Curtiss-Wright Corp (CW) 2009 Q3 法說會逐字稿

Good day, and welcome to the Curtiss-Wright third quarter 2009 financial 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, Teresa, and good morning, everyone. Welcome to our third quarter 2009 earnings conference call. Joining me today on the call is Mr. Glenn Tynan, our CFO, who will begin our forum today. Glenn?

Thank you, Marty. If any of you do not have a copy of the earnings release, which was issued yesterday, please call [Ms. Deborah Tori] 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 and 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 third quarter 2009 operating performance, and 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.

We indicated in our second quarter call that needed an increase in demand in some of our markets in order to meet our full year expectations. This did not occur in the third quarter. While overall, our sales were flat for the quarter compared to the prior year, our operating income was down significantly. The main driver for the lower operating income was the sharp decline in sales volume in our Metal Treatment segment, which has the greatest operating leverage, and also in our [coker] business in the oil and gas market. On the other hand, we had higher sales in the defense market that generates government-regulated margins, and also in the commercial nuclear power market, driven by the AP1000 program, which is still in the early stages of production. This combination is major reason for our lower segment operating income on essentially flat sales in the quarter. Also contributing to the lower operating income is a pension expense error made by our external actuaries that negatively impacted the third quarter by $4.7 million.

We have lowered our earnings guidance for the year, primarily due to lower sales of approximately $30 million, or a $0.20 in EPS. Again, this drop in sales is in our businesses with the greatest operating leverage and higher profitability. In addition, the pension error with lower our EPS for the year by $0.08. Marty will discuss our full year expectation in detail in just a few minutes. As of September 30, our backlog of $1.7 billion is essentially unchanged from December 2008 and new orders of $425 million were down slightly in the quarter. Commercial new orders declined 19% but were substantially offset by a 20% increase in defense orders, primarily related to the ramp up on US Navy programs. Our book to bill ration is expected to be slightly above 1 for the year. Our free cash flow, defined as cash flow from operations less capital expenditures, was $23 million in the third quarter of 2009. Cash flow from operations was $47 million, and increase of $31 million as compared to the prior year, mainly due to working capital improvements, specifically accounts receivable and accounts payable, partially offset by lower net earnings. Capital expenditures were $23 million in the third quarter. Our balance sheet remains strong, with $72 million in cash, working capital $370 million, and total debt outstanding of $548 million as of September 30. For book, debt to capitalization of 36%.

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

Thank you, Glenn. During the second quarter, I indicated that we needed incremental demand in our commercial markets based on improvements in our automotive and general industrial markets. That did not occur. Also I indicated that we needed to receive $50 million in new gas and oil orders, including a $20 million in the third quarter. While we received $11 million of new orders in October as anticipated, the program associated with the $20 million order increased in scope, resulting in a delay as the revised contract is approved. I'm obviously disappointed in the lack of demand in our commercial markets.

In the oil and gas market, a combination of order slippage and continued lower capital spending for coker products and associated turn key valve systems by refineries resulted in a sales decline of 15 % in the third quarter. However, asset management, or maintenance continue to drive strong orders for field service work in [ansulary] products cushioning the dramatic impact lack of credit liquidity and reduced worldwide demand for energy has had on this market. We continue to track the number of engineering studies underway that should be indicative of a ramp up in future projects. However, we have lowered expectations for gas and oil to a 15% decline in sales year over year.

In the commercial aerospace market, sales declined 15% in the quarter. Factors negatively impacting our quarterly performance include, the unexpected continuation of customer inventory rebalancing, particularly in Europe, lower business jet and helicopter demand, the weak US dollar, all of which continues to create a drag on orders for our Metal Treatment services and integrated sensor products. While we expect a rebound in demand to occur in the third quarter, we now expect a low order trend experienced in the third quarter to continue to the remainder of the year, resulting in a need to lower our forecast in this market to 10% decline year over year.

