Curtiss-Wright Corp (CW) 2008 Q3 法說會逐字稿

Please stand by, we're about to begin. Good day everyone, welcome to the Curtiss-Wright Third Quarter Earnings Conference Call. Today's call is being recorded.

For opening remarks and introductions, I'd like to turn the call over to Martin Benante, Chairman and CEO. Please go ahead sir.

Thank you very much Melissa. Good morning everyone. Welcome to our 2008 third quarter earnings conference call. Joining me today is Mr. Glenn Tynan, our CFO, who'll 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 Torry at 973-597-4712 and she will be happy to email or fax a copy to you and add you to the Curtiss-Wright distribution list for all future press 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 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 FCC 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 agenda today, I will provide an overview of Curtiss-Wright's third quarter 2008 operating performance and then Marty will discuss our strategic markets and full year outlook. After the formal remarks, we will open the call for questions. So let's get started.

Curtiss-Wright had consolidated sales of $436 million during the third quarter of 2008, an increase of 10% over the third quarter of 2007, including solid, organic growth of 7%. Our organic sales growth was driven by contributions from all three segments including 8% at Flow Control and Motion Control, and 4% at Metal Treatment. From a market perspective, our commercial markets grew 8% overall and 5% organically, including 39% organic growth in the power generation market and 7% organic growth in the general industrial market, partially offset by lower sales to the oil and gas market.

In addition, our defense business grew a healthy 14% overall and 12% organically in the quarter, led by 37% organic growth in ground defense and 10% organic growth in aerospace defense, partially offset by flat naval defense sales due to the timing of the procurement cycles. In our Flow Control segment, sales increased 13% due to strong organic growth of 8% and the incremental sales of $10 million from our third quarter 2007 acquisition.

From a market perspective, the sales improvement was driven primarily by strong organic growth in our power generation and in general industrial markets, slightly offset by lower sales to the oil and gas market due to the impact of the hurricane season and general economic conditions. The growth in power generation was driven by higher revenues for our reactor coolant pumps for the AP1000 program.

The strong commercial markets are evident in Flow Control's backlog which is approximately 80% commercial and 20% defense at September 30th. In addition, we anticipate an increase in naval defense orders in 2009 as a result of the submarine and aircraft carrier procurement cycles. In our Motion Control segment, sales increased 8% nearly all of which was organic. The increase was 11% excluding the divestiture that closed in the second quarter of this year. The key driver of the organic growth was strong sales of our embedded computing products for tanks and light armored vehicles across the major platforms we serve, including the Bradley Fighting Vehicle and future combat systems.

In addition, we had higher sales to the aerospace defense market driven by the F-22, F-16 and V-22 programs. The strong defense market more than offset the impact in commercial aerospace of the early stages of the Boeing strike and extended delays on the Boeing 787 and Eclipse programs.

The third quarter includes only three weeks of the Boeing strike, and as you are all aware, that situation will have a more significant impact on our fourth quarter results. In addition, we anticipated a continual ramp-up throughout the year of the Eclipse and Boeing 787 programs that did not materialize.

Motion Control's backlog is balanced with approximately 2/3 defense and 1/3 commercial at September 30. Sales in our Metal Treatment segment were up 4% from the prior year, nearly all of which was organic. Higher Airbus production drove overall higher sales in commercial aerospace, but was slightly offset by the impact of the Boeing strike in September, and as expected, weakness in the automotive market resulted in a 9% decline in the quarter in that market.

Our consolidated operating income of $48 million in the third quarter of 2008 increased 8% over the prior year, including 11% organic growth. The organic operating income growth was driven by our Flow Control segment which achieved 30% and healthy contributions from Motion Control at 10% and metal treatment at 6%.

Our consolidated operating margin in the third quarter of 11.1% benefited from strong segment performance but was negatively impacted by a foreign currency forward transaction, related to our acquisition of the VMETRO. We entered into this transaction in September in order to limit the downside currency risk of a weakening US dollar versus the Norwegian Kroner.

Due to an unusually volatile currency market fluctuation, there was a sharp strengthening of the US dollar after we entered into the transaction. In the end, the company realized the net cash savings of, and a reduction in the purchase price from the offer date of $4 million and $7 million respectively. However, as mandated by FAS 133, we mark to market the transaction at September 30 which resulted in a $1.8 million pre-tax charge in Q3 and will result in an additional $1.4 million pre-tax charge in Q4.

On a segment basis, Flow Control's operating income improved 30% overall, including a 90 basis point margin improvement, versus the prior year quarter. The improvement was the result of higher sales previously noted, improved profitability on several long-term contracts, and lower R&D expenses as costs relative to the AP1000 design in 2007 did not reoccur. In addition, Flow Control recognized a negative inventory adjustment of approximately $1 million in the third quarter.

Overall, our commercial businesses are generating strong margins while our defense businesses are at lower than normal margins due to the lower procurement of our traditional Navy programs and higher development work on the CVN78 and DDG 1000 programs.

In our Motion Control segment, operating income increased 10% organically over the prior year quarter, and margins were essentially flat. Demand for our embedded computing products produced solid results that were materially offset by the beginning stages of the Boeing strike and more significantly in the third quarter, the extended delay in the ramp up for the Eclipse and Boeing 787 programs.

