Curtiss-Wright Corp (CW) 2011 Q3 法說會逐字稿

Good day, Ladies and Gentlemen, and welcome to the Curtiss-Wright third quarter 2011 financial results conference call. (Operator Instructions). I'd like to introduce your host, Martin Benante, you may begin.

Thank you, Stephanie, good morning, everyone. Welcome to our third quarter 2011 earnings conference call. Joining me on the call today is Mr. Glenn Tynan, our CFO, who will begin our forum today. As you will see this morning we produced a solid third quarter performance despite the challenging environment in our oil and gas market. This and 50% growth in new orders through nine months gives us confidence that our future outlook for Curtiss-Wright. I will now turn the conference call over to Glenn. Glenn?

Thank you, Marty. Our call today is being webcast and the Press Release as well as the copy of today's financial presentation are available for download through the Investor Relations section of our Company website at www.curtisswright.com. A replay of this call, also, can be found on the website.

Please note today's discussion will include certain projections and statements that are forward-looking statements 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 uncertainties and we detail those risks and uncertainties in our public filings with the SEC. In addition, certain non-GAAP financial measures will be discussed on the call today. A reconciliation is available in the earnings release and at the end of this presentation and will be available on the Company's website.

For our agenda today, I will provide you with an overview of Curtiss-Wright's third quarter 2011 performance, followed by Marty, who will discuss our strategic markets and open the call for questions. We are pleased with Curtiss-Wright's third quarter performance as sales grew 11% with increases in all three of our segments. Operating income increased 4% led by strong performance by our Metal Treatment segment. Organically operating income increased 7% on a 4% increase in sales.

In addition we produced solid growth in net earnings and diluted earnings per share. Our operational EPS was $0.68 for the quarter when you exclude the $4 million R&D tax credit and unfavorable foreign currency translation. We also experienced solid new order activity based on strong demand in the commercial aerospace and power generation markets and higher orders for MRO products in our oil and gas market. We remain encouraged by the continued positive trends experienced in these markets.

Looking deeper into the third quarter results, segment organic operating income rose 8% while segment organic operating margin increased 40 basis points to nearly 12%, driven by significant improvement in our Metal Treatment segment. Partially offset by lower than expected performance in globe controls, oil and gas large project business. In addition, corporate and other costs were higher by approximately $1 million in the quarter. We also ended the quarter with a strong backlog of approximately $1.7 billion due to solid growth of 15% new orders year-to-date. Our backlog at quarter end was split approximately 70% in Flow Control and 30% in Motion Control.

Meanwhile book-to-bill was a solid 1.12 for the third quarter and 1.04 for the nine months ended September 30. Moving on to segments beginning with Flow Control where oil and gas played a major role in the segment's third quarter performance. Flow Control third quarter sales in the oil and gas market increased 3% year-over-year and we have experienced a sequential improvement in sales since the beginning of the year, as MRO activity continues to improve; however, the delays in capital spending on large, international projects continues to negatively impact our sales in oil and gas, leading to reduced profitability based on the under absorption of fixed overhead cost.

In addition, we are in the startup face relative to our new super vessel business , which will negatively impact our near term profitability before turning profitable as volumes continue to increase. Despite solid profitability coming from the general industrial and power generation markets it was not enough to overcome 150 basis points negative impact from oil and gas resulting in 100 basis points reduction in total segment operating margin for the quarter. It is interesting to note that excluding oil and gas, the remainder of our Flow Control businesses performed well with operating income up 22% on a 7% sales increase.

Next we'll turn to Motion Control where several factors impacted their profitability this quarter, as expected and consistent with recent trends in the segment we experienced unfavorable foreign currency translation of nearly $2 million or 120 basis points in the third quarter. In addition, operating margin was impacted by the first few dilutions from the acquisition of ACRA as well as the divesture of a non-core product line. Excluding the effects of these items, organic operating margins increased sales increased 3%. Organic operating margins was 13.2%, a 20 basis decrease from the prior year period, primarily due to strategic investments in several long-term ISR related defense programs.

In addition, we recently announced the acquisition of South Bend Controls to leading suppliers of solenoid based components for the global aerospace and defense industrial and medical markets. We expect this business to add, approximately, $3 million in additional sales and a penny of dilution in 2011. Moving on to Metal Treatment, which continued the strong performance this year with another solid quarter including notably strong increase in aerospace and general industrial markets. Operating income rose a healthy 120%, 88% of which was organic.

