Curtiss-Wright Corp (CW) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Curtiss-Wright third quarter 2010 financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Martin Benante. Please go ahead.

Thank you, Marina. Good morning everyone. Welcome to our 2010 third quarter earnings conference call. Joining me today is Mr. Glenn Tynan, our CFO, who will begin our forum today. Glenn?

Thank you, Marty. Our call today is being webcast, and the press release as well as the replay of this call can be found on the Company website. Before we begin please note today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995.

These statements are based on management's current expectations and are not guarantees of future performance. Forward-looking statements always involve risks and uncertainty, and we detail those risks and uncertainties in our public filings with the SEC. For our agenda today, I will provide an overview of Curtiss-Wright's third quarter 2010 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. Overall Curtiss-Wright delivered a strong third quarter, and we were pleased with our results based on higher revenues and strong operating performance across all three of our business segments. Consolidated sales were $466 million during the third quarter of 2010, up 7% overall and 5% organically as compared to the third quarter of 2009. The sales increase was driven solid growth in both commercial and defense markets. And includes $8 million of incremental sales from our recent acquisitions of Skyquest, Hybricon, and SES, all of which were in the motion control segment. Our consolidated operating income in the third quarter of 2010 was $48 million, a strong increase of 33% over the third quarter of 2009.

All three segments contributed solidly to the quarterly performance with growth of 32% in Motion Control, 30% in Metal Treatments, and 17% in Flow Control. The segment increases were supplemented by lower non-segment operating costs, due primarily to lower pension costs and higher FX transactional gains. As a reminder, the third quarter of 2009 included an unfavorable nonrecurring pension adjustment. If you exclude the pension expense from the third quarter results for both years our operating income increased 26% on a 7% sales increase, and our operating margin increased 170 basis points in 2010 as compared to 2009. Our consolidated operating margin was 10.3%, a 200 basis point improvement from the prior-year period, primarily driven by our strong segment operating margin performance, which increased to 11.5%, or a 160 basis point improvement.

This margin improvement was realized across each of our three segments, primarily due to favorable overhead absorption on higher sales, and the continued benefits from our cost-reduction and restructuring programs. As you know over the last couple of years, we have implemented significant cost reduction and restructuring programs, and we continue to see the benefits of those programs favorably impacting our operating results. Net earnings for the third quarter increased 38% to $28 million, or $0.60 per diluted share, a very solid improvement from the $20 million, or $0.44 per diluted share earned in the prior-year period.

Interest expense was down slightly, due to lower average debt levels resulting from our cash generated from operations in the third quarter. Our effective tax rate for the third quarter of 2010 was 34.4%, a slight increase over the prior-year period. New orders received year-to-date of $1.36 billion are up 6% over the prior year, while our backlog as of September 30th, 2010, was $1.63 billion, essentially unchanged from year end. Free cash flow which we defined from cash flow from operations less capital expenditures was $19 million for the third quarter of 2010. Cash flow from operations of $35 million was down $12 million from the prior-year quarter, due to lower deferred revenue and higher unbilled receivables on long term contracts, much of which we are expecting to bill and collect by year end.

Capital expenditures of $16 million were $7 million lower than the prior year due to the completion of our AP1000 facility expansion in the fourth quarter of 2009. Our balance sheet remains strong with $84 million in cash, working capital of $543 million, and total debt outstanding of $527 million as of September 30th for a booked net debt to capitalization of 28%.

Moving on to our segments in our Flow Control segment, sales increased 5%, driven by a double-digit increase in our naval defense sales, primarily for the Virginia Class Submarine, the CVN-79 Ford Class Aircraft carrier, and our helicopter landing systems. And similar to last quarter, this growth was offset somewhat by a reduction on the DDG 1000 destroyer program as we complete work on the third and final ship.

Our performance on the commercial side was mixed, as we saw continued sales growth in the general industrial markets, primarily control systems for the HVAC market, mostly offset by a decline in the commercial power market. Within our oil and gas market, higher demand for our coker products internationally, was offset by customer delays and capital spending on larger projects domestically. Flow Control generated operating income growth of $4 million, or 17%, and operating margin improved 100 basis points to 10.4% in the third quarter of 2010.