Foreign currency translation positively impacted operating income by $700,000 or 50 basis points in the quarter. In our metal treatment segment, operating income was up 6% from the prior year, generating a 40 basis point margin improvement, almost all of which was organic. The higher sales volume led by increased Airbus and aerospace defense business drove solid performance but was somewhat offset by lower sales in the automotive market.

Consolidated net earnings of $28 million or $0.60 per diluted share for the third quarter of 2008 equates to 9% growth over the prior year. This bottom line performance was achieved despite absorbing a significant increase in non-segment operating expenses as well as a 56 % increase in corporate pension expense offset partially by a 14% decrease in interest expense.

New orders received in the third quarter of 2008 were $442 million, a decline of 35% from the prior year quarter, as a result of the large AP1000 order from China received in 2007. Our backlog remains robust at $1.7 billion, up 33% from December 31. Overall our booked to go ratio is a healthy one times in the third quarter.

Now I'll review or liquidity and financial position. For the third quarter, our free cash flow defined as cash flow from operations, less capital expenditure, was a negative $8 million versus a negative $18 million in the prior year, primarily due to working capital improvements and timing of progress payments. Depreciation and amortization was approximately $19 million in the third quarter, versus $16 million in the prior year. Capital expenditures were $24 million versus $12 million in the prior year.

And as noted in the press release, we have decreased our 2008 free cash flow guidance to be in a range from $70 to $80 million primarily as a result of inventory buildups in commercial aerospace relative to the Boeing strike and program delays, and also in the oil and gas market due to a large contract for SR Oil in India that is expected to ship in 2009 and also for anticipated orders that have shifted into 2009.

Our balance sheet remains strong with $77 million in cash, working capital of $423 million and total debt outstanding of $519 million as of September 30, 2008, for a net debt-to-book capitalization of approximately 31%.

I will now turn the call over to Marty to discuss our strategic market performance and our full year guidance. Marty.

Thank you, Glenn. I'm pleased to report our solid third quarter performance which is a result of the strong demand for our advanced technologies, as well as our strategic diversification, which enabled Curtiss-Wright to continue to achieve growth and profitability in difficult economic environments. So it's very clear our core market, specifically defense and energy, provided healthy growth and profitability. While uncertainty exists in the commercial aerospace market and throughout the global economy, we are prepared to meet the challenge with our superior product portfolio enhanced operating performance.

Starting with defense, which represents just over 1/3 of our consolidated revenues, we achieved a robust growth of 14% in the third quarter and 10% year-to-date. Our ground defense portfolio led the increase with 38% growth, primarily related to embedded computing orders for the Bradley Fighting Vehicle, as well as increase actuation systems for other light-wheeled vehicles.

Aerospace defense generated 15% growth in the third quarter, driven by increased sales on the F-22, F-16 and V-22 programs. Although the defense revenues were flat in the third quarter and down 2% year-to-date, we're pleased that the president's budget was approved in September. The fiscal year 2009 defense budget funds the next Virginia Class submarine, accelerates transitions to building two Virginia Class subs per year beginning in 2011, and provides multi-year procurement of authorization for the next seven submarines.

We received additional funding for the first submarine in April and our current working year proposals for the seven block buy for non-nuclear components that we expect to be awarded in 2009. The nuclear reactor components, we have the same multi-year procurement authority, that will likely include two or three ship sets. In addition, the 2009 budget authorizes material procurement for the CVN-79 aircraft carrier construction and we expect to see these contracts in late 2009 or early 2010.

In the commercial markets, our 8% growth reflects strong demand for our advanced technologies, led by our commercial nuclear power market, which generated 39% organic growth in the third quarter. This strong performance reflects both the startup of the AP1000 China program, and increased orders for operating reactors related to plant outages and maintenance schedules.

Our facility expansion in Cheswick, Pennsylvania for the AP1000 is currently more than a month ahead of schedule and we will work on the Chinese program to advance according to plan as well as the startup for the domestic orders for three power plants. Our commercial aerospace market declined 5% in the third quarter due to the effects of the Boeing strike and extended delays in the startup of new programs, such as the Eclipse and Boeing 787. While Boeing has achieved a tentative agreement with the union, the cumulative market impact of the strike on Curtiss-Wright and all suppliers, as well as continued program delays, require conservatism in demand forecast going forward.

Our diversification has provided a significant measure of strength in our third quarter performance, but we are not totally immune to the unprecedented market turmoil and subsequent softness in the economy. Our oil and gas market declined 9% in the third quarter due to a combination of the impact of the hurricane season and some orders were delayed until the fourth quarter.

In addition to our strong operational performance, our acquisition strategy continues to enhance our portfolio of advance technologies in recent months. In September, our Metal Treatment segment acquired Parylene Coating Services which provides a critical coating technology for medical device market such as coronary artery stents. We plan to extend PCS's market reach by establishing this technology at a number of our global facilities in the future.