In the general industrial market, the cycle is considerably more protracted than we anticipated. Automobile market shows no signs of recovery and sales declined in excess of 50% as a result of lackluster demand and low production globally. Similarly, our non-automotive general industrial businesses, which are a combination of industrial sensors, controls, and metal treatment services, were down 18%. On the industrial control side, our order book reflects a stagnant industrial market. However, we completed a significant restructuring and consolidation in this business, rationalizing seven facilities into one domestic location, while also establishing low-cost manufacturing facility in China. Also we have lowered our fixed costs by 20% to 25%. We are now targeting growth next year from a growing customer base through strategic R&D collaboration.

We are realistic about the economic challenges. In particular, the timing of the eventual rebound. However, we feel our increased deficiencies will allow us to meet expectation for the fourth quarter. Therefore, we are maintaining previous guidance of a 30% decline for the full year in this market. In our commercial nuclear power market, we achieved nearly 20% sales growth due to both higher upgrades and maintenance and increased production of the AP1000 program. As an update to our AP1000 program, we initiated testing in our first reactant cooling pump during the third quarter and an issue with the thrust bearings was discovered during no load operation. Those not familiar with the complexity of unique first of a kind pumps, a few bumps in the road are expected and working in partnership with our customers and suppliers to determine the appropriate changes. All parties believe this situation can be resolved in the normal program schedule and has been no change to the delivery time frame. We have a substantial backlog in excess of $500 million for this market and expect to achieve a 16% growth in the commercial nickel market this year.

The defense market provided a robust 12% organic growth with double digit contributions from aerospace and naval platforms. Native defense generated an impressive 28% organic growth due to higher production in all of our key platforms as well as higher sales of embedded computer products and helicopter landing systems an increased development. In addition, we received approximately $80 million in new orders for submarines and aircraft carriers generators, including the first ship set of CVN-79 orders. Our aerospace defense market generated healthy 10% organic growth primarily related to higher sales for the Global Hawk and strong sales for helicopter programs. In addition, we are in the start-up phase of the [DAMS] program, which is the Navy's variant of the Global Hawk. We expect this program to be a long and successful program as it progresses from development into production. Our ground defense sales were flat during the third quarter, impeded by the cancellation of the FCS program earlier this year. However, this decline was offset by solid growth from our [EMGUM] development program, [ITASK] program and following military sales.

Going forward we will continue to be a significant player in vehicle modernization programs for the [Abrahams, Bradley, and Stryker]. In addition we see significant opportunities on the unmanned ground vehicles, or mules, where our ruggedized embedded computer processes are being developed to host the battle command software. This program is a key element of the Army's modernization program, and the current plan is to outfit all 72 brigade combat teams with a mule vehicle. Even though we are seeing pressure on the defense budget, we feel that it will not only enhance our opportunity for outsourcing as they look to reduce costs and accelerate lead times to support our troops in the field. 2009 is shaping up to be a record year for our package cost design with significant winds on (inaudible) and G/ATOR program. At Lockheed Martin, these program wins are due to our portfolio expansion through both organic development and our successful acquisition integration strategies. And due to the strong performance year to date, we are raising our full expectation to achieve approximately 10% overall growth in our defense market.

In summary, the first quarter performance did not meet our expectations, due primarily to the lingering negative economic impact to our gas and oil, commercial aerospace, and general industrial markets. As a result, we are revising our full year guidance downward for the year. Our current outlook for revenue is between $1.795 billion to $1.825 billion, operating income of $171 million to $178 million, and earnings per share of $2.05 to $2.15. In 2008 our earnings per share was $2.41. In 2009 we experienced an unprecedented drop in our metal treatment segment and the impact of the financial crisis on our gas and oil business. These two matters, combined with our pension adjustment, amounts to $0.80 reduction in our earnings per share year-to-year. Giving our revised guidance, we were able to make up $0.50 in other areas, primarily business restructuring and cost reductions, as well as increased sales and other markets.