Favorable overhead absorption and savings generated from our cost-reduction and restructuring programs drove the margin improvement, particularly in our oil and gas division which has undertaken significant restructuring initiatives, including the consolidation of manufacturing operations into Houston. Sales in our Motion Control segment increased 9%, 4% of which was organic. This solid performance was largely driven by an 80% increase in our general industrial market, due primarily to higher demand for our integrated sensor products.

Based upon improving economic conditions, this is the third consecutive quarter our Motion Control segment has generated year-over-year growth in this market. This strong performance was coupled with an increase in both the commercial and defense aerospace markets, primarily resulting from increased sales due to the ramp-up in production on the Boeing 787 program, higher sales on the Global Hawk and BAMS UAB programs, and increased demand from international aircraft and helicopter programs.

As expected our ground defense sales were down due to the cancellation of the FCS program, and lower sales on the Bradley platform. Motion Control generated strong organic operating income growth of 34%, up nearly $6 million over the prior year quarter. Foreign currency translation negatively impacted operating income by nearly $1 million in the third quarter as compared to the prior year. Motion Control's organic operating margin improved 320 basis points to 14.3%, representing the third consecutive quarter of triple-digit organic operating margin improvement.

This organic operating income and margin performance was largely driven by favorable cost absorption and the benefits generated from our cost reduction and restructuring programs. In our Metal Treatment segment, sales increased 10% over the prior year period, or 12% organically, if you exclude $1 million of negative foreign currency translation. Organic sales increased in most commercial markets mainly due to the continued recovery in our general industrial and automotive markets, as well as solid performance in our commercial aerospace market, with higher sales of shot peening, heat treating, and coating services.

Metal Treatment generated strong operating income growth of 30%, a 160 basis point improvement over the prior year period. This improvement was predominantly based on the favorable cost absorption on the higher sales volume, as well as the benefits from our cost reduction and restructuring programs, which were partially offset by higher startup costs related to investments in international expansion initiatives. Sequentially sales in operating income for Metal Treatment were down in the third quarter, due primarily to facility consolidation, and customer consolidation costs, and customer plant shutdowns in Europe. In terms of our operating margins for the full year 2010, our guidance remains unchanged for each of our three business segments.

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

Thank you. Curtiss-Wright delivered a strong third quarter that met our expectations, enhanced by the benefit of strong triple-digit operating margin expansion across all three of our segments, reflecting the impact of cost reductions, and restructuring initiatives implemented across the Company. And a continued rebound in some of our key markets, that are sensitive to an economic recovery. Based on our solid third quarter results, we have generated year-to-date organic operating income growth of 18%.

Overall, the economy continued to show signs of improvement particularly as it relates to our commercial markets. And this is clearly visible in our general industrial market where we generated a 35% increase over last year's performance in the quarter. Throughout the recession, we have proven our resiliency due to our diversified business model, as well as our ability to execute our strategic plans and drive increased profitability. I remain confident that our strong operational performance will continue in to the fourth quarter.

Looking at the third quarter 2010 market performance, we will start with our commercial markets, which is up 8% overall in the quarter. We experienced solid growth of 11% in our commercial aerospace market, due to the continued ramp up in production on single hull aircraft and uptick in sales related to Boeing's 747s and 787 airplane, and higher demand for our integrated sensors and Metal Treatment services.

Throughout the industry, we continue to see a number of positive dynamics that should prove favorable to Curtiss-Wright for the remainder of this year, and into 2011 and beyond as well. IATA recently forecasted strong 2010 profitability for the airline industry, a dramatic turnaround from the weakness in 2009, as well as expectations for increased capacity related to new aircraft delivery and a recovery and full utilization, which will further drive profitability improvements in 2011. Overall based on the continued growth in air travel worldwide along with new order flow, and increased production rate from both Boeing and Airbus, we remain optimistic about our commercial aerospace operations, and we continue to believe that the long-term fundamentals for our commercial aerospace are attractive. Finally, our full-year 2010 guidance for our commercial aerospace market is growth of 14% over the prior year.

Moving to general industrial markets, we had a healthy, 35% growth, as we experienced a broad recovery across several of the markets we serve. During the quarter, we generated solid demand for our control systems for the commercial HVAC industry, as well as strong sales in our automotive market for both domestic and international customers, due to the increase in global auto production experienced throughout 2010. Our full-year 2010 guidance for our general industrial market is growth of 16% over the prior year.