On the heels of the strong sales increase , Metal Treatment produced 16.8% in the third quarter, an increase of 640 basis points from the prior year. Operating income included a non-recurring insurance recovery, which contributed 190 basis points to the increased margin. Excluding this item , operating margin would have been a solid 14.9%. Next, we'll discuss the overall end Meyers. Please note the percentages you see on the pie chart on the slide relate to third quarter 2011 sales for each of our end markets.

Our commercial markets produced strong sales growth of 20% in the quarter, based on increases in all four end markets. Meanwhile the performance in the defense markets was essentially flat overall as improved sales of defense electronics and ISR products were offset by lower sales in naval defense. We will begin with our aerospace defense market, had solid sales growth in the quarter led by embedded computing and sensor products supporting ISR applications, most notably on helicopter programs such as the black hawk. We also experienced higher sales on B-22 and JFF programs. We achieved this growth despite the winding down of F-22 program and lower sales on US Navy BAMS variance of the Global Hawk as this program moves from development to production. Overall, we are projecting 7% to 9% sales growth in the aerospace defense market in 2011, unchanged from the prior guidance.

Next, to ground defense, we experienced higher sales of turret drive aiming and stabilization systems to international customers, as well as a slight uptick in striker sales however these gains were not enough to offset the expected year-over-year sales decline this quarter on the Bradley and Abrams programs. As a result, the ongoing decrease in Bradley sales we lowered our 2011 sales forecast in the ground defense market to 6% to 8% growth down from the previous guidance of 8% to 10%. Next, we'll look at naval defense, we experienced solid growth in production on the advanced arresting program, as well as increased sales on DDG 51 surface combat program; however these gains were offset by the winding down of the CVN-78 aircraft carrier and DDG 1000 Destroyer programs as well as reduced sales on Virginia class submarines and CVN-79 aircraft carrier due to timing on long-term contracts.

Some production work on aircraft carrier is now expected to shift into next year and we lowered our 2011 sales forecast in our naval defense market to 1% to 3% growth down from our previous guidance of 3% to 5% growth. We continue to see a strong benefit from the ramp-up in the commercial aerospace market where we had a strong third quarter that again led all end markets. Due to solid organic growth of 13% supplemented by the 2011 acquisitions of Douglas, ACRA, BASF. We saw increased across Boeing and Airbus platforms. In addition, we experienced healthy demand for sensor and control products on various commercial aircraft. Given the continued strength and acquisitions in this end market, we are now projecting sales in our commercial aerospace market to grow 30% to 32% in 2011, which is an increase from our previous guidance of 26% to 28%.

In our oil and gas market we again experienced solid increase in sales and new orders in the MRO business while our business supporting large capital projects continues to be soft,primarily internationally. For the full year 2011 we saw modest growth in both the US refinery-related MRO projects and large super vessels. This will be partially offset by the continued delay in large, capital global projects. Note known of these projects have been canceled; in fact, we have actually increased the content on some of them. However, they continue to move to the right into 2012 and beyond in some cases. Overall, we'll projecting sales decline of 3% to 5% in the oil and gas market 2011 which remains unchanged from the prior guidance and primarily is due to the sale of our legacy valve distribution business.

Next, we'll move on to power generations markets which benefited from higher revenues on US and China AP1000 projects as well as increased after market sales with reactors. We also experienced solid sales from the BASF business acquired earlier this year with strong demand for thermal spray coating capabilities. For 2011, we're increasing our sales projection in our power generation market to 9% to 11% growth up from the previous guidance of 6% to 8%, primarily due to solid organic growth supporting nuclear operating plants world wide.

Lastly, we'll turn to general industrial market which produced a solid third quarter. Based on higher volumes and overall stronger demand for Metal Treatment services. Sales for the automotive and transportation industries were particularly strong globally as were sales to international HVAC market. Based on the continued solid demand we're increasing 2011 sales projection and general industrial market 14% to 16% growth up from the previous guidance of 10% to 12%. Our revised guidance also includes an expected contribution from the recent acquisition of South Bend Controls.