In Motion Control, we acquired Eketronics, a global leader in celluloid technology based in the UK which will greatly enhance our portfolio in the general industrial market. In October, we completed the voluntary 10-year offer for VMetro, one of the last largest independent high performance embedding computing businesses. VMetro will notably enhance Curtiss-Wright's products portfolio in the defense market with high density, real time processing, data recording and network storage products. VMetro also brings a significant European presence including a significant engineering talent pool, extensive sales and support team, and deep, long-standing customer relations. The addition of VMetro to our portfolio solidifies Curtiss-Wright's position as a leading global provider of organized embedded computing technology.

In summary, we're able to generate a solid quarter of growth and profitability as well as a substantial backlog of $1.7 billion that is indicative of our opportunities for our continued success coming forward. Until September, we expected a better than average year as we were performing above our expectations, but the acquisition of VMetro and the Boeing strike has required us to reduce our full year guidance.

Due to the ongoing challenges ahead, we're updated our full year guidance for sales in the range of $1.83 billion to $1.85 billion, operating income to be in the range of $203 million to $207 million and EPS to be in the range of $2.45 to $2.50.

To wrap up my prepared remarks today, I would like to reiterate how pleased we are with our performance year-to-date, and also reiterate our strong outlook for Curtiss-Wright to continue to grow sales and profitability over the long-term horizon.

I will now open the call up for any questions you may have.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, (Operator Instructions) and we'll go first to Myles Walton from Oppenheimer.

Thanks, good morning.

Good morning Myles, how are you doing?

Okay. Hey thanks for the color in the release to the individual items that are effect in the guidance. I was wondering though if you could give us maybe in the quarter and for the year what the revenue impact was of the strike as well as the 787 and Eclipse delays.

Myles, I don't have it broken up by quarter, but I do have the annual amounts that line up with those numbers that were in the press release. For the Boeing strike, it's about $12 million, for the Eclipse and the Boeing 787 it's about $10 million, $10 million to $11 million, somewhere in there.

Okay. And is it -- the VMetro lab maybe $12 million to fourth quarter; is that about right?

We think it's probably going to be closer to $14 million depending on what exchange rate you use.

Okay.

The current exchange rate it's about $14 million.

Okay. Fair enough. And you commented on some of the moving parts as far as growth in oil and gas and slippage of orders as well as the hurricane effect. Can you give us a little bit more color on the slippage of the orders in particular and should that mean that 2009 will be, you know, an accelerating annualized growth versus 2008 in oil and gas or maybe just kind of how it's going to roll into 2009. Are these things pushing out and being collected in 2009 and therefore maybe making your oil and gas growth for '09 an acceleration?

Well, Myles, on the oil and gas, I don't know if there'll be an acceleration. I think it will be, might be slightly improved to what 2008 would look like. I think what everybody's doing based on the capital markets' stress is that they're realigning their projects and taking hardware where they absolutely need it. So we are getting some slippage in 2009 and that may say that some of the business that we have for 2009 may slip into 2010 but I think on whole we'll do fine in the oil and gas industry.

Okay. And then on Naval, I just want to understand, the bookings I think you talked about now taking place in 2009 so I guess that would mean that you won't have the growth in the Defense, Naval business in 2009; you'd expect that to take place in 2010. Is that--

No, no, I think that we indicated that 2008 was the lowest for sales basis and that we'll start picking up in 2009. You know, the thing is, because we have several businesses associated in the Navy business, each one of them have different start times as far as their new orders are concerned so as we indicated, you know, previously 2009 will be an improvement over 2008 and 2010 will definitely be an improvement over 2009.

Okay. And I know that your strategic planning usually takes place in November, I think.

Right.

But maybe a couple things that you probably have clarity on or a little bit better clarity than I do, the earnings impact for VMETRO in '09, how should we think about that?

What will happen is you'll see a dilutive of the fact in the first couple of quarters and then it'll reverse itself. It'll be neutral or slightly accretive as far as VMetro's concerned.

Okay. And then maybe Glenn, on pension?

Yeah.

What should we expect in 2009?

Oh man, that's a low. Well, I'll tell you, this is where we're at. As an evaluation using September 30 was the last time we did our preliminary evaluation, so let me just say we are -- our formal evaluation date is December 31 now so we won't really have our final final numbers until January, but I'll use, as of September 30, you can probably expect $1 million increase in 2009 in our pension expense from 8 to about 9. That's holding our assumptions the same as this year, our return on assets of 8.5% and a discount rate of 6% but as you know, everything's in flux. The asset values have changed since then, the discount rates have changed so we really won't have those final numbers until January.

The ballpark, I mean, if the discount rate goes to 7%, 7.5% and market returns or your plan returns are down 20%, will that change very much what you just said about increase about $1 million?

Well right now the sensitivity on a 0.25 point so if the discount rate went up to 7% it's probably a $0.5 million benefit say, $0.25 million per quarter point.

Okay.

So that's kind of our sensitivity so if it goes up to 7 we can get 500 of that back.

Okay.

But if the asset values continue to deteriorate obviously everything's up for grabs again.

Okay.

In terms of that whole calculation, but that's the way it is as of September 30 with what we know right now.

Okay. Fair enough. And one last cleanup one on tax rates. Will you have a pickup on R&D tax credit legislation in the fourth quarter? I guess from the implied 35.7% it doesn't look like it but I'm kind of curious about that.

Yeah, there is a little bit built into there, an estimate, into the fourth quarter, so we are expecting a little bit. It's not very material though. I don't have the exact figure on hand but it's a small number.