While current demand remains lack luster in the commercial market, where our operating leverage is the greatest, I remain confident that the highly technical and innovative nature on our products will continue to foster our market leadership position over the long-term. We have not lost any business to competitors, but the timing of recovery continues to move to the right. Some of our commercial businesses are going through a tough economic cycle and will rebound as the economy improves. We have implemented aggressive cost reduction programs and business restructuring initiatives that will continue to invest in all of our core markets, defense, energy, and commercial industrial in advance of a rebound. Ultimately, our strategy of market diversification will continue to enable Curtiss-Wright to mitigate the impact of fluctuations in certain market cycles, which draw performance in other markets.

At this time, I would like to open up the conference for questions.

Thank you. (Operator Instructions). Our first question is from Chris Donaghey with SunTrust Robinson Humphrey.

Hi. Good morning, guys.

Good morning, Chris.

Marty, on the one oil and gas oil order that increased in scope, do you expect that to be a fourth quarter issue or is it going to be something that gets delayed because of the scope increase into next year? And then can you talk a little bit about what's happening in the pipeline in general. Is the opportunity segment getting better and we are just waiting for economic recovery, or could things start to break free in the fourth quarter?

The first question was on the $20 million we expect in December. So we expect it will be a fourth quarter event. The number of opportunities for new orders have increased in the gas and oil sector. Last time I indicated that they were $50 million and we received $11 million in October as we have expected, and there is still about another $48 million out there that could be continued by the end of the year. But obviously we have discounted that based on getting orders later in the year than in the third quarter, especially that $20 million order.

And then on the AP1000, can you talk a little bit about the production rate assumptions there and have there been any changes in the AP1000? I guess approval of the original design is seeing some issues. Do you expect that to impact your production rates?

Not at all. Everything is still the same as we indicated at the very beginning of the year. You have to understand that with that certification. There are two different types of certifications. Number one is the overall certification which the AP1000 is the only reactor that has been approved by the NRC. The second is the detailed design. And there is always going to be some comment on the detailed design. [Westinghouse] has already come out and said that they intend to respond to the NRC's questions within a few weeks. So, no, we do not expect that that is going to impact the AP1000 program internally.

Great. And then just one last question. Can you walk us through the segment assumptions on revenue growth and margins for the year?

Sure. We will have Glenn do that.

Sure. Okay. Revised guidance now on the revenue side flow control is between $970 million and $980 million . Motion control 625 million to 635 million . Metal treatment 200 million to 210 million. On the operating margin flow control around 9.5%, motion control around 13% and metal treatment around 9%.

Great. Thanks, Glenn.

Thank you. Our next question is from Myles Walton with Oppenheimer & Company.

Thanks. Good morning, guys.

Hi, Myles.

Good. A couple questions. First on the RCP. You mentioned during test discovery of an issue that you were determining the fix 4 and schedule 4. Can you give us a little more color as to has that affected your profit booking rates, and I think by this time you're probably going to be in the 10% plus accrual rate for profit in the program including licensing. Are we still in that range?

Yes, we are. As far as the thrust bearing is concerned, that's what the lead pump but obviously we are making other pumps. There is a detailed sale associated with that. That has not really delayed us. We do have an extended testing program, which allows for these types of situations that take place.

Okay. So it hasn't actually changed your manufacturing build out plan into I guess this year or into next year?

No, not at all.

And then you mentioned to Chris some of the orders in oil and gas but I think, Glenn, you expect book to bill to be above one for the full year.

Overall, yes.

In my math is right I think that means $500 million plus for the fourth quarter in overall bookings. I guess that's one of the better quarters we have seen for quite some time. I guess -- where is is that coming from?

It is across the board. I wouldn't say it is in any one particular area. Military is a piece of it. Oil and gas is certainly a piece of it. It is no big -- nothing big. I would say probably defense is the biggest piece of it. Yes.

Can you give us bookings for the quarter? By the two segments?

Bookings?

Yes.

New orders for controls in the third -- motions control in the third quarter is about $115 million. Flow control is about $260 million or so. $262 million. I'm sorry. $50 million for metal treatments.

