Curtiss-Wright Corp (CW) 2009 Q2 法說會逐字稿

Good day everyone and welcome to the Curtiss-Wright second-quarter 2009 earnings results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Chairman and Chief Executive Officer, Mr. Martin R. Benante. Please go ahead sir.

Thank you Dana and good morning everyone. Welcome to our 2009 second-quarter earnings conference call. Joining me today is Glenn Tynan, our CFO, who will begin our forum today. Glenn?

Thank you Marty. If you do not have a copy of the earnings release which was issued yesterday, please call Miss Deborah Torrey at 973-541-3712 and she will be happy to e-mail or fax a copy to you.

Before we begin, please note that we will make certain forward-looking statements on today's call such as statements about the Company's 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 Private Securities Litigation 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 Securities Exchange Act of 1934 as amended for a more thorough discussion of risks and uncertainties as well as further information relating to our business.

For our agenda today, I will provide an overview of Curtiss-Wright's second-quarter 2009 operating performance and then Marty will discuss our strategic markets and update Curtiss-Wright's full-year outlook. After the formal remarks, Marty will open the call for questions. So let's get started.

Curtiss-Wright had consolidated sales of $447 million during the second quarter of 2009, a decrease of 1% from the second quarter of 2008 and includes negative foreign currency translations of $13 million. FX adjusted sales were up 1% quarter over quarter.

On a segment basis, our results were mostly impacted by significantly lower demand in our metal treatment segment which was down 30% in the second quarter as compared to the prior year quarter. And as most of you are aware, this is our shortest leadtime business with virtually no backlog.

In our Flow Control segment, sales increased 2% in total and declined 1% organically. Strong sales growth occurred in the commercial power market driven substantially by higher domestic plant outages and increased production of AP1000 pumps and also in naval defense, in particular on the CVN 78 and 79 aircraft programs. Offsetting the strong performance of these markets was significantly lower sales in the oil and gas market as capital spending by the refineries continues to be sluggish due primarily to the continued lack of liquidity in the credit markets.

In our Motion Control segment, sales grew 7% overall, 10% when adjusted for FX and 4% organically excluding FX. Strong sales from military aerospace production across all major platforms as well as ground defense for the Bradley and Abrams programs was partially offset by continued weakness in demand for our sensor products, primarily for the general industrial and commercial aerospace markets.

Metal Treatment segment sales were down 30% in the second quarter as the global session resulted in significantly reduced demand across all of their service offerings and markets. Our consolidated operating income of $44 million in the second quarter of 2009 decreased 12% due primarily to the 71% decline in operating income from our Metal Treatment segment due to the underabsorption of fixed costs caused by the sharp decline in their sales volumes.

The drop in Metal Treatment was partially offset by organic operating income growth of 36% and 1% in our Motion Control and Flow Control segments, respectively. Foreign currency translations favorably impacted consolidated operating income by approximately $5 million in the second quarter.

Operating income in our Flow Control segment was down 1% in the quarter and down 5% after adjusting for FX. Higher volume and margins in the commercial power market, cost reduction programs and improved performance on certain long-term contracts were not enough to offset the underabsorption of overhead costs caused by the sharp decline in the oil and gas and general industrial markets.

Our Motion Control segment increased operating income 16% organically without the impact of favorable foreign currency translation. This increase is the result of higher sales and the benefit of their cost reduction programs.

Besides our ongoing cost reduction programs in all of our segments, we also implemented significant business restructuring initiatives beginning in the fourth quarter of last year after the Boeing strike and we have begun to realize the benefits of those initiatives which will significantly increase in the second half of this year.

Consolidated net earnings of $24 million or $0.54 per diluted share for the second quarter of 2009 decreased 10% from the second quarter of 2008. Lower interest expense and a lower effective tax rate added $0.03 to our performance in the second quarter as compared to the prior year. As of June 30, our backlog of $1.7 million includes approximately 73% of our second-half sales forecast.

Our free cash flow, defined as cash flow from operations less capital expenditures, was $46 million in the second quarter of 2009. Cash flow from operations was $67 million, a decrease of $10 million as compared to the prior year mainly due to lower accounts payable, deferred revenue and net earnings; partially offset by improvements in inventory and accounts receivable.

Capital expenditures were $21 million in the second quarter of 2009. Our balance sheet remains strong with $59 million in cash, working capital $428 million and total debt outstanding of $561 million as of June 30 for a total book debt to capitalization of 37%.