Okay.

We have built that into the rate.

Okay. Thank you.

You're welcome.

We'll take our next question from Steve Levinson with Stifel Nicolaus.

Thanks, good morning.

Good morning Steve.

There has been some talk coming out of the Nuclear Regulatory Commission that they're concerned with some of the imported reactors in keeping control on the parts that go into them. Do you think that opens an opportunity for Curtiss-Wright to make parts for reactors that it's currently not doing?

Well, we always thought -- think -- and we have thought that we will be participating with whomever come into the United States. We even just announced that we are teaming with General Dynamics for building reactors in the United States and that it would look at off-loading or offsetting 80% of the manufacturing in the United States. So yeah, we definitely intend to participate in all of the reactor builders that come into the United States.

Specifically, do you think that helps on the coolant pumps or do you think that's something they'll bring over on their own?

The thing is that we're one of the few people that have this facility that can do that so if you're going to offset 80% it would probably include some portion of those reactant coolant pumps.

Okay, thanks.

(multiple speakers) 80%.

And how much remaining is there for you to spend on capital expenditures on the plant there in the fourth quarter and next year or is it largely done?

It's largely done. In fact, we intend to have an investors conference there, in either the May or the June timeframe. It will be completely done, machines will be in and we'll be manufacturing hardware through that plant.

Great. On V-22 and some of your other aircraft programs, there are a number of production rate increases. What are your lead times? When do you expect to see the revenue begin to ramp up or continue? When do you see it jumping on those programs?

Well we normally divert orders pretty quickly when it comes to our actuation systems in both the F-22 and V-22 and F-16 so I would imagine that we're going to see impact in the early part of 2009.

Okay thanks. Last one: It sounds like Eclipse is certainly having some problems and I guess there's a question how much longer they'll be around. I don't know where you stand in your backlog. Are there things that you could potentially have to de-book related to Eclipse?

Only sales, you know, only orders. The thing is that, realistically speaking, there's not really many programs that cause us any headache. Unfortunately, if you looked at the Boeing strike and the VMetro situation combined, we probably could have lived with either one of those occurrences taking place without the other and stayed within guidance, but Eclipse to us it's not that big a thing. The problem is you get a lot of little things that have taken place that were nip and tucking on us. That's about it.

Okay. Thanks very much.

All right, Steve.

We'll take our next question from Eric Hugel with Stephens.

Good morning, guys.

Hey, good morning Eric.

Hey, what are your assumptions for when the Boeing strike will be settled? Is it sort of they go back to work on Monday and it's just sort of, you don't really probably make up what was lost, just sort of gets pushed out? How quickly can you guys sort of ramp back up?

Well let's put it this way. It really doesn't matter what they do. It really matters what we're turned on to deliver. If you look from the beginning of the strike which was September 6th or 8th, there's basically 17 weeks till the end of the year. We were cut off immediately and now we're only going to get 5 additional weeks of shipment. So if you take the 17 minus the 5, we really have a 12-week or one quarter impact from the Boeing strike. We can ramp up very quickly. Our people are still there, you know.

The one thing, when Boeing has a strike, their people are on the other side of the fence; our people are not. Our people are inside the fence. Obviously we didn't lay anybody off. We're making hardware in other programs which pushed up our inventory but we're able to respond immediately. But realistically, everybody has, when they talk about the Boeing strike, they have a different effect. If we were behind schedule, you're going to ship more this year than some other people are. We are always line-to-line with Boeing. We haven't missed a delivery in just about 18 years. So our effect is really 12 weeks of not shipping compared to whomever else is out there, whatever else effect they would have.

I guess you're also going to have an impact, because, I mean, Boeing just doesn't flip the switch and ramp back up to full speed immediately. It's probably going to take them a month or so to get back up to speed, correct?

Well again, we're only going to get five weeks of shipment starting now. We're already worked--they've pretty much worked out the details with Boeing so.

Your expectations reflect right now sort of where thing are now as if the strike was settled on Saturday and they go back to work on Monday and start that ramp process?

Right.

Okay. Perfect. With regards to your comment earlier with Areva building a plant here and looking to get 80% US content. I guess the big dollars for you obviously you have lots of opportunities on lots of other things, but in regards to, might you have opportunities to build reactor coolant pumps for the ERP, for the European, for the Areva reactor? Is that a different technology? I mean, do you have that kind of technology or are there sensitivities to where Areva might not look to you to build that?

We have that technology. Basically that technology is the Westinghouse technology. So we do have the technology. It really comes down to what Areva intends to subcontract. We have been having discussions with them, they're very wide-ranged and we'll see what happens when the dust clears.

I mean, just in terms of ballpark, if they did come to you and say hey we want you to build this stuff, would the opportunity be potentially as large for a potential content on an Areva reactor as it would be for an AP1000 reactor?

No, I don't believe so.

Okay.

But I'm not sure--the thing is, we're not really sure what that's going to be so. It's going to be better than zero, that's for sure.

I guess so.

More than the content we currently have right now so that's encouraging so what it's going to be we'll find out.

Great, because the content you have now are the, it would be like dry rod control mechanisms and air lock types of stuff, right?

Exactly.

Okay. When would you expect for things like China and the currently on order US reactors to start to see those types of fall-on orders on just reactor coolant pumps?

We indicated that we're started to quote already, mainly safety -- some safety release valves so I'm worried about, I would imagine that we're going to start to see orders beginning at the end of this year, beginning of next year. And again, because we have so many products it's going to be very widespread as to when you get those orders. So we have over 150 technologies that we can sell so --

Okay. With regard to your pension as of 9/30, can you give us what was that between equity and debt and other investments; what's the mix? You probably don't know your returns right now. What was your return as of September 30 and do you have any inkling as what it would be like as of now?

I quite frankly don't have that at my fingertips. I think our mix is 65% equity, 35% -- our target mix. Obviously the values will change as of September, I just don't have that at my fingertips, but our target is 65/35, equity versus fixed. You know, the values have deteriorated since September 30, but I just don't know the impact. It's kind of fluid, as you know. We're just not that dynamic with our pension calculation on a daily basis. So I don't know the actual returns through September right at this moment.

Okay. And I guess with regard to thinking about as we get into fourth quarter and into next year, should we expect to see some, I mean you guys have been seeing some headwind over the last couple years because of the strong dollar--because of the weak dollar. Now that the dollar is strengthening, should we start to think about, are you guys not getting a little bit of a tailwind with regards to the Canadian dollar and now we're talking about the Kroner and some of the UK businesses?

Well I think there's no question we should see some favorable activity in the fourth quarter for sure. The rates are, the Canadian dollar rate is unbelievable at this point so for once, which is quite frankly what we predicted at the beginning of the year was going to go this way. It's probably one of the first times it actually did get better throughout the year like we kind of budget -- but we have set preliminary rates, we haven't set our final rates for 2009 for obvious reasons. We wait till around now, around November to see where they are so but I think you're going to see some favorable activity year-over-year heading into next year. The rates are favorable as compared to the share for sure.

Great. Thanks a lot, guys.

All right.

We'll take our next question from Karl Oehlschlaeger with McGorry Capital.

Hey good morning, guys.

Good morning Karl.

Would you, you had 7% organic growth in the quarter when you think about how that's trending and given all the puts and takes, that's kind of difficult but what you think, how do you think the next several quarters and into '09, how that's shaping up given the economy and the aerospace market? How are you thinking about that?

Well the thing is that one of the problems with the growth is obviously come September shipments stopped, so the commercial growth should have been better. What's interesting is that the growth in the military as we originally predicted would be somewhere around 6% is extremely high right now. Organic growth is going to be fine. Even next year we're still looking that will be somewhere around the 8% to 10% area. When you really look at the products that we have, in gas and oil they are going to continue to refine heavy crude. All of our products are made improving the safety and the reliability and also to improve maintenance. Nuclear power, again you don't shut down nuclear power plants. Those programs don't get delayed because it's a 5-year cycle and you'll go in and out of a cycle anyway. Defense is going up so we look at it very strongly.

When you look at the commercial aerospace and the automotive, that's about 18% of our portfolio. Backlogs look good for 2009. I don't think you're going to see big ramp-ups, Airbus I don't think is going to ramp up bigger, so being somewhat neutral, automobile which is about 4% to 5% of our, or less, of our portfolio, obviously is going to decline so you're going to have the commercial aerospace probably be neutral, automobile will go down, but the rest of the market should just hang in and improve very nicely, so I'm not that worried. I think we'll be fine in 2009.

On the commercial aerospace, can you remind me what your mix between OEM and aftermarket?

We are mostly OEM.

Okay. And in oil and gas, you mentioned that it was down 9%.

Quarter to quarter.

Quarter to quarter. And that was hurricane dealings. How much was that, was the hurricane?

The hurricane in the third quarter was about $3.6 million in sales. That's really shifted into the fourth quarter for the most part.

Right. In terms of what's some of the business that's slipped because you've seen some of the customers pushing off some Cap Ex and trying to save, conserve cash. Within your product bases, are there certain areas that are getting hit more than others or is it pretty much across the board?

No, the government's not moving anything so defense markets fine. The commercial nuclear's not moving. The only thing that moved a little bit is our gas and oil.

I meant within the oil and gas there.

That's it.

Yeah, but not like Delta Valves? More than something else it's just across the board within that segment?

Exactly.

Okay, and then just finally on pensions, I'll just go back to it really quick. I don't want to get a lecture on how you do it, but with your 8.5% return assumption, what is the methodology that you used to determine what that number is given that the market's down a lot and how do you sort of spread that out if you do over the next couple of years?

It's a building block approach, not typical thing. We build it up from expected returns in each of the segments of your plan assets. Ironically, we've discussed with our actuaries that particular thing and we're still holding it at 8.5% because again it's a long-term assumption and right now we still have support for the 8.5%.

You know, we've had downturns in markets before where negative returns we held at 8%, we've had times in a 10-year cycle where they've been well over the 8.5% but been a good solid long-term thing and we don't change it very often, again because of our long-term view. And the last time I think, it was probably a couple years ago, we looked at the market and top 100 pension plans, we were in the bottom, there was only five companies out of the 100 that were below 8.5%. They were all well above 8.5%. So I think we're pretty conservative at that point.

Okay. Thank you.

You're welcome.

And once again (Operator Instructions). And we'll take our next question from Jim [Afong] with [Develling] Company

All right. Good morning.

Good morning.

I was wondering Marty, if you could just give us the percent of sales you sell to Boeing, I guess on an annual basis?

Of our 14% aerospace, about 2/3 of that is Boeing and 1/3 is Airbus.

Okay. And so the Boeing strike would impact all your businesses to them pretty much, right?

Well the thing is is that it does impact metal improvement, it impacts controls and there's some Penny & Giles but basically those are the two businesses that were affected most by the strike.

Okay. And could you just kind of, I'm not that familiar with the Eclipse, what province they're going through. Could you just kind of give me more color in terms of what your ship-set is to Eclipse and then I know they're tucking down production numbers from a very high level to current but if you could just provide some update on that.

Yeah, the thing with the Eclipse they're struggling with financing, they're having financial difficulties and the impact to us is we build into our plan and our budget X amount of ships, I don't have the exact -- down to the exact ship-set -- but what we're quantifying is the fact that how much we've actually gotten versus what we plan for. And they are struggling.

I do want to follow up on a question that Steve asked before too, with Eclipse, as well in terms of the orders we don't really have to de-book an orders per se because we have them on COD basis right now so as we get orders they need to pay for them before they get them so it won't have an impact on our backlog or any of the orders to de-book them. That's the general issue. I don't have the exact ship-sets but if originally they had, I think in broad terms say they were going to do 1,000 ship-sets in 2008, well our projection was probably maybe 300 to 400. They're actually coming in at 50 or whatever and that's the issue for us.

We've really reduced that number down from the number they originally had but they didn't even come up close to our number which was, we thought, extremely conservative.

Right. So they're going to be doing about 50 ship sets this year then, right? Yeah. So that kind of almost--

I don't have the exact number (multiple speakers).

We're going to do about 200 I think.

I'm was doing that hypothetically.

Oh okay, so you're just doing--

Yeah, they're basically way, way below what we already knocked down from their projections.

Okay. All right. That's good. Thank you. And then on the 787, it's all development work right now, what's your ship-set on there, on the Boeing--

About 2.25.

2.25 Okay. And just swinging over to Flow Control, I missed your last Analyst meeting in the (inaudible) area but I was just wondering, is there any change in your schedule to China or to the domestics in terms of what you laid out a couple years ago?

No, not at all.

Okay, and everything's on track pretty much--

Everything is on track.

Okay. And then lastly with Areva, have you sold to them before? I know you have some dollar content which you laid out--

Yes, we have sold to them before in the, mostly in the capacities we've acquired the last couple of years, it's always been our intent that we will gain content on all nuclear reactors and so yes we have shipped and sold to Areva before.

Okay. And so if you get anything for this kind of potential domestic business would be an up side to you in the Flow Control business?

Yes.

Okay.

So haven't anticipated what it will be and we've laid those numbers out. It's just that we do expect that we will be contracted over and above our traditional products.

Right. Okay. All right great. Thank you.

Bye Jim.

We'll take a follow-up question from Eric Hugel with Stephens.

Hey guys. Just an follow-up on an earlier comment you made about oil and gas market projects sort of being delayed because of issues in the capital markets. Are you seeing any of that on the nuclear power side too? I mean, those are, to be kind, capital intensive.

No. You know, realistically the nuclear power plants always go through their normal maintenance and--

I'm not talking maintenance repair. I'm talking new builds.

No, no, not at all. Not at all. I was just going to give you the scope of the entire--

Okay. Yeah go ahead.

In other words, they'd never really move things out. When things have to get done they have to get done, so we don't really see pushback when we start to take a look at around the world. You know there was a change in government in South Africa, they were going to have a decision made somewhere around the early part of 2009 which then got put off. India is also anxious for nuclear power. They went from having five reactors picked from five different reactor builders to they're going to select two and then do a down-select after those plants are put in. So there's still good demand for nuclear power.

Are you somewhat skeptical of some of this demand given the decline in oil?

No because I think when all is said and done, when the economy comes back and it will, you still are going to have a problem. You know, the thing is is that you still have oil will start being pushed up again, you're going to be pushed right back into the same situation. And everybody knows that. I mean, prior to the decline in oil, you still had problems with India and China where they just don't have enough power and they're not going to have enough power. The slowdown in those countries is going to be less than the slowdown in our countries. So I don't see that as being a deterrent to building nuclear power because if it is, it can only be for a short period of time and it's going to be a shortsighted situation.

And just one, just for bookkeeping, what are you guys looking for, I guess, with the VMetro deal now, what are you guys looking for the year in terms of interest expense?

On VMetro alone?

Well just in terms of for the year, what should we be targeting as interest expense?

For 2008?

Yeah.

Probably an extra $0.5 million.

So on top of the run rate you did in the third quarter just tack on another $0.5 million onto that; that should be a good number?

No, I think it's probably $1 million, Eric, 'cause there's two pieces of it. VMetro will probably have $0.5 million on their notes and we will have about $0.5 million on ours, so about $1 million.

About $7.5 in the fourth quarter.

I mean, we're still holding around $30 million for the year and whatever that works out to be, that's still in our number for the year.