And so given kind of the motion control bookings year-to-date, you don't expect that one to have book-to-bill above 1, I would imagine. Is that right?

I'm not sure. I would have to go back and look at the breakdown by unit. They are close. But they may be a little under flow, maybe a little over.

And I guess your segment margin implied guidance for 4Q is kind of flat year on year despite flattish sales, but a tougher economic environment. Is that really motion control taking up the ball for the other two segments in the fourth quarter on a year over year basis?

Well, you have motion control, but the thing is that motion control actually started in cross reduction programs when the Boeing strike took place last year. So they are a little bit ahead of where flow control is right now. So obviously the motion control margins are looking very good to date. I think next year flow control will also have better margins than they have this year.

And I guess there was [VMETRO], is that still anticipated to be a $3 million positive in Q2? I'm just looking at the profit by acquisitions you provided. At a run rate of $2 million of losses for the first three quarters. Should we expect that be to change measurably in 4Q?

We estimate a $2 million pop in Q4 for VMETRO and another $1.2 million for their other acquisition which is [megatronics]. So they have a $3 million plus pop for the fourth quarter for that.

Okay. I'll get back in the queue. Thank you.

Thanks, Myles.

Our next question is from Eric Hugel with Stephens.

Good morning, guys.

Good morning, Eric.

I guess first on the pension error, Is that related to pension income for this year only or is that sort of a catchup from prior year also?

Oh, boy. Well, it was a programming error. That's what a little bit of nature the error was. A little of it goes back. The error was make, actually in 2008, but the impact in 2008 was much smaller. This year's number was much bigger. If that answers your question.

So in other words most of that, what we are seeing there, if the numbers were right would have been in the pension income anyway for the year?

That's correct. Yes.

Okay. So it was more of just the guidance you gave would have been lower?

Exactly. If we would have known it at the time.

With regards to AP1000 -- I guess, Marty, there is another potential US order out there. I guess it has been sort of slipping to the right for a while. The last we talked about it it was maybe a Q4, Q1 of time frame. Can you sort of update us on sort of the status there?

Well, I think it is going to be a little bit further to the right than that. I think it is going to be more of a second quarter possibility.

Okay. Can you talk about -- you mentioned that there was some nice strength in the nuclear upgrade retrofit maintenance business.

Right.

Can you talk about sort of the sustainability of that as we go forward into Q4 and I guess maybe into next year can we continue to see growth there, or does flatten out, does it come down? How should we think about that?

I think next year it will come down a bit because there will be less plants that are going to be in shut down but I think what will happen is you're going to have a greater piece of the pie will also come out. So I think it might be a wash or slightly down from this year.

And with regards to sort of expectations on the oil and gas side, what gives you more confidence now that those orders are going to come in versus I guess last quarter when they didn't come in and has something really changed? What has gotten you comfortable that those orders are going to in fact come in and not sort of slip out further?

That's one of the areas that I consider that we have risk in. I think we conservetized out outlook in other areas. If there is one area that may have some risk associated with it, it is there. The thing is we got the $11 million orders on time. We were told that the increase in scope it will flow a little bit to the right, but that's right now -- what our customers have told us. We have discounted it, but if there is an area of risk, it is right there.

And lastly, and I'll get back in the queue. Your guidance for metal treatment was $200 million to 2$10 million. Anything other than sort of a number right at the low end of that range would imply a pretty healthy pop in metal treatment. So what would have to happen in order to sort of get guidance even in the middle or upper end of the range?

To hit the $200 million we need $49 million in sales. We did 49 --

Exactly. The low end of the range you can certainly do that. I'm looking if you give the high end of the range at $210 million. What would have to happen to get there?

The economy -- maybe the GDP that just increased kind of flows to metal treatment. We haven't seen that yet but it would have to be the beginning of the pick up for us, and as Marty has continued pointed out it would begin probably in our heat treating business. To get that high we would have to see an improvement in the economy.

It is relatively a short cycle business. Is it sort of realistic. Is it possible that you're not seeing it now that it could happen? Or should we pretty much being thinking the low end of the range?