Our commercial nuclear power market experienced a 3% overall decline in the third quarter. New construction revenues decreased due to a deceleration of sales of our next-generation reactant coolant pump for the China AP1000 program, which will continue as we approach initial deliveries on this program.

This deceleration was largely offset by increased demand for upgrades in plant maintenance on domestic operating reactors, including pumps, valves, actuators, and also our plant performance systems. Despite lower plant outages in 2010, operating reactor maintenance sales increased 21% due in a large part to increased content per reactor, an encouraging sign for our domestic markets, and this business posted its second consecutive quarter with greater than 20% growth. Internationally, we see increased activity and significant opportunity for future reactor builds, with expectation of future orders from China as well as other parts of the world.

Looking ahead we would expect our next order will most likely come from China. During the third quarter, we continue to make progress on the AP1000 program, as diagnostic testing is under way and is expected to be completed in the fourth quarter. This is an important step since it will allow us the freedom of design as the requirements of this test are met. We can then begin qualification testing that is expected to run through April of 2011. All hardware production remains on or ahead of schedule for the first four pumps are expected to be delivered on or ahead of schedule. These tests are critical to our AP1000 program as successful tests will provide confidence to the Chinese and the rest of the world, and the capabilities of the first of a kind reactant cooling pump, and will open the door for future orders. Finally, our full year 2010 guidance for our power generation market is a decline of approximately 1% from the prior year.

Within our oil and gas market, we experienced a slight sales decline of 2% from the prior year, although our performance was mixed. We have seen higher demand for our coke product internationally. However, we continue to see capital spending delays on larger products for both domestic and international customers, especially as it relates to our engineered pressure vessels, as new capital equipment orders have failed to materialize at the expected volumes. General economic uncertainty as it relates to this market, along with the aftermath of the BP oil spill continues to make customers less intent on committing to large capital projects, which are being delayed. We are encouraged to see that the US moratorium on deep water drilling has been lifted.

However, the continued uncertainty, market conditions, and new safety regulations are likely to continue to delay orders in the oil and gas market. Refining margins have trended slowly, slightly lower in the past few months, compared to the first half of the year, but are still well above 2009 levels. While the spread between light and heavy crude prices has somewhat decreased.

As we mentioned in the past, this is an industry that is known for volatile fundamentals. So we expect the recovery to be slow. However, in the meantime, we continue with our facility expansion, and manufacturing consolidation in Houston, which will better position us for the recovery in this market. That said, I am pleased to mention that a major international refining customer, who for competitive reasons cannot be named at this time, has contracted with Curtiss-Wright for a significant coker project valued at in excess of $10 million. Finally, our full-year 2010 guidance for our oil and gas market is a decline of 6% from the prior year.

Moving on to our defense portfolio where our program diversification continues to provide stability in this market, third quarter our defense market grew 6% overall, led by strong gains in our naval and aerospace defense market that was offset by expected lower revenues in ground defense. It is worthwhile noting that we have seen a substantial increase in demand for our embedded computing products in various UAV platforms, as these and other products continue to meet the Intelligence, Surveillance, and Reconnaissance, or ISR needs of the US and foreign militaries. We find this very encouraging as this is one area of the DOD budget that has grown.

In aerospace defense, we experienced 19% growth, principally due to higher sales of embedded computing products related to the ramp-up of the Global Hawk program for the Air Force, and the Navy variant BAMS, as well as higher demand for integrated sensing products on international aircraft and helicopter programs. The strong performance in aerospace defense was partially mitigated by the cancellation of the F-22 program, and lower F-16 sales. Looking ahead, performance on the F-35 Joint Strike Fighter program is expected to increase as production begins to ramp-up, then we expect to see some new orders next year. Our full-year 2010 guidance for our aerospace defense market, growth of 15% over the prior year.

Our naval defense market posted an increase of 14% in the third quarter due to the ramp-up in procurement for the Virginia Class Submarine program. Increased production on the CVN-79 Ford class aircraft carrier program, and higher sales related to helicopter landing systems, offset partially by lower sales on the DDG 1000 destroyer program, and legacy aircraft carrier programs.