So, given our current outlook, as just discussed, we have revised our sales projection to grow 4% to 6% overall in defense down slightly from our previous guidance mainly due to the shift in timing on Naval contracts into 2012. We also raised our expectations to grow 12% to 14 % in our commercial markets up 9% to 11% previously due to the improved performance in our commercial aerospace, power generation, and general industrial market . Based on the rational and expectations across all end markets, along with the recently announced transactions we've increased expectations for total Curtiss-Wright sales growth of 9% to 10%. Up from the previous guidance of 7% to 9%. The overall increase in sales guidance primarily driven by organic growth.

Let me now cover our guidance for each of our three segments. Starting with Flow Control we adjusted overall sales guidance based on strong new orders and increased demands in power generations that will be partially offset by a slight reduction in our naval defense sales we also remain cautious regarding our outlook in the oil and gas market following third quarter operational performance and as a result we have reduced Flow Control operating margins by 60 basis points to a range of 9.9% to 10.1%. Our sales guidance in be Motion Control has been updated to reflect the strong demand in commercial aerospace and general industrial markets; however, despite the increases, operating income will be negatively impacted by the additional first year dilution from the 2011 acquisitions which as a result has leas us to reduce Motion Control operating margin by approximately 35 basis points to a range of 11.3%, to 11.6%.

The sales guidance in our Metal Treatment segment has been increased to reflect the improved outlook in all of their markets and operating income and operating margin have been raised to reflect the better than expected operational performance. As a result, we've increased operational margin guidance by 100 basis points to a range 15.5% to 16%. Finally, we've reduced forecast for corporate and other expenses by $3 million.

In addition to our solid sales growth we expect overall operating income to grow 15% to 19% and our consolidated operating margin to increase 60 to 80 basis points over 2010 . Meanwhile we expect diluted earnings per share to grow 17% to 21% up from our previous guidance of 12% to 16% growth. The revised EPS guidance includes the aforementioned R&D tax credit, operational improvements and reduced cost, partially offset by additional dilution relative to recent acquisitions. In addition, as we highlighted last quarter, full year guidance includes absorption of the negative impact of foreign currency translation $0.05 per diluted share when comparing rates our guidance was based on versus the current forecast rates as will as the unanticipated strategic investments in AP1000 program experienced earlier in the year.

Here is some additional financial guidance metrics for 2011. Depreciation and amortization in capital expenditures increased by approximately $10 million each to reflect recent acquisitions while pension expense lowered by $1 million to $22 million overall. Now, I'd like to turn the call back over to Marty for his final comments before we wrap up the call, Marty?

Thank you, Glenn. Based on the solid performance thus far in 2011, we remain confident heading into the remainder of the year with growth forecast across our defense and most commercial end markets. As we said over the past few quarters we expect to benefit from improved market conditions as demand for Curtiss-Wright products and services result in sales growth rates over and above the anticipated growth rates in several markets in which we participate, namely defense, and nuclear this year and oil and gas as we look into the future.

Given that outlook, I'm pleased to say that along with the solid sales growth forecast for 2011, we are projecting both double-digit growth in operating earnings, operating income and earnings per share. Providing further confidence of the future outlook look Curtiss-Wright is well-positioned heading into 2012. Looking at our markets, albeit in the power generation, an update, AP1000 program. As we told you last quarter, during the final phase of testing we discovered a localized high temperature that only affects the life of the pump, which is designed for 60 year life and does not affect the performance. We have successfully tested, fixed the pump, and now incorporating the changes into the production pumps. We expect endurance testing to be late this year and conclude successfully and we remain on schedule for the delivery of the first four pumps in the second quarter of 2012. This new delivery date meets our customers' requirements and would expect it will not impact the overall plant construction schedule.

As a reminder, we have over 60 years of experience making reactor coolant pumps and the AP1000 pump is the first of a kind design, highly advanced state-of-the-art technology. We continue to next necessary steps to insure a lifetime of reliable service for our customers. As AP1000 plants construction continues to move ahead in both United States and in China. Looking ahead, we still expect our next major AP1000 order to come from China in 2012.

Our low-term view on our new built nuclear power generation business remains positive. In fact, I want to highlight a recent development in the industry. As early as this week, Florida Power and Light was given the go ahead by the state of Florida to raise additional funds to fund operations at St. Lucie and Turkey Point reactors and a portion going to the development of two new AP1000 reactors at Turkey point. The decision is good news for Progress Energy which has $140 million request pending that a portion would go toward a new AP1000 reactor at Crystal River Plants. While it is still early in the process, this is definitely a step in the right direction.