The thing is, you don't need a tremendous amount of volume among all of our plants that we have out there. We are close to 70 some plants. You just need a slight increase to kind of get you there.

All right, guys. Thanks.

Thanks, Eric.

Our next question is from Steve Levenson with Stifel Nicolaus.

Hi, thank you. Good morning, Marty and Glen.

Good morning, Steve.

In relation to that order that seems to be slipping that you are now saying second quarter, does that change your plans at all?

No, not really. No, we wouldn't see much from that order anyway. It wouldn't really change our plans. It really doesn't affect us.

Thanks. I know this is looking out a ways, but what do you think is the sort of the production rate you've got to get to on reactor coolant pumps to get the operating margin up to the teens?

We haven't really looked at that.

Too far out still?

Yes. You are just going through a learning curve on making the first ones now. Obviously even if you sat at the same production level you are at now you can improve something in efficiencies.

One think on that, Steve. What happens, it is not so much the production level because the production levels we have are good in our plant. But as you progress on the project, because of the first time nature of it there is risk releases that we can -- as we progress and we achieve a milestone and risk diminishes, our profitability does increase as we progress through the project, so that really needs to happen for us. It will continue over the 5-year period when you achieve those major milestones.

Got it. Thanks for the color on that one. There is a story out that I guess that constellation energy, which [Electricity of France] was thinking of bidding for, that bid may be abandoned, and I think that covered four EPRs. It doesn't seem like that would cost you much, and it is way out in the future, but do you think that opens up any different sort of possibilities for Curtiss-Wright?

We would like not to comment on that right now.

Okay. I understand. And lastly, any color on the F-35 and what's going on there? It looks like it may start to pick up.

No.

Thanks.

As brief as you can get.

I guess.

(Operator Instructions). Our next question is from Michael Ciarmoli from Boenning & Scattergood.

Hi. Good morning, guys. Thanks for taking my question.

Good morning.

Most of mine have been covered here. First you talked about a motion control continued -- you have been generating a good portion of business from a lot of ground vehicle upgrades. Looking at some of the DOD documents, it looks like the [Bradley] funding buckets could be targeted for some cuts. Does that pose a risk to any of your business? I know you've been doing a lot of Bradley, simultaneously it looks like Strykers could get a bit of a pickup. What are you seeing there for the outlook?

Right now the Bradley is going through I think it is six electronic updates, which we are participating in and right now they are planning on yet another. So if there is some cut in funding I think it would just be something that is temporary. Bradley is a good program for us, so obviously if the funding goes down, our output will change somewhere out in the future. I don't think over the next year or so that would pose a problem. Because we are pretty well funded there.

Can you give us a sense of how much revenue stems from that program?

I think it is about $50 million.

Okay.

I don't think it is about, it is $50 million even.

Okay. Perfect. And then just shifting over to Metal Treatment. Help me understand. Obviously, it seems it has been weak. It seems like the automotive side was very weak again. Could that business actually get dramatically worse? It seems like the cash for clunkers could have provided somewhat of an uptick? I'm not sure how you quantify what sort of demand --

We expected that. But I think if you go to car dealerships, you'll realize that the cars that were sold were not really restocked. I don't think that a lot -- except for buying up excess inventory, that car manufacturers are really producing cars to take the place of what was already in an overstock position. So we have seen absolutely no increase in our automotive production as it is.

Okay. I'm saying, could it actually get significantly worse since you didn't even benefit from that particular program?

We didn't benefit from it. We are still going along at the same rate each quarter. We don't anticipate that.

That's fair.

Anything is possible. I never thought we would be where we are in Metal Treatment as it is now. Realistically it is a $0.50 earnings per share differential between last year and this year. Obviously we never anticipated that.

And then last question. Is there any update on the centerfuge program? Is that still idling, and what do you think thoughts are there?

We are getting some low rate production but really not much on that.

Great. Thanks, guys.

Talk to you. Thank you.