Given the strength that we have seen in this market year-to-date, our full-year 2010 guidance for our Naval defense market is growth of 3% over the prior year. As anticipated, our ground defense market was down 33% for the third quarter and 32% year-to-date, primarily due to lower Bradley and FCS sales. As previously noted, we expected to see lower 2010 revenues in this market compared to 2009, due to the reduced orders for the Bradley and Striker vehicles, and the cancellation of the FCS program. And our full-year 2010 guidance for our ground defense market is a decline of 36% from the prior year.

Wrapping up on defense overall we are very pleased with our performance. We have been able to offset the loss of business from the termination of the FCS and F-22 programs, significant lower Bradley sales, and the completion of the DDG 1000 program, through sales of our embedded computing products and other areas of defense, principally for ISR applications. In fact, if you were to exclude the ground defense related portion of our embedded computing and electronic components products, the remainder of those businesses would have produced a solid gain of 21% year-to-date, a further indication of the continued importance of the electronic portion of the defense budget moving forward.

Overall this was a strong quarter across all three of our business segments. As stated in our earnings release, our third quarter met our expectations, I am very encouraged that this momentum will continue into the fourth quarter, enabling us to overcome $5 million, or $0.07 per share of unplanned foreign currency impact. Additionally despite various challenges to our business, including the FX headwind and the impact of oil-drilling moratorium, we still expect to be at the high end of our guidance for sales, operating income, and diluted earnings per share.

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

Thank you, sir. (Operator Instructions). Our first question from Tyler Hojo with Sidoti & Company.

Hey, good morning, guys.

Good morning, Tyler.

First, just hoping that you could give us the backlog by segment, and what depreciation was in the quarter?

Yes. Okay. The backlog by segment is about $501 million for Motion Control.

Okay.

And $1.26 billion for Flow Control.

Okay. And --

Depreciation in the quarter was about $20 million.

Okay. And just looking at free cash flow, you maintained your free cash flow guidance, but year to date, I mean free cash flow was negative, and I guess looking back last year, you obviously had a big cash flow year, but through the first three quarters of the year, I think you had something like $20 million in positive free cash. What gives you confidence that you are going to be able to kind of fill the gap in the fourth quarter this year?

Well, I think I said in the second quarter, the bulk of what is still driving us and we are still moving a little bit to the right is unbilled receivables. But what gives us a little bit of confidence, a couple of different things.

A chunk of that unbilled receivables shipped out in the month of October, has already shipped out, and we expect to collect that in the first quarter, and the rest of it is all scheduled for early November. So that is moving into the billed category. We expect to be billed in the fourth quarter. As well we have some defined milestone payments on the AP1000 program in the fourth quarter, which will help us out as well, and we received significant -- we go through this every year in the fourth quarter, a couple of our big customers have September 30th year ends, so we get into this thing where we receive significant cash in the first seven days of business in the fourth quarter, so over 20--, I don't have the exact number, but it is a fairly large number, and we go through that every year.

So everything is starting to move in the direction we expect it to, so there is the usual inventory burn-off that we go through in the fourth quarter that we billed, if you notice we billed through most of the first half and into the third quarter and then it burns down in the fourth quarter, and that is already starting to happen, so we did do $100 million last year in the fourth quarter, and we only have to do $90 million this year, so we are ahead of the game. But things are moving in the right direction. Is everything there yet? No. But it is moving in accordance with plan, I guess I'd say, Tyler.

Okay. That sounds fair, and it sounds like you have fairly decent visibility in terms of what you have seen so far in the fourth quarter?

Right.

Okay. And then just lastly, I appreciate Marty's commentary just in terms of nuclear, but look, we have been hearing about this nuclear renaissance for some time, and sales are down. I am just kind of wondering when you guys expect to see growth in that market, and clearly, it seems like the retrofit sales are really carrying you guys right now, which is great to see.

Yes, it is. We at the very beginning of the year said our nuclear sales would be down. Actually it is not down as much as we expected to be, because of the increased sales for reactor maintenance, but we do expect a new order from China in 2011.