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

Thank you Glenn. Our sales decline of 1% year-over-year is indicative of the challenge we are facing in the lingering economic slump. However, the broad diversification of our markets and our unique technologies minimize the significant impact of a depressed global economy in the second quarter.

Our defense market provided a robust 22% growth with double-digit contributions from aerospace, ground and naval platforms. Naval defense generated an impressive 20% organic growth from higher production on the CVN 78 aircraft carrier program as well as long-term, long-lead materials of the CVN 79. In addition, we had higher sales on the DDG 1000 program as well as higher sales of embedded computing products and increased development work for the Navy.

Our aerospace defense market generated a healthy 8% organic growth, primarily related to higher sales on the F-22 Global Hawk and Blackhawk programs. Our ground defenses business generated a remarkable 26% organic growth due to increased orders on the Bradley and other military vehicles.

I know many of you are concerned with the FCS termination and we have received stop work orders on our server motor controller contract which will have a minimal impact in 2009. As FCS undergoes another review, we are seeing ramp up in vehicles modernization programs for the Bradley and expect similar activities on the Abrams and Stryker.

In addition, we see significant opportunities on the unmanned ground vehicles or mules. We are in receipt of our first development contract for the U.S. Army to supply advanced rugged computer processing modules to host the battle command software on an advanced, large, unmanned ground vehicle [demonstrator] being developed.

Also, we are currently (inaudible) significance providers on unmanned air vehicles, including over $55 million in revenues to date for the development and production on the Global Hawk. We currently received a new $30 million development award from Northrop Grumman for the [bams] program to provide a Navy variant of the Global Hawk. Ultimately, this could have a lifetime contract value nearing $100 million between development and production.

The prospects with our continued push in unmanned vehicles and this significant opportunity in current Army ground vehicles are upgraded to provide coverage and growth opportunities for the future. On balance, we feel the defense market will continue to provide healthy sales and profitability for Curtiss-Wright.

In particular, due to our strategic diversification in all branches of the military, as well as our competitive positioning on current programs in production and new development programs. In the commercial aerospace market, sales declined 22% organically in the second quarter due to continued customer inventory rebalancing and lower demand for the regional jet market which significantly impacts our Metal Treatment services and sensor products.

We believe we are still operating to plans and as a result, we are maintaining our full-year commercial aerospace market guidance as essentially flat. This is supported by a number of key awards for our sensor products which have been down year to date, including $245 million in long-term agreements with (inaudible), Goodrich, Parker and Woodward as well as flight control sensors on the A350 program.

In the oil and gas market, sales declined 27% organically in the second quarter due to lower capital spending for coker products and associated turnkey valve systems as refiners continue to hold off major project spending during the market volatility. We tracked 10 different market drivers such as inventory, commodity prices and spreads, the (inaudible) demand and [refine] utilization and so far we've seen little stability. In fact, year-over-year is still down 50% by most measures. With the exceptions of petroleum industry, inventories are up.

There's no doubt demand will return. It just appears to be a slower rebound than we had hoped. There are signs of life in the spread between light and heavy crude which was almost nonexistent at the beginning of the year. Last week it topped $10 which is a nice improvement and will ultimately drive demand for coking and (inaudible) cracking equipment.

Currently we are anticipating $50 million of new orders for our coker products during the second half of this year. In the meantime, asset preservation is driving strong orders for field service and ancillary products, cushioning the dramatic impact [of] lack of credit liquidity and reduced worldwide demand for energy it had on this market.

Additionally, we are aware of a number of engineering studies underway for future projects. But as I mentioned last quarter, timing of this project is extremely difficult to predict. For that reason, we have lowered expectation for this market by approximately $20 million which equates to a 10% decline in sales year over year.

Our automotive market, which is essentially dependent on metal treatment services, was down 50% organically as a result of our customers' inventory reduction strategy, government intervention and lowered demand globally. This is an extremely short cycle market for us and we feel we have opportunity to rebound over the second half of the year.

In particular due to construction vehicles and infrastructure spending, we are targeting full-year performance being down 20% from the prior year. Similarly, our non-automotive general industrial market which is a combination of industrial controls, sensors and metal treatment services was down 33%. On the industrial control side, new construction is still at a standstill but new opportunities are beginning to materialize in the aftermarket arena for spare parts and services as customers opt to repair existing equipment rather than replace due to the economic internal pressures to cut expenses.

A little further out on the horizon, economic stimulus money earmarked for clean and wastewater markets have resulted in a noticeably uptick in quoting activity as the stimulus money finds its way to municipalities. In addition, international sales to China provide an opportunity for growth due to the substantial construction and infrastructure projects.