Our next question is from Tyler Hojo with Sidoti & Company.

Good morning, everyone.

Hi, Tyler.

Question on the DDG1000 program. You guys mentioned that in the press releases. One of the reasons for seeing some pressure on margin and flow. I was hoping maybe you could just talk to that, quantify what your expectations is when that rolls off as a drag?

Yes. I think year-to-date we probably had cost overruns on that program. An area of $5 million that is actually part of our profit improvement in the fourth quarter as well because it is dwindling down to nothing. It is pretty much behind us. So if you remember back in the second quarter I said that is one of our items that helps us improve our second half was the fact we are not going to incur that $5 million. Still some trickling effect. It is -- we are seeing some --that's pretty much behind us. We are seeing that in the second half.

Do you think it will pretty much be gone in the fourth quarter?

Yes.

Just on R&D. Not a material change sequentially, but as a percentage of sales, this is one of the highest quarters where you have been at 3.2% of sales. Just wondering if that is kind of a new trend, or how do you tell us to think about that?

Well, I'll make a comment on it. I will say I don't think we went out and hired a bunch of engineers this quarter, but what I will say is that fluctuates mostly on the amount that we get funded by our customer, and it could be a low quarter for that. That's probably the biggest thing I could say that would drive that number, up to fluctuate.

Great. And just a quickie here. In terms of your free cash flow forecast, has there been any change in CapEx that goes into that?

We are still holding at $100 million for the year.

Okay. Great. Thanks a lot.

You're welcome.

Our next question is from Myles Walton with Oppenheimer & Co.

Hi again. Just a question on cash throw. Glenn, does the picture change for contributions to the pension plan, has that changed? I think it was 20 million?

I'm so glad you asked that question because I was trying to figure out a way to just let everybody know that, but it actually has because some of the new regulation that came out in the third quarter has allowed us to make a certain assumption, interest rate assumption, whatnot, for a one-year period. Actually you can make it for longer, but we are not sure if you want to pick this particular method for the rest of our lives, so they gave us a one-year window which will move that pension payment out, so we will not be making a pension payment in 2010 which we originally said was $20 million.

And does the CapEx still come down, though, $20 million?

Excuse me? Yes.

Around about?

We are presuming but I did want to get back. Myles, you were asking a question before about the pops in the quarter. I thought maybe I would just go over that for a minute with you. With the rest of the group.

Sure.

If you look at -- we are looking at about a $60 million -- when I say pop I'm comparing third quarter to fourth quarter. So we are looking $60 million of higher sales in the fourth quarter than we had in the third quarter. $35 million of that is in motion control. And same on the OI side. Let's stay on motion control. So motion control has a $35 million increase in sales and a $15 million increase in operating income. Well, before I even get to the operating income, I will say about 90% of their fourth quarter sales is in their backlog at September 30th. For motion control. So on the increased sales, we will get about $8 million or $9 million incremental OI just on the higher volume in the quarter. Then you are the swing in the acquisitions of about $3 million. You have net restructuring gains of about $1 million. We have some money we are expecting in related to the finalization of the FCS contracts of about $1 million. And then they had $1 million inventory, negative inventory adjustment in the third quarter that is obviously not going to reoccur in the fourth quarter. So those are the pieces that get you to that profit on the motion control side.

On the flow control side, it is about a $25 million incremental increase in sales and $13 million in profit. On those sales about 85% of those sales are in backlog as of September 30. Large part is the orders we talked about. And in their case, the bulk of their incremental OI, operating income, which was $13 million comes from the sales. And in addition to that, they have about $2 million of additional cost reduction savings in the fourth quarter as well. So that's kind of our bridge.

I'm glad I asked the question.

You asked me before -- I just wanted to make sure we provided that. How we got to where we are at.

Some of the incremental increases, phenomenon of -- we have some businesses that do most of their reporting based on the -- they record profit as they ship, shipments get out in the fourth quarter. And obviously the profit increases. Where that expense is in the first three quarters. They are going to see the greatest portion of the profit in the fourth.