I also want to give you an update on the NRC's recommendation from its 90 day report based on lessons learned from Fukashima. It was determined United States plants were safe to operate but actions could be taken to make them safer. NRC staff reviewed recommendations from the task force and for our side of the auctions in three tiers. Based on the required engineering end regulatory framework, the earliest tier 1 actions will not incur until December 2012.

We may have the opportunity to sport the NRC and industry with the development and implementation of seismic and flood hazardous re-evaluations and seismic and flood walk-downs. The more complicated requirements will took place over the next four or five years. By the 2013-2014 timeframe due to the NRC further evaluation and development of regulatory requirements, we would expect to see a shift from the typical MRO projects and upgrade sales to orders that will meet the new requirements, which could result in significant hardware upgrades for Curtiss-Wright, beginning in 2013. However, we will not be able to provide a clear estimate of our potential future revenues until next year.

Overall, our confident existing operating reactors worldwide remains strong and will continue to expand over the long run. As assessments and analysis, from Fukashima as well as future regulations from NRC will drive safety and reliability improvements which is essentially the sweet spot for Curtiss-Wright. Looking ahead to 2012, we expect to see increased opportunities worldwide for the vast portfolio and advanced nuclear technologies, based on our history and expertise in the power generation history.

Within Curtiss-Wright's oil and gas market we continue to see stronger domestic MRO sales a key positive for us and usually the leading indicator of pent up demand for refineries and normally proceeds increased spending of major capital projects. In addition, we've seen solid new orders for our super vessels, which we expect will turn into solid new revenue stream for Curtiss-Wright as we move forward. However, the big story within our gas and oil business continues to be the negative impact caused by the delays in capital spending on large projects. Particularly from international customers.

Thus far we've made considerable consolidated restructuring within the business that recognized significant savings of $3 million as a result. However, the volume on large capital projects have been about two-thirds what was expected. Resulting in reduced sales and significantly lower profitability that have exceeded the year-to-date savings that we generated. As a result, we will continue to improve the profitability in this businesswith further consolidation and restructuring in order to size our gas and oil business accordingly as we move into 2012.

Furthermore, although our new super vessel business is ramping up to meet increasing new orders we have been faced with lower margins due to start-up costs associated with the first year of operation of this business. Which we will expect to improve as we go out into the future. Longer term, we remain confident in our overall energy business, based on projected increase in worldwide energy demand. Expectation that capital spending levels or large-level projects will rebound in the future.

Turning to defense. We made an adjustment to the naval defense sales guideline for 2011, primarily due to the shift in the timing of long-term contracts into 2012. This led to a slight reduction in the overall defense sales guidance, which we now expect to grow between 4% to 6% in 2011. Despite the change, our overall guidance in defense still supports our view from our investor side where we expect our confidence in the current and future outlook, even though years of flat DOD or reduced budgets. In fact, we overcame over 3% of lost sales in 2011 due to large program cancellations. Including the F-22, FCS and DVG1000 . Excluding the impact of the loss of these large programs our projected 2011 defense sales would have shown a solid growth between 7% and 9%.

As you look into the future, I want to reiterate two key points we made on the previous call. Number one, that we were well-positioned on key and future defense platforms both domestically and abroad that will continue to support growth into the future. We expect to benefit from increased demand for ISR and electronic warfare capabilities in the battlefield, both are expected to be strong contributors to our growth in the next five years.

Turning to other matters we'll look to continue to build our Company through acquisitions and organic investments and also expand our unique portfolio highly-engineered advanced technologies that enable us to continue to outperform the markets we serve. Additionally, our consistent focus on strategic investments, diversification and improved operating efficiencies has positioned us to grow profits faster than sales and increase our long-term competitiveness. We've hit our numbers during the first nine months 2011 and raised sale and earnings per share guidance, again, based on the continued strong showing in some of our commercial end markets, and continued ability to overcome headwinds in defense. We're well-positioned heading into 2012.

Finally, a month ago, Wayne announced our Board of Directors approved the repurchase of up to 3 million additional shares of the captain's outstanding common stock subject to limitation of $100 million. This significant increase in our share repurchase authorization reflects our confidence in our ability to continue to deliver strong revenue and profitable growth along with solid free cash flow generation.