We remain optimistic but we are realistic about the challenges as well as the results from reducing our (inaudible) expectations for this market is down 30%. To date, the negative effect of the economy has been partially offset by our aggressive cost reduction programs and a small contribution from our business restructuring initiatives. In the second half of the year, our cost reduction programs will continue. However, we see an acceleration of the material savings associated with our business restructuring and lean initiatives and the increased efficiency from our operations.

In our commercial nuclear power market, we achieved 38% organic sales growth due to both higher spring outages and increased production for the AP1000 plant restructuring. A number of you attended our 2009 investors conference in Cheswick recently and were able to view first-hand our reactor coolant pumps being built.

It is truly an exciting experience to be part of this renaissance. We hope you came away with a better understanding of the significant challenges both in producing a first-of-a-kind product at corrugated logistics of a 20 foot by 5 foot piece of equipment that cannot fail for 60 years and Curtiss-Wright is well-suited for this challenge. We expect to begin testing in August and look forward to welcoming senior executives from China to our facility in Pittsburgh in September to review our progress.

In summary, the second-quarter performance met our expectations. But the magnitude of the global economic recession and its negative impact on some of our commercial markets was clearly disappointing.

Therefore we are revising our full-year guidance downward for the second half of the year. Our current outlook is for revenues to be between $1.83 billion to $1.85 billion, operating income of $194 million to $201 million and earnings per share of $2.35 to $2.45.

While current demand remains lackluster in the commercial market and is resulting in significant pressure on our profitability, I remain confident that the highly technical and innovative nature of our products will continue to foster our market leadership position over the long-term. In addition, our strategy of market diversification will continue to enable Curtiss-Wright to mitigate the impact of isolated market declines which drove performance in other key markets.

And while we have implemented aggressive cost reduction programs and business restructuring initiatives, we continue to opportunistically invest in our core markets -- defense, energy and electronics -- in advance of a rebound. At this time, I would like to open up the conference call for questions.

(Operator Instructions) Myles Walton, Oppenheimer.

A couple questions and a clarification. First I guess, Marty, you mentioned the oil and gas market color which is really helpful. What was -- or what is embedded in 2009 in terms of your sales in that market growth-wise or decline-wise?

The remainder of the next nine months or five (multiple speakers)

For the full year.

For the full year in gas and oil, we are expecting revenues of about $300 million.

That would be down 10%.

Thanks. So down 10%, in the first half looked like it was down maybe high teens or 20s?

High teens, right.

So the back half you must have really easy compares or is there something else?

I'm sorry, what was the question?

If the full year is down 10% but the first half was down 20, just kind of interpreting that you're looking for flat growth in the back half of the year in oil and gas. So I'm kind of curious why that's comfortable.

Right now we are anticipating as I indicated during the script, about an additional $50 million in new orders of which $20 million should be signed next month. So the crack spread now is in excess of $10. In reality, the spread between light and heavy crude was -- actually reversed itself which is a phenomena that's very rarely seen where light crude was less expensive than the heavy crude.

And it was somewhere around $3.00 in the first quarter, now it's $10.00. So that will pick up investment in the gas and oil sector. Not only that, most of our sales that we are looking for the next year (inaudible) end of the year is coming from foreign governments which is less affected by the economic situation.

Okay, so some of that order activity you are expecting could happen very near term and actually help you out in the fourth quarter, I guess.

That's correct. You have to remember that we only received one major -- well one major order (inaudible) in the entire industry over the last six months which we received. So we have been really operating off of backlog.

And then on Motion Control, good margin performance there. And I guess a help -- a contributor there with Forex. Glenn, what's the outlook for Forex for the second half on the company?

Well it's going to be pretty much flat. It's going to be -- really not have a major impact in the second half. It's very favorable in the first half. It's going to be down in the second half relative to the first half anyway.

So then the margin improvement at Motion Control that you expect in the second half is really going to have to come through operations and the results of the cost-cutting that you have done, cost containment you have done so far?

Without a doubt.

And then the other question I had, VMETRO I think is going to hopefully turn into a positive in 4Q. Is that still on track?

That is on track. As a matter of fact, EST is also another -- will be another contributor for the back half of the year. In fact, Glenn, would you like to (multiple speakers)

Yes, I'm just going to -- besides those things that (inaudible) VMETRO [in controls], you've got VMETRO and they also have some nonrecurring costs. But if you look at the whole second half for us, we're looking at approximately $82 million or 85 -- somewhere between 80 and $85 million of additional sales in the second half relative to the first half but sharply increased profitability.

And the way you get there is first we;re going to have obviously margin and favorable absorption due to the increased volume. That's about say $20 million.

Then you're going to have -- I think we mentioned -- both Marty and I mentioned in our discussion that we have seen acceleration of the business restructuring initiatives that we employed in the first -- actually went back to the beginning of last year. But the first half was basically a wash between the costs we incurred and the benefits we achieved. But the second half, we expect to achieve approximately $10 million of benefit.

We also will see an increase in our cost reduction initiatives of approximately $5 million incremental in the second half versus the first half. We will see development costs on certain long-term contracts that we incurred in the first half of the year go away or if we don't expect them to recur obviously. In the second half that's about $5 million.

And you have the acquisition performance and as Marty mentioned, the VMETRO (inaudible) acquisitions is about a $3 million swing first half to second half and so is the ESP. The combination of ESP we had for a partial in the first half of the year and incurred all of their purchase accounting and in the second half of the year, we get a full period with profitability. So that's another $3 million.

So we'll see $6 million just in acquisitions improvement and then also in controls, we have highlighted a couple of nonrecurring expenses at a couple of our facilities for moves and ERP implementation, things like that that we don't expect to occur. That's about $3 million. And then offsetting all that is about $7 million lower which is what I was getting at, lower FX, favorable transactions in the second half than we had in the first half.

That's an awful (multiple speakers)

That's a lot of stuff (multiple speakers)

That's really helpful Glenn (multiple speakers)

We expect improvement in our commercial sales which carry more profitability than our military sales the second half of the year.

That's fair and thanks for the color, Glenn. And then just one last one on Metal Treatment specifically as a segment. What is your outlook for the second half both in volumes and margin?

Well it's very similar to the first half. As we indicated, we really didn't increase it. Right now we're operating at a 10.7% margin. We see that going to 12.

So there's a slight improvement. We feel that we are at the bottom of the inventory and purging of the inventory, that we're going to start seeing increased demand in the second half of the year; not by a lot. (technical difficulty) increase in order to improve the margin.

Michael Ciarmoli, Boenning & Scattergood Inc.

Marty, I guess on the -- can you give us an update on the status of the EMALS program? I guess there's some grumblings and reports out there of technical challenges. Can you give us some color on what you guys are seeing from your end and what the status of that program going forward might be?

At one time it was thought by the Navy that the EMALS would not be part of the CVN 78. However, those technical difficulties were overcome. None of this was our problem and it will be part of the CVN 78.

So you see no additional risk out there even from some of these most recent reports that are out there in the news over the past couple weeks?

No.

Okay can you -- just on a housekeeping -- can you give me the backlog breakdown by segment?

Yes, I will do that. (inaudible) Control is about $0.5 billion and Flow Control is about $1.2 billion approximately.

Also realize that Glenn indicated that 73% of our sales between now and the end of the year is in backlog. There isn't anything in backlog for MIC. So actually, it's better or greater than 73%.

Okay, that's helpful. And then I guess last one, Glenn. I know you went through some of the outlooks by market. But can you just revisit some of the ones you didn't cover for 2009, what you are expecting growth-wise for some of the defense end markets and some of the commercial ones that you didn't cover? Actually I think you covered -- maybe general industrial and commercial and what the growth outlooks are for airborne, ground and naval for the remainder of the year?

Yes, we really haven't changed the defense at all. It's 8% overall. It's 8 aero, 8 ground and 2 Navy and then we have (multiple speakers) another that's a bunch of other different things and mostly VMETRO and other things. But 8% overall for defense. Commercial aerospace, flat. Oil and gas, down 10. Power generation, up 18; automotive, down 20; general industrial, down 30. So that gives you overall commercial down 5.

Okay, perfect.

I think what you were looking -- I don't know if we really answered your question.

That's what I was looking for.

Okay, fine.

Last question. Just on getting back to the commercial power generation, I think at the investor day, you talked about potentially some opportunities for the CRDMs maybe as Westinghouse offloads some of that work. Can you give us an update as to what is happening there?

Realistically, we're still pursuing that but nothing has clarified itself.

Eric Hugel, Stephens Inc.

Can you break out for us by I guess segment your revenue and your margin targets?

Sure, Flow Control is between 990 and $1.5 billion, Motion Control is approximately 630, Metal Treatment between 210 and 215. That's the revenue guidance.