Great. Thanks a lot guys.

Alrighty.

All right, Eric.

And we'll take a follow-up from Myles Walton with Oppenheimer.

Okay thanks. I just a couple of questions on bookings. If you can provide either bookings or backlog by segment in the quarter and also as you look at 4Q, what's your expectations for book-to-bill the last couple years, it hasn't been above one. I'm just curious if you think it would be above one in the coming fourth quarter.

Well the book-to-bill in the fourth quarter it's tough to give a book to bill because it's our biggest bill month so the rest of the quarters are higher book to bill but the backlog at September is 582 Motion Control.

Okay.

$1.48 billion is Flow Control.

Okay so both of them had about book to bill of 1?

Yeah, roughly. Fourth quarter's tough because it's our biggest sales month, biggest billing month so I wouldn't expect as we typically do it's probably a little bit below one.

Yeah, I understand. It's tough to offset that. And this advanced procurement for the second sub, I think you mentioned you got some in April; is that correct?

Yes.

And is there a second piece of that that comes in this year or is the next piece to come until you get to the block buy?

We'll probably get more this year and we'll get some pushed to the next year. Again because we have four businesses that supply to that and all our different procurement cycles, it's going to be spread around.

Okay. All right. Thanks again.

But I think, Myles, if you're trying to get to, we should have a strong military new orders coming that one of the things that you normally see because of the large dollar value of contracts is that we have yet to see the aircraft carrier come in, which produces high blips and right now we're down at the end of the cycle, so you're going to see a lot more shipments with not much new orders, then that's going to reverse itself in the next year.

Okay. Yeah, it sounded like the block buys are an '09 event and the--

(Inaudible -- multiple speakers) Aircraft carriers is going to be up there and so we're going to get a large set of new orders from those particular items.

But in the meantime your backlog is enough to support those single digit type growth reacceleration in a defense naval business?

Oh yes, without a doubt.

Okay. Thanks a lot.

We'll take our next question from Tyler Hojo with Sidoti & Company.

Hey guys. I hopped on a little bit late so I don't know if you covered this but the guidance, did you break that per segment yet?

We did not.

Would you mind doing that?

Sure. Sales were operating, I'll give you sales and operating margins. Flow Control between 925 and 930; Motion Control 640 to 650; and Metal Treatment between 265 and 265. So it's going to be around 265.

Got it.

The margins for Flow Control haven't really changed too much, about 10.7 to 10.8; Motion Control 10.2 to 10.5; and Metal Treatment would be around 20.

Okay great. And then just a little bit of clarification here since so much of the call has kind of been on Eclipse. What's your content there? I didn't think you had too much exposure to that platform.

I think it's about $30,000 a ship set.

Okay.

It's just a lot of -- the numbers are big, you know, in terms of volume.

Okay.

And realistically, it's not so much that the 787 and fire content, it's really just the multiple of little things that just nipped and tucked. The only reason why we're laying that out is obvious. We did drop our guidance, but realistically if it wasn't for either the strike and/or the acquisition, we probably would have kept within the guidance even though there has been some changes--there's always plusses and there's always minuses when all is said and done.

Okay.

We shouldn't look at Eclipse as being, it's not that big of a -- it just happens, it went to almost 0 from what we anticipated.

No, that certainly makes sense. And then just lastly, Marty I think you commented on, I think you said your expectation for commercial aero was that it was going to be flat year-on-year? Is that right?

I think so. I think even though Boeing says that their numbers will go up, you've got to have a little bit of conservatism. There are some airlines that are starting to show that weakness and there may be some spare airplanes out on the market so if it goes up it's fine, but I look at it as being more neutral than anything else.

So for your planning purposes, you're likely going to look at it as flat?

Yeah, I think so, yeah.

All right great. Thanks a lot.

Okay.

And once again (Operator instructions). We'll take our next question from Bob Fetch with Lord Abbot.

Good morning.

Hey Bob, how are you?

Very well thank you. If you could expand a bit on the metal treatment side, I think over the last few years you've been talking about gaining some penetration in Europe, in particular exposure to the auto business and I think you built a facility in France as well. Can you just update us on the activities generally there, and if now the facilities have come on just as the market is declining?

I'm sorry, I really didn't hear all that. You were breaking up a little bit.

Okay, on metal treatment market, I think one of the areas you've been going after is some of the European auto customers?

Yes.

And you built a facility in France?

Right.

How's that progressing, is it really a penetration story at this time and even if the end market might be declining somewhat your business is expanding?

Well the thing is I'd never look at the downturn -- is going to be a moment in time. And the thing is we already are in the construction of the plant and we'll be manning it so we're going to continue on with that item.

Same thing in China. I mean, we've expanded in China. China needs a lot of plating; it needs a lot of finishing obviously. They've been under severe attack from some of the mishaps they've had in their process problems, be it food or other products. And again, the French market -- their market is not going to expand, but the Chinese market for our type of products will be expanding.

Okay and then just generally for laser painting, is there any more visibility in terms of some of the newer applications projects that you've been working years on?

Well the thing is is that we haven't installed a laser with Boeing to help form the 747-8 wing and we're out looking at other applications that we hope we'll be using that laser that we have placed there obviously it hasn't gotten too much use with the strike that's gone on.