While we remained totally committed to our acquisition strategy we believe a disciplined capital deployment strategy that consists of both reinvesting in our business and growing through acquisitions combined with our commitment to return cash to shareholders through solid earnings per share growth, dividend, and share repurchases are in the best interest of our shareholders. Shortly after we received authorization from our Board we entered a blackout period which ends next week at which time we'll be open to begin repurchasing shares, which will depend upon market conditions at that time. At this time, I'd like to open the conference call open for questions.

(Operator Instructions). Our first question comes from Eric Hugel from Stephens Inc. Your line is open.

Hey, good morning, guys.

Hey, good morning.

Good morning, Eric.

Could you talk about in the oil and gas market, these, I guess, these large international programs, keep pushing out to the right. Can you talk to us about, sort of, some of the underlying reasons why that is? Sort of what needs to happen in order for those to sort of firm up? Do you have a guesstimate , sort of, as the timeframe that may happen?

One of the biggest problems that we have, Eric, is that on the international sales, because they have to go through a lot more sign-off on contracts, these contracts continue to move to the right. As I indicated in our last call, normally in the United States, it is kind of like a well-oiled machine, if they move, it won't move that far. So, there are items, we said only got two-thirds of the large capital equipment. Again, if you look at these programs, they're $8 million to $10 million dollars, and they're large programs which does give us a lot of manufacturing. So, that's kind of the reason why we've had some problem there. We'll resize it. It is only a cost issue. We'll resize it and we'll also, at the same time, the vessels will start to pickup profitability-wise. We saw a lot better-improved conditions. If the sales were to go up a lot, we will get a lot better profitability out of that business.

And Eric, just to give you an idea of impact that has had on us just in the quarter, the sales were down $15 million in that business quarter to quarter and (Inaudible). was down $6 million just in the quarter. Year-to-date sales were up $40 million and $15 million in OI. As you can tell, we were able to make that up for other pieces of Flow Control. Those are pretty hefty -- that's the issue of impacting Flow Control right now.

I understand what's going on. I guess what I'm trying to get, insight from you guys as to , do you have any visibility as to when this ends? Sort of what the underlying root cause is? What has to happen for it to change?

Unfortunately, there are publications of when projects are supposed to take place. We talked with all of the A&E and, unfortunately, it is not a situation that we can say that we can thoroughly explain when these new programs will take place. Let's just say there's more confidence they are going to take place, it is just a matter of when.

Fair enough. Can you talk about what the potential impact would be over the next, I don't know, two or three years? Something like that to you? If, maybe, given a worse case scenario in some of these budget negotiations. You know, the Navy decided to push out the next the carrier into 2015 and talk about maybe not refueling the next carrier coming up. Can you talk about the potential impact for you guys would be?

We already took that out of our forecast looking forward. I forget what the number was. I think we said at the last meeting? It was area of about $60 million. If the aircraft carrier, we already had it moved out by a year. So it really tous it, doesn't matter that much.

Great. Just a modeling question and I'll get back into the queue. You kept your share count at, I think, what is it 47.3 orsomething like that? The

Yes.

Implication, Glenn, would be that your share count in the fourth quarter is stepping up from, I think, where you were today at the end of the quarter, below 47 up to something over 48. I thought you were buying back shares, not sort of adding. What's going on there?

Well, we didn't assume any buyback in our -- as of right now.

Yeah, but, still. I mean, one million share step-up when it's been flat as a board pretty much all year? Sort of you didn't want to change it? Is there something going on there I need to understand?

The only thing that usually happens in the fourth quarter, Eric, to make it a little higher we do our long-term grants in the Board meeting every year. That will come into play. That's really only anomaly we have. It is probably, if you go back similar to fourth quarters in the past.

So you could honestly think the for example grant could add one million shares to average diluted share count for the quarter?

That sounds a little high, honestly, I don't have that particular math you're looking at in front of you. That may be a little high, yeah, it is going to add shares, though, for sure.

All right, thanks, guys.

All right, Eric.

All right.

Our next question comes from Stephen Levenson with Stifel Nicolaus, your line is open.

Thanks, good morning.

Good morning.

Just curious, Boeing and Airbus are jacking up the single rates and Airbus talking going as high as 50 planes per month. Do you think you'll require significant Capital Expenditures to keep the metal treatment business or to be able to go to those higher rates?