On the margins, you have got flow control between 10 and 10.25%, Motion Control 13% to 13.25%, and Metal Treatment 12% to 12.5%.

Great, can you talk about I guess with regards to any clarity with regards to a nuclear side. I know there's been some recent sort of talk with regards to things going on in India as well as sort of additional developments in the US market.

Is there any clarity? Are you still expecting a Q4 US AP1000 in order? And with regards to India, is there any visibility there yet as to when sort of things might happen or any visibility into potential technology transfer requirements?

The answer to the first question is we do expect something either in the fourth quarter this year or the first quarter of next year in the US market. As far as India is concerned; no, we haven't had any more clarification on whether there would be offset requirements or not.

Great, just one housekeeping thing. In your guidance, I guess first-half share count is 45.5. You're talking about 46 million shares. Just are you expecting share count to be up 1 million shares in the back half to sort of get you to 46?

Right now that is our guidance. It might be a little high but that is our current estimate. You're right. I'm not sure it will go up that much but that's our best number right now.

Tyler Hojo, Sidoti & Co.

Just on restructuring, what are your expectations there? What is kind of baked in the guidance and where do you see potentially some opportunities to take some additional cost out of the business?

Well on the restructuring side, that's more headcount. And the thing was is that as Glenn indicated, in the first half our expense almost equaled the benefit where we slightly had more benefit. And you're going to see in the second half of the year about $10 million flow to the bottom line where there will be almost no expense and you will have the benefit of lower headcount.

Okay, so as you look at the business today, you basically think that you are at a point where you want to be just on the cost side? Is that fair?

That's just restructuring. You still have -- the other items would be lean initiatives and also supply chain management which we also have the additional cost reductions and savings there.

Okay, great. And just on the acquisition side, if you could maybe just comment on what you are seeing there and how that market looks for you, that would be great. Thanks.

Right now, things seem to be a little bit slow. We thought that in the very beginning of the year that would be much more robust than it is right now. There are some acquisitions that we're looking at but I'm surprised that the relative number is a little but lower than I expected.

Steve Levenson, Stifel Nicolaus.

This morning, USEC, the Uranium Enrichment Company, announced that their request for loan guarantee to build their centrifuge plant was denied by the Department of Energy. Do you view this as a negative in any way for nuclear power generally or in any way for your own reactor coolant pumps specifically?

No, not really. We don't see that as deterring what we are accomplishing with the AP1000. That was -- it's an ancillary item.

Okay, I guess what -- adequate fuel supply with their existing plant, you don't think that reflects anything about what they think the demand will be for new facilities? It seems a little bit counter to policy but who knows?

Right but I really don't look at that as being a problem.

Okay, as you began to ramp up your reactor coolant pump production, how is the pricing for the specialty metals that you use? Could that impact margins in any way up or down next year? Do you have pass-throughs on price changes?

No, no. We are expecting actual improvement in the costs associated with those exotic metals in the second half of the year.

And into next year too?

Definitely.

Last -- how's the sales of ancillary equipment going?

Very well. At our investors conference, we indicated that the spring outage was the most companies that we have seen in a long time [or] power plants coming up for service and we also see a good fall, not as good as spring, but still a good fall and our commercial power is doing very, very well.

Chris Donaghey, Suntrust Robinson Humphrey.

First of all, just on the oil and gas business in general, you said that you're expecting $50 million in new orders in the second half of the year so (multiple speakers)

(multiple speakers) I should have said for our DeltaValve (inaudible) alone.

Okay, great. So you know, the proposal volumes is obviously picking back up. Is it a combination of both the spread and the credit cycle or is one dominating more than the other?

(technical difficulty) the switch between the light and the heavy crude. That's a phenomena that you don't normally see.

So once that is now back to -- because the greatest amount of reserves -- over 80% of our reserves is in heavy crude. So you would always expect just from a supply and demand situation that it would always have a lower cost or a lower price than the light.

So I think that from the United States standpoint, that the credit crunch caused the problem but we already have a significant amount of -- a percent of the business in the United States whereas it hasn't caused as big as problem in our foreign business because in many instances, the oil companies are owned by the government. So I think the combination of the credit crunch and the spread in the United States and the spread more in foreign countries.

Okay and that was going to be my next question is that $50 million in new orders that you are expecting, can you split that out geographically?

(technical difficulty) getting some feedback here. (technical difficulty)

And then on commercial aerospace, can you just walk me through the expectations there again? I think you said it was down 20% in the quarter but you expect it to be flat for 2009. So I'm assuming the implication there is pretty strong growth in that business in the back half of the year.