A lot of it is tied into the testing that we are doing right now. The diagnostic testing that we are doing will set the configuration, and right now testing is going very well. We are passing the tests that it has to go through. We are back on test, we will finish up that diagnostic testing, and then we are going to our qualification testing, which will run through April of 2011. The one thing about these pumps is once they start testing, and they are built, they normally have, they will run for many, many, many years, an extended period of time. So that will give our customer a lot of confidence that the configuration is ready to go, and place more orders for AP1000.

Okay.

So I hear what you are saying about -- we have heard about it before, but everything goes well, we will get an order next year from China in 2011.

And you would expect to be booking sales on that order in 2011 as well or is that more 2012?

Yes, we should start getting long lead materials. And you asked the question about backlog, and one thing that you should understand about backlog is that we are at the down cycle of CVN-78 aircraft carrier, that is almost gone. You are going to start seeing a buildup of the aircraft carrier which is CVN-79.

Also you are going to see a new order for nuclear power come in next year. So you are going to start to see a ramp-up in new orders in the flow control area, because you are starting to see a ramp-down in the aircraft carrier area, and also in the nuclear new build reactor area, and also you are going to see increased new orders for submarines.

Right.

So you are going to start to see a buildup in the backlog in the Flow Control area, it is just a matter of timing.

But you have already seen the orders from the second Virginia Class, or is that inaccurate?

No what happens is it doesn't get funded, so we have signed a multi-year procurement, but we have not received all of the funding. We only put in to our backlog what we have been funded for.

Okay. Understood. Alright. Great. Thanks. I will hop back in the queue. Thanks.

Thank you.

Thank you, our next question comes from Myles Walton with Deutsche Bank. Please go ahead.

Thanks, good morning.

Good morning, Myles. How are you doing?

Good. Good. Question for you on the implied fourth quarter with everything that you have done here, the $5 million in unplanned FX that you talked about, what segment is that in particular hitting you in?

It is mostly in the Motion Control segment, it is mostly from the Canadian dollar. And when we say on plan Myles, I mean we are always going to have differences from the prior year, which we kind of know going in, but when we set our budget rates in the beginning of the year which is the basis of our guidance, that has deteriorated pretty significantly from what we set our guidance at. So that is the unplanned piece, but it is in Motion Control, and mostly the Canadian dollar.

Okay. I am just looking at the implied margins year-on-year, despite, I guess you are looking at sales down year-on-year, and margins down year-on-year, and I am just kind of curious on the sales side as well, what the bigger moving parts are there?

If you look at our year, most of -- as we are looking at the fourth quarter, we are pretty much ahead in terms of, through the nine months how much of the year we have gotten our nine months versus the fourth quarter. So it is a little bit of shift in timing.

Most of that from the sales side is in the Flow Control segment, in terms of the decrease in the fourth quarter. A little bit in Motion Control, but those are the two pieces. And it is mostly timing. Sometimes we get to the end of the third quarter, and the fourth quarter looks humongous, because it shifts into the quarter. This time it is evening out a little bit. Those are the two areas where we have the sales declines.

Okay.

If you look at the fourth quarter overall, I mean at the end of the day, it is about $1 million lower in earnings before tax, which is about $0.5 million on the net, and then if you look and also our shares are up about $1 million. So if you compare quarter to quarter it is about $0.01 from operations, and maybe $0.02 from the shares. So it is not tremendously different.

You are looking Q4 2010 over Q4 2009?

Yes.

I was more curious if this was leading to some conservatism on the sales line into 2010, in the fourth quarter of 2010, or if this was like you are alluding to, more of a smoothing out I guess, of the usual steep ramp into 4Q?

Correct. It is more of the latter.

Okay. And then the other question I had for you was on the nuclear side, and with respect to the China order, I am curious is it a manifestation of the supplier organically in China being not yet up to speed, and is this an opportunity for you to renegotiate kind of the longer term contracts, whereby the organic supplier owns that market.

No, it is not really that the organic customers not really getting up to speed. As we contemplated over the years that we would have input in future plants in China. Now it is going to be how significant is that number going to be.

Okay.

And we think we are going to get a nice order and a nice chunk of that business, so we will see how that plays out in 2011.

So I guess to follow up, is it a new reactor coolant pump order, or is it orders on the reactors that you are currently providing RCPs for?

No, no it would be new, new reactors.

Okay. Fair enough. And then any thoughts on what type of growth rate you are looking for at a high level into 2011?

When we look at 2011, we are expecting to have a modest increase in sales, but we do expect margin expansion from all of the cost reductions, and that is going to be despite significant increase in pension expense and higher medical and labor costs. So the bottom line will obviously grow much faster than the top line.

Okay. But you could get to double-digit earnings growth?

Well, if you are looking at high single, low double, but we still haven't gotten where our pension expense -- we have got a fairly good indication, and that is about the only thing we need to get sorted out.

Fair enough. Thank you. Thanks again.

Thanks Myles.

Thank you, our next question comes from Ken Herbert with Wedbush Securities. Please go ahead.

Good morning.

Hi, Ken.

Good morning, Ken.

I just wanted to follow up on the quarter and for the year, can you give any more specifics on what the benefit was in the quarter in terms of the increase from the cost savings and the restructuring, relative to just better volumes and absorption?

That is kind of tough as far as the absorption is concerned, because we are doing it with not a lot of increase in sales. Organically our sales went up somewhat like 5%, but our profit really went up 18%. So it is not as much absorption as it is cost reduction.

So it is more of the cost story in terms of what you have been able to do over the last 12 to 18 months or so?

That is correct.

And even longer than that.

Sure. Sure. And as we think about that in to 2011, is there anything you can talk about just in terms of your expectations from that standpoint? Are we looking at that to continue to accelerate, or are we looking for, do you feel like you are sort of through a lot of what you have done on the cost savings, and there is maybe still benefit? But how would you characterize the process, in terms of thinking out one to two years, or specifically for 2011?

We are going to continue to see benefit. There is give back along the way. Everybody is under pricing pressure, so we will continue to see benefits from cost reductions going out into the future.

Okay.

And we are not done yet with some of the cost reductions that we have, so it is an ongoing process on both sides.

Okay. And can you just finally, Marty, comment on what you are seeing in terms of the M&A pipeline?

There are a lot of opportunities. I think that it will be -- the amount of companies that we are looking at is growing, so I think that the pipeline has got more companies in it, and I think when that happens, we are normally successful in bringing a couple of acquisitions home.

And is there anything you are looking at in terms of changing priorities for markets, or specific areas of interest as you look at acquisition opportunities?

No, we like a lot of the markets that we are in, and a lot of areas that we are just coming in to those markets. We see a lot of opportunities in areas that we are consolidating, so we like a lot of the areas that we are in.

Alright. Thank you very much.

Thanks, Ken.

Thank you. Our next question comes from Stephen Levenson with Stifel Nicolaus.

Thanks, good morning, Martin and Glenn.

Good morning.

Good morning.

Just to try to expand a little bit on Ken's question there, do you see yourself favoring either the commercial side on M&A or defense, given the declining defense budget? When it comes to M&A?

Well, the thing is that we like technology, and we like technology that is built on defense and commercial, so it is not an easy question to answer. Obviously we get more leverage out of the commercial side. That is an area that we would like to continue to pursue, but there is also a lot of the technologies that we would pursue, there is an application on the military side also, so I guess you would say it would be more on the commercial side.

Okay. One of your peers yesterday mentioned anticipating some orders from Petrobras, relating to deployment of subsea equipment. What sort of opportunity do you have there on your submersible pumps?

There is still opportunity, it kind of comes and it goes. It has been hot and it has been cold, so we don't have a lot of that planned, but we do think that there is going to be opportunity for our pumping station in the future.

Okay. Thanks. Last one is the Marines have talked about not having enough money to buy Joint Light Tactical Vehicles, and trying to do something on the Humvees to better to protect the troops. Is there an opportunity there for Metal Treatment, anything to do with armor, or any plan to expand into armor?

No, I think the biggest area that we have with the Humvees is the electronics that we provide for detection of IEDs, and things like that.

Okay. Thank you very much.

Thank you.

Thanks, Steve.

Thank you, our next question comes from Eric Hugel with Stephens, Inc.

Good morning guys. With regards to you are seeing a pickup in 787 work, has there been any shift for you guys in any of the delivery schedules, because of all of the things that are going on with the program with the push-outs?

Not really.

Relatively stable there?

Yes.

Yes.

Okay. With regards to ground vehicle, I mean, you talked about Bradley, and you talked about FCS really as the main drivers there. We know that FCS is a lost cause here, but Bradley, when would you expect sales to start to pick up again here?

2012.

And you would start getting those orders in 2011?

Yes, I would say so.

Okay. Glenn, with regards to pension, can you give us any sort of visibility with regards to maybe an expectation of sort of incremental step-up in pension costs, or at least a sensitivity analysis to changes in discount rates and/or returns?

Yes, I guess all we can really, I mean we really just got some of the preliminary information yesterday, so I would say preliminary it is going to be a significant increase. Until we study it and get through it I am not, I don't really want to go through too much of the details at this time.

Okay. With regard to the AP1, a follow-up on Myles' question, the orders that you are talking about for the AP1000 those would be for reactor coolant pumps, correct?

That is correct.

Okay. Good. And is there anything else beyond the official qualification testing ending, and all of that stuff, are there any other hurdles that you need to climb over before an order might be forthcoming?

Negotiating price, I guess. No, that is really it. The testing is important.

Right. So I mean, I am assuming that you are in discussions with the customer, and there, you have a framework, and they are just saying, look, we are not placing any more orders until we get through the qualification, and then we can move forward?

No, it is not that. I mean, realistically if you were sitting on their side of the table, you want to make sure that these configurations work. They are very optimistic about where it is going, but when you start to take a look at some of the numbers that they may be talking about, you want to make darn sure that this thing works.

Right.

If I were sitting on their side, I would want to make sure it works.

Fully understand that. And I guess my last question on the topic here, I guess Shaw just got sort of a contract to do a technical assistance work for an AP1000 plant, and I think though Chinese are talking about wanting two more plants in addition to that one online by 2015. What is sort of the timeframe in which, if that is what they want, sort of in-service timeframe, when would they need to give you an order by? It is next year?

Very soon.

Okay, guys. Thanks a lot.

Sooner rather than later. That is for gosh-darn sure.

Alright. Guys thanks a lot.

Thank you. Our next question comes from Michael Ciarmoli with KeyBanc Capital Markets.

Hey, good morning guys. Thanks for taking my questions. Marty just one question or Glenn, as we sit here today right now without the order for the AP1000, it sounds like revenues are going to be down year-over-year in 2011 versus 2010?

No, the thing is we probably won't have a tremendous input for sales on the new order on the AP1000. We are still expecting to see an increase in sales.

Remember, what is happening is that China is coming down, and the domestic is going up, so it is a matter of whether the domestic increase, will be more than bigger. But that is the dynamics going on when we get our final 2011 settled, we will be able to tell you that.

As of today, though hard to tell how long that domestic will ramp, and it is tough to say if that will make up for the China decrease?

No, we expect that it will be up. It doesn't mean that nuclear is going to be up. It is just that overall we are going to be up.

Okay. And just clarity on the Metal Treatment margins. It sounds like it was just startup costs and some EU shutdowns that tamped down the Metal Treatment margins sequentially. What are kind of the expectations in the fourth quarter for those margins?

Obviously they are going to improve. And if you look at the fourth quarter is probably going to be very similar to the first quarter in Metal Treatment. That is what we are looking at, but obviously it is going to be better than the third quarter. Third quarter had some extraordinary items in there.

Okay. Perfect, and then just regarding a lot of your defense electronics and embedded systems, are you starting to any sort of pricing pressure out there, are some of the prime contractors coming down on you harder with price, in an effort to lower overall costs?

We have seen that for years now. That is nothing unusual, because of the fact that most of the Armed Forces are saying that their per unit cost needs to come down.

So obviously then you are bringing your costs down to conform with that?

Yes, we have had to for years.

Okay. And last one, just on the kind of revenue gap being created by the F-22 and the F-35. Where do you see kind of your F-35 revenues next year?

We have I think 400,000 on that -- go up to 32 next year from about 17 this year.

Okay. So you are going to bake in the whole ramp?

About 15 more units at 400 per I guess. Something like that, we will give you more color when we get all of the details. That is probably fairly close.

Okay. Great. Thanks a lot, guys.

Alright.

Thank you. I am showing no further questions at this time. Martin Benante: Well, if not, well, I thank you very much for joining us today. And I look forward to speaking with everybody in February. Thank you very much. Take care.

Thank you. Bye bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference and you may now disconnect.