No, no. As far as the Boeing is concerned, the answer is definitely no. As far as Airbus having bigger rates where we'd fold their wings, we would just add more people to another shift.

That sounds good, thank you. Right now based on the --I'm sorry?

We didn't say anything.

Okay. Just an echo in the line. Sorry. Do you think a rate of two submarines per year is going to be sustained or do you think the budget situation is such that it can be cut back?

I think it has tremendous support. Two submarines a year. We do not anticipate that being cutback at all.

Okay. And on ISR, do you see more of the business coming from new programs? Or do you see more of it coming from upgrades and retrofits?

There are quite a few new programs out there. So I see more upgrade -- I see more new programs now. They just passed ECP on the Abrams the Bradley and the Striker, that in a couple years out will have more upgrading. I think over the next few years you'll see a lot more new programs that will add to our sales and then you'll start seeing that back fitted price from upgrades.

Okay. Thank you. Last one, on your share buyback, do you expect to do that under 10-B5-1 plan or something you actively manage from the office, headquarters?

It will not be a 10-B5 plan. But we'll have an outside bank that will be handling it in accordance with our guidelines. We are not really going to be directly involved on a day to day basis.

Great. Thank you very much.

Welcome, Dave.

Our next question comes from my Myles Walton from Deutsche Bank, your line is open.

Thanks, Good morning.

Good morning., Myles

Glenn, could you clarify you offered up the head wind you are facing in the oil and gas this quarter, $15 million on revenue and $6 million OI. If you took oil and gas as entity today, the 22% within Flow Control, is that entire business profitable?

Yes, it is.

Okay. And, can you give us a relative of that bucket versus last year? How much is OI down?

That was the difference from last year.

Right about 15.

Sales down 15, OI down 6 from last year's third quarter --

No, for the year.

The year?

The year, about 15.

15 OI for the year, year-to-date.

Okay.

Figure that's about $0.27. Obviously, would have hit the numbers we thought we'd blown the lid off this year.

Right. So, you didn't lower sales guidance for the year? So what you -- within the oil and gas segment, what you have going on is a mix shift of better MRO coming through?

Exactly. What's happening, we're getting a lot of our sales out of the super vessels, unfortunately, it is at lower margin because it is just start-up. Brand-new plant and getting down the learning curve.

Can you give me the bookings by segment? 580 million bookings in the quarter looks good. Just curious how it's down between flow and motion?

Yes. Sure, 308 is Flow. and about 200 is Controls. and the difference is Metal Treatment, about 75.

Okay. So, that implies Flow had another good quarter of bookings on the back of second quarter bookings. What are you blocking in Flow that's not oil and gas related? I s this Nuclear orders coming through for next year?

Yes. A lot of nuclear orders coming through.

Yes. In support of operating reactors, the after market business, yes.

Okay. Okay. Marty, you said you taken refueling out of the forecast, are you talking about the USS Washington refuelingor are you talking about something else?

I am not too sure of the designation. It is a submarine refueling.

Yeah. Supposed to start next year?

Yes.

Okay. So that's not in the forecast?

No.

Okay. So, as you do look into next year, if you look across your business, are you looking for mid single digit organic growth outpoint at this point?

No, as we indicated we normally look at triple-double, double increase, triple-digit increase in sales, operating income in earnings per share, we feel very confident about the double digit growth in sales, operating income and earnings per share. And we're right there on the sales side.

Um, for 2012, so you're -- make sure I understand what you're saying. So, for 2012, you're looking at 10% top line growth?

Yes. 10% operating income growth -- well, in the double digits.

Yes. Okay, let's probe one of those business's a little bit. Metal Treatment is good indicator of general industrial trends.

That's right.

First mover, you obviously have raised nicely the sales guidance in the course of the year.

Right.

Including this quarter. Are you seeing any weakness there?

No, in fact, we're seeing the first thing to slowdown is heat treating we are seeing improvement in heat treating. So you are seeing an improvement. I think everybody is looking for economic improvement next year. off of this year. I think we're seeing that, quite frankly. Through the Heat Treat and then it flows through the rest of the Metal Treatment from there. So we are looking at a better year in 2012 for Metal Treatment. I don't think it will be as big as dynamic change between 2010 and 2011, which was, I think, 11.7% operating margin to we're looking at about almost 14, 15. It won't be that three percentage points. But, it probably halfway or little bit more into that range.

Okay. And then with -- I guess, the other question on the 10% for next year. What is your assumption about defense in there? Does it actually get better year-on-year? In terms of the growth rate?

Probably stay the same. This year, like we said, if not for the cancellation we'd be between 7% and 9%. We're going to be, we said about somewhere around 5% to 7%. I think we're going to be 5% to 7% range, yes.

Okay, okay. Seems like cancellations and slip-outs and budget reductions are probably more going to be the norm from here on out, right? I hear what you're saying. Within --

No, I agree with you. When you take a look at some of the larger primes and continued resolution and the concurrency clause which really doesn't have much effect on us, most of the hardware for F-35 is qualified. We're keeping track of that. We don't -- there's going to be -- we think there will be additional cuts but we don't see it, of course, we are so diversified, really hurting us in any one particular area.

Okay. Last one, working capital trends, Glenn, this year, is -- or free cash flow, rather, stayed stable but you increased the CapEx. Is that better working capital? or is it affect to the acquisitions? Then what's working capital look like put or take into next year?

Yes. I'm not sure. We have a big fourth quarter, as I think you pointed out, we usually do.

Yes.

I'm happy to say it is less than we did last year. So that's good. The working capital will come down in the fourth quarter as it traditionally does, burn off the inventory and build it traditionally and ship in the fourth quarter and we have large customers that will be making payments. Some have September 30 year end so their payments in the fourth quarter and typical phenomenon we have. Overall basis, typically, general basis, use working capital in relative to our sales level, if you know what I mean.

Yes.

The timing gets a little funky during the year. At the end of the day, cash flow from operations was $54 million year-to-date versus $38 million last year. And that included a $34 million in pension payments. So. the only other difference that you pointed out was CapEx which is up $22 million from last year, mainly due to investments in oil and gas and also our commercial aerospace business for Boeing.

Okay. Sorry, last one, he pension expense into next year, should we be modeling a significant uptick there regarding discount rates, give us a sensitivity, maybe?

I am not ready to give the number yet. It is going to up the rate will go down. The sensitivity is about, for every 25 basis points, about a little bit over two million in pension expense for us.

Okay. Great, thanks.

You're welcome.

Thank you, Myles.

Our next question comes fromKen Herbert from Wedbush Securities your line is open.

Hi, good morning, everybody.

Hi, Ken.

I want to dig into the first nuclear. I know, so far this year, operating reactor business seems to have been doing very well. Can you provide is little bit more detail on some of what you're seeing there, in terms of bookings in the quarter and the outlook over the next one or two quarters for that business in particular?

Well, this year is probably, as far as outages are concerned, which is normally how we use to explain, probably the lowest it's been in a long time. We are getting a lot more business per reactor. And I think you're going to continue to see that trend to continue. That we will continue to have more sales year-over-year. Quarter-over-quarter is kind of tough, things may move around. Year-over-year, you are going to see improvements in the operating reactor sales.

Okay. So, so, it is fair to think --

Next year, you are going to have more outages than you did this year. That should be another indicator how that sales will go up.

Okay, if I were to try to quantify that a bit, next year, maybe up, mid-to high-single digits over this year? Is that a good way to think about this?

We really haven't gone into the detail yet. We know the overall gross numbers, not the individual numbers.

Okay. Okay. Now, that's helpful. And then I think you mentioned now is still looking, obviously, for the next order out of China next year and shipments there, now, the pumps, I think you said second quarter.

Second quarter, right.

Has the discussion with the customer at all changed in terms of level of importance for the new orders out of China? Or is there any incremental insight or change in just the dynamics around this that you can comment on?

Well, the thing is, as far as our discuss with the customer, the customers e very, very happy that we put a test to the fix for the high temperature, it resulted 100 degree reduction in temperature internally, which is exactly what we predicted, which is really, really good. If you take a look at the fact we ran 14 cycles and took the pump apart -- 14 cycles is considerable number of years on the life out of the full 60 cycles. The parts looked very good. So, since we passed most of our performance requirements, it is very good we will have solved the problems put it back together successfully test. When that happens, during that course, sequence to develop the qualification testing is over , which is the end of the first quarter, we'll probably have a lot better light what the new order is going to look like and be.

Okay. Based on the comments, Marty, it sounds like, clearly no change in the Chinese desire to, obviously, move forward with the nuclear plans. You certainly haven't heard anything or discussions along the lines?

We want to move forward with their plan out a doubt. I think as Westinghouse has said, because of Fukashima, a Gen 3 plant which is an AP1000 is going to be more preferred in China then the Gen 2 even though they will build both.

I appreciate the color, thank you very much.

Okay, Ken.

Our next question comes from Tyler Hojo, Sidoti & Company your line is open.

Hi.

Good morning, good morning.

Good morning, Tyler.

So, just wanted to ask you a little bit more about the super vessel business. I'm just trying to get a better understanding of how big it is today and more importantly, what the growth potential is. I mean, what could this business be generating, a year from now, or two years from now?

Well, it continues to evolve, Tyler it is a start-up and it's brand-new for us. But I would say, year-to-date, only done about $10 million in sales, approximately, on it. These are huge things that take a pretty long time to build. So the encouraging thing is that the orders are strong and that will be -- mostly lead to increased business in 2012. I mean, we will get some this year, but these are long lead time build items.

That particular plant has capacity to do between $50 million to $75 million per year. We think as time goes on we'll fill that plant.

Got you. Okay. That's perfect. And, I also want to go back to nuclear power. Looks like you generated just shy of $100 million in nuclear power sales this year. Could you talk about how that is split out between parts to pre-existing plants and what you're doing with AP1000 in China?

Unfortunately, we don't have that information with us right now.

Okay. Maybe I can follow-up on --

Yes.

Please do. We normal will you have that.

Yes. No problem. And let me squeak a last one in there. You guys typically kind of comment on your acquisition pipeline. I was wondering if you could talk about that, what you're seeing, regard to multiples and that sort of thing?

I think there's more candidates out there. I think the multiples are fair. So I do believe that we'll be more active in the future. It is not a lack of our desire to acquire, it is just the candidates that we flushed through. We're seeing some better companies up there.

Okay. Great. Thanks a lot.

Okay, Tyler.

Our next can he comes from Michael Ciarmoli, KeyBanc Capital Markets. Your line is open.

Hey, good morning, guys, thanks for taking the call.

Good morning, Mike.

Maybe to clarify, looking at kind of the 2012, I guess, talking about the double-digit growth. You're thinking all organic double-digit on the top line next year?

Well, except for the acquisitions we made in 2011. Right.

Okay.

It is all good.

Okay. Help me on the bottom line. It looks like next year pension might be a little bit of a headwind. If my math is correct, this year, even this quarter about $0.11 of one-timers, that settlement earlier in the year, maybe about $0.14 of one-time tailwind items that aren't going to hit next year. Does that pose any challenges at this point? Are you firmly confident in double-digit growth rate?

No, we're very confident we can do that. If you look at you are going to have better sales and profitability items out of Metal Treatment. You're not going to have as much investment on AP1000 that we had this year, that's a lot of money. We will solve the oil and gas situation is a cost issue. We're very capable of solving that issue. So, when you put those numbers together, it is a pretty good chunk of money.

Okay. Okay. So, just maybe to probe a little bit --

The other thing is, remember, your AP1000 sales are shipping from China to the United States. China we had the development problems with, and that cut into the profitability. But the United States contract will also be more profitable. That's another good chunk.

Okay. If I can on the Metal Treatment, are the margins going to be up there year-over-year, because I know you had a couple of settlements, called 200 basis points, it sounds like some of the new facilities that you have opened, getting better utilization.

That's correct.

Can you maybe give us an update on capacity and profitability of some of those new plants?

Capacity, we don't normally strain on the capacity problem. Okay? Normally, it is the amount of sales we start bringing in. We started to track as we enter into new territory. The thing is, we're attracting those sales. So we do expect that those plants, although it won't be as profitable as our normal plants are, are starting to get into the black instead of the red.

Okay. Okay. So do you think margins can go up year-over-year even with, just basically look at the one-timers that hit? Is it kind of safe --

Yes.

Yes. Okay. Okay. Then, just last one, I'll get out of the way, Glenn, accounts receivable looks like it's been building up pretty significantly. Anything happening there?

No, it goes back to the -- a piece of it comes from international customers who are perennially slow and we are expecting and will collect those in the fourth quarter. You got Westinghouse and a lot of our defense payments, again with the new budget, Westinghouