yes.

Okay. Great. And also I guess in the fourth quarter -- I mean sort of -- thinking about maybe like risk to plan, I think you threw out sort of a number last quarter, but sort of how much of your expected sales do you already have in backlog?

Basically all of it.

So it's a done deal, pretty much?

It's -- it's as we are -- the last two years and the same thing this year, it's a matter of execution, and we have always been able to execute. I did say there was an outside chance about raw material. That's the only thing because raw material has not only gone up, but lead times have gone out, and we actually have missed some shipments based on lack of raw material, but obviously we know what to go after, and, we intend to get there.

And I guess you guys maybe have a little better insight -- I mean I read there was a -- there was a newspaper article with relation I guess from the Journal back in September with regards to them short of talking about when they were going to order nuclear power plants, and I guess there was a U.S. trade representative that stated pretty firmly that it was still on board for the end of this year. Is that still what you're hearing?

For the United States, or for --

Of course they're going to announce something, either -- either they're going to announce a Westinghouse deal or an AREVA deal, but something is is going to be announced before the end of this year. Is that still what you're expecting?

We said we're expecting something by the end of the year. We're in negotiations right now, so, yeah, we do, but, the first quarter of next year, but the time frame is coming where they have to make a decision. Based on the lead times and when they want plants be to put in. And their requirement for power, we would have thought that the decision would have been made already, but --

Right.

So, yes, we think that it should happen by the end of the year, based on what they're looking for, but I wouldn't be surprised if they announce sooner, or announce later.

When you say you're negotiating with China, are you talking Westinghouse, or do you have direct negotiations with the Chinese in some way.

Yes, we do.

Can you explain sort of that -- I mine why -- if you're just a component or components into the Westinghouse design, sort of what type of negotiations would you have with the Chinese, others than sort of just sheerly technical.

Well, no, it's top to bottom. It's also pricing. There's offset requirements. Those offset requirements are negotiated. Everything there is being negotiated. Even though we are partners with Westinghouse, we are a significant portion of the unit, and they are looking for data rights and a whole slew of things.

Are you at risk? Because I mean the one thing the Chinese really want is to be able to -- is the technology. How do you protect yourself so that, you know, 5 years from now China isn't knocking off your pumps and valves?

Because what you do is -- it will be related only to their -- their -- their power plants. Not be allowed to sell it outside the country.

So basically you'll sell pumps and valves for the first, or whatever four, if Westinghouse wins, and then you're not going to get anymore, because China is going to build them internally?

No, no, you would get a royalty.

Okay. Would that be --

There are several different aspects of the negotiations that have different -- different possibilities of how long you manufacture and when you turn things over, so that's very hard to describe right now, because it's not ended.

But needless to say, your royalty payment for that design would be quite -- would be quite significant.

It would be very significant, yes.

That sounds good. And I guess as the last one, you talked about, you have contact with GE, with Westinghouse. I was surprised -- I guess when I had spoken to you last, you really didn't have much or anything with AREVA. Could you sort of describe your relationship with them?

Right now it's a beginning relationship. We are looking to supply some hardware right now in France, and it's going to be a relationship that we're going to have to continually develop, but we don't have -- because you remember the -- French built all their power plants by themselves with American help, but they were companies in France. If AREVA is looking to come to the United States, obviously they're going to have to have United States contractors associated with them.

Yes.

So I think -- and there's not too many people who do that. Okay? so I think there will be a mutual type of a relationship for them needing United States contractors, and obviously our desire to want to be on part of their plants, because we feel that they'll -- they will have a portion of what takes place throughout the world.

So you -- you would have, I guess, in the near term, or over the next five years or say, if AREVA built some reactors here in the state, you might get some content, but let's say AREVA won the China order, would you benefit from that potentially, or is that sort of already taken by these French companies that are working with them already?

No, net income we would have some portion, but it would be nowhere near what we have with Westinghouse.

Okay. Thanks a lot, guys.

There are no additional questions at this time, sir.

Okay. Well, I would like to thank everybody for joining us today, and look forward to our year-end conference call in February. Take care, everybody.

Bye-bye.

Thank you for your participation in today's conference. You may now disconnect. Good day.