When we expect 39% growth, you've got to remember the Boeing strike took place in September of last year. So, we expect a 39% increase from the first half of the year.

And then just a last question. Just from a management philosophy perspective, I mean, you such a wide spread of growth rates in the company right now. Some business up 28, 38%, some businesses down 50%, 20%, 30%. How do you manage through that through that given the wild fluctuations that you are seeing in the different markets right now?

(technical difficulty) our markets were going to be stabilized. About the biggest question mark that caught us by surprise was gas and oil.

If it was just MIC and it being down below our expectations, we could've weathered that storm with our cost reduction initiatives. But the gas and oil was an area that we were surprised about because even though I keep harping on this light to heavy crude spread, that's very big in determining the amount of business we would do in that industry.

But we expected (technical difficulty) we had much better growth in the defense side than we indicated and we had less growth in the metal improvements side. Now there, it's all restructuring initiatives that we do because it's a very fixed-price business there.

So probably the only area that we weren't anticipating where we were going to go is oil and gas. All the rest of it, we had a good understanding -- our basic understanding held through. So that's how you do it.

Okay and then just the last question on the cost reduction initiatives. I know there was kind of a three-tiered system, a plan A, a plan B, a plan C. Can you just tell us about where you are in that process? Are you just executing on plan A?

Let me say this, plan A -- there are three different segments of our cost reduction program. Now I indicated in the first quarter that the two CLO's and myself visited all of our companies and went through their cost reduction programs. So it is aggressive.

We are on track. Both Motion Control and Flow Control's cost reduction programs are in access of $20 million and we have seen some portion of that. We have talked about the restructuring side, the supply-chain management side.

They are both in excess of $5 million currently to date and that is variable because you have to extinguish the old inventory at a higher value before you start realizing the profits on the material side. And then we have our lean initiatives which are quite robust between the two companies.

Eric Hugel, Stephens Inc.

Can you talk about maybe specifically given sort of -- given the results out of the metal treatment, what kind of cost reduction are you looking -- are you looking at total facility sort of shutdowns or just selective headcount reductions? How should we be thinking of that and how do you position yourself for -- I guess a slug of that demand sort of going away was just all the shutdowns this summer from guys like Chrysler and Ford. And hopefully, knock on wood, some of those facilities will start producing again. But how do you deal with that in the meantime?

Well we already went through the restructure. Most of it was headcount reductions and there is over a $6 million savings there.

The thing is that we have temporarily mothballed some of our facilities but we're still performing the customers workout of another facility. We do not expect to take a lot of plants off line because once you stop producing for that particular customer, when things get better and you try to come back online, they're not going to want to do business with you.

Are there any -- because I know your facilities are located geographically next to sort of production plants. Are there any facilities or significant facilities that you have that are -- have significant level of exposure to facilities just that aren't planned to be reopened in terms of production?

No, because in reality, they're in industrial areas that are just not automotive. They are in pockets of enough industry where they are -- it's variable on the amount of business they get from whatever market it may be.

Okay, but let's say potentially an auto plant going away wouldn't significantly impair their overall business because they're pretty diversified? That's how you have them set up?

Yes.

Is there any visibility with regards to large commercial sort of de-stocking trends? Can you sort of talk about that and sort of where you are in terms of production rates on sort of 737, what you're looking for in terms of sort of the end of the year and going into 2010?

One of the areas when we talk about de-stocking was in our sensors. There was quite a bit of an inventory buildup among our major customers and based on our conversations with them, it looks like they've depleted all of the inventory we've had.

So sense is we have another 10% inventory burnout over and above what was -- we saw in the normal commercial aerospace business market. We are expecting the 737 to remain on target at 31 through the end of the year and that is our mainstay. But we also expect sensors to pick up during the last half of the year because it actually was -- the sales were down inordinately compared to the aerospace market.

Okay, fair enough. And finally, any update in terms of laser peening? You guys have been pretty quiet about that business of late.

Still doing fine. It's still going to be in that 12 to $15 million range. We are picking up profitability but really haven't found other areas for that service.

Any feedback? I know you guys got the laser into one of Boeing's production facilities to do work on the 747-8. Has there been any sort of indications there that they've maybe found additional applications?

Not right now.

And with no further questions in the queue, I'll turn the conference back over for any additional or closing remarks.

Well I would like to thank everybody for joining us today and look forward to speaking to you again in October. Take care and thank you.

Thank you.

That does conclude today's conference. We thank you for your participation.