And how about in the non-aero area though?

We have some prospects; more of it is in the gas turbine related items. We're getting more orders for different type of gas turbine configurations so that's started to take some good momentum there.

Can you update on us on the momentum in the sub-sea area with some of the applications programs you've been working on and I know, I think Cameron was one of your primary customers.

The thing is is that unfortunately that rig is just being deployed and it's going to take at least six months. It's the never-ending story on that item, because it was supposed to be deployed a year ago with Polterprost, but it's going to be deployed and we'll see the results we get from it, but we expect very, very good results on that particular aspect.

Okay. In regards to the tax you've talked about the level of paid-for development and going back maybe a year and a half or so ago you might have thrown out a number like $60 million. Is that a number that tends to rise in time and with the expectation oftentimes or generally results in some multiple revenues off that development spend?

The development spend has been increasing on a yearly basis and it's not so much related to our size, it's related to the fact that our technologies are being used in many different applications so actually that number's been increasing. Sometimes when you have good years as far as profitability is concerned, and it doesn't earn any particular quarter, it kind of goes unnoticed and untalked about. But we still have a lot of paid for development by our customers. And right now it's more than $60 million.

Okay. And are we getting closer to Advanced Arresting Gear getting installed or sales generated?

The advanced resisting gear, yeah. We are currently shipping the Advanced Arresting Gear for the CVN 78.

Okay. And what's the penetration so far?

On the Advanced Arresting Gear you know that's going to be retrofitted, not complete and they have I think funding for five aircraft carriers. This is the first one it'll be to prove out and as they start refueling ships, they'll start putting in more on the Advanced Arresting Gear.

So how many potential ships are we talking about then?

Well we're talking that right now they have five but it's going to be a total of 10.

Okay. And so you actually have orders and sales related to a single or for five?

Just a single for now.

Okay.

But the Navy has funding for five.

Okay. They just haven't released a balance?

That's correct. If they're going, obviously what takes place on the first one but the new aircraft carrier has it on it--it's a definite, it's one of the changes that has to get done. It'll be on that aircraft carrier and it'll start its prove out within the next couple of years.

Okay. And what's the revenue contribution for each carrier?

I forget. I thought it was somewhere around $20 million and somewhere in that area.

Okay. Update on the coke or valve side, you know, what's your backlog there and the current penetration is and whether the prior number of 640 coke drums that exist worldwide, if that number has increased and expanded as well?

Well the number of coke drums is 700, and right now there's anticipation that another 50 will be made and they are producing new ones so in our penetration, the top or the bottom valves about300 of that 700, and the top is about 150 of the 700 so --

Okay. 300 bottoms and 150 tops so far?

Yeah. So that leaves us with a lot of space.

And are you on all the 50 new ones?

So far there aren't 50 new ones yet. There's anticipated 50 new ones.

But are you designed?

It has been built, we have one, yes.

Fabulous. And then on the aerospace side I know the helicopters are very important to you, what were the contributions during this period and can you give us some sense on the visibility and stability going forward in the next 12 to 24 months?

Right now we do about $40 million a year and we see that as -- that number will continue to improve.

Okay. And that includes any of the non-military or are we getting significant orders in the oil and gas side?

Right we just look at it as a total market right now so if we do supply a lot of the different equipment and the thing is we win a lot of brand new programs on the Blackhawk and commercial aircraft and that, the $40 million is definitely going to go up.

Okay. And last question. If you were to look out over the next two to three years, which parts of your diversified business are likely to be the largest incremental revenue contributors to your growth?

You're going to have the defense business, especially embedded computing. Our embedded computing orders are up 44% year over year, so the defense is going to do fine. Nuclear power, obviously, is going to be the fastest growing. I still think gas and oil will do well because again when you look at the fact that most of the oil that you process is heavy crude, our products are in demand for that because of their improved lifecycle cost to the customer over and above what they are in terms of cliche. So those are going to be your, I still think that the markets in that area are going to do very, very well, but I think obviously the nuclear power and defense will do just fine and commercial aerospace is going to be somewhat neutral over that point of time.

So when you compare yourself to let's say some industrial peers, your direct economic sensitivity clearly appears to be a good bit less?

Without a doubt. I mean, when you take a look, if people were to go back through the last down turn from 2001, 2002 and then start the uplift in 2003, you notice that we did grow organically during that timeframe, although it was small. Of course, and at that time, you have large dips in commercial aerospace. You had 9/11 which kind of put things on hold and we still grew, so we feel that we are very well suited for an economic downturn, but obviously we do have portions of our business that will be affected by it.

So does that suggest net-net that it would be hard to imagine a scenario where you wouldn't grow at all for a period?

I think so. I mean it's very hard for me to see that happening at all. Now that you ask that question, we never do look at it--we always look at it from the standpoint that we will continue to grow 'cause we feel that our organic growth has always been good and we're going to continue to do well.

Thank you.

It appears we have no further questions at this time. I'd like to turn the call back to our speakers for any additional or closing remarks.

Well thank you everybody for joining us today and we look forward to our fourth quarter call in February. Everybody take care. Thank you.

Thank you.

Thank you. That once again does conclude this call. We do appreciate your participation. You may disconnect at this time.