And as you look into 2010 in terms of overall Company sales, what kind of growth expectations should we have?

I don't look at any growth expectations. I think that everybody had -- I'm talking about more than just ourselves. Everybody had a backlog going into 2010. We have been fortunate that we hold our book to bill ratio, but maybe people's book to bill ratios have gone down. Sales will be probably less than 2009 and I think everybody will have better margins and the profits may end up staying the same I think obviously sales may go down.

And then the pension situation, given the decrease in discount rate and I assume your rates are pretty good. Are we looking at that $4 million a quarter as a run rate next year?

Not sure.

Can't wait until you hire the new guy.

Exactly. When we get the right number up front. We will let you know on that one.

Okay. But the underlying number is about $4 million a quarter at this point, into 4Q?

For some reason that sounds low but that could be. It is close. Close. $ 4million to $5 million. Something like that.

Okay.

Somewhere in there. I'm not really -- actually, it will be $5 million because we still have some more catch up to do as a result of -- so -- fourth quarter about $5 million.

The last one I had was on M&A. Marty, can you give us a picture of activity there in the pipeline and kind of --

It is really a change from what we discussed last quarter. That is, there are some opportunities out there, but valuations are kind of getting in the way.

Okay. Thanks again.

Thanks, Myles.

Our next question is from Eric Hugel with Stephens.

How much restructuring was in Q3 in the margins? Can you sort of walk us through that?

Sure. The restructuring savings I want to say was about $4 million and we are saying it is going to be about $5 million in the fourth quarter.

For six months.

I was thinking more how much -- were there any sort of incremental charges that you took in the quarter that were maybe partly responsible for the margins being low?

The number it is the net savings. There might have been some expense, but I think most of our expenses were in the beginning of the year.

The only offsets we have, Eric, is in some of the new plants that we have opened especially in China. Right now our new plants have had a profit drain of about $3 million.

We spent about $1 million in third quarter.

I did this on the fly so I might be off a little bit, but I was looking at your motion control guidance, and you did say 13% margins for the year, correct?

Right.

And the implication there is that fourth quarter will be something like 17% margin?

That's correct.

I have never seen a margin that high. What's going on? How can you do that?

Well, again, that's what I just walked through a minute ago. They have a couple -- they have about $1 million of incremental restructuring savings. There is a $3 million swing just in the fourth quarter of their new acquisitions. They have got $1 million amount for recovery on the FCS program, and then the remainder, it is about $8 million on $35 million in sales. That is you get favorable absorption when you book that much, which is our more normal activity. So they have a couple other things in there that are happening in the fourth quarter to get us to the 17%.

I think about it normally, if I look back historically, I mean, margins in the fourth quarter for motion control. I have seen them as high as 13%, 14%, but then there is some sort of extra kickers in there of additional sort of program money that you are getting on top of that. Is that sort of the way to think about it? Plus in addition to the restructuring you have done in the first quarter?

Yes. I think you're right. That's absolutely right.

Okay. And I guess lastly, any update on the [petrol deep sea pump] trial, how that is going?

I'm trying to think of the last update we got on that. I know it is in the bottom of the ocean. It has been connected to the tentacles.

I think they are experiencing problems with that particular unit, of which we have to find out what the details are.

So there is no data there?

No. no real update to speak of.

Okay. Thanks a lot, guys.

And our next question is from Chris Donaghey with SunTrust Robinson Humphrey.

Marty, I know you're probably not ready to get into the quantitative nature of this, but talking about 2010 being flat to slightly down. Could you help us with putting the plus or minus signs in front of the segments with the acquisitions motion control might have a positive but the other two may be down.

Certainly for that we have not gone through it and we don't normally give out 2010 guidance. I'm just giving you off the cuff comment about 2010.

Thanks.

And there are no further questions by phone.

Okay. Well thank you very much for joining us today. I look forward to speaking with you again in February of 2010. Take care.

Bye-bye.

That concludes today's conference call. We thank you for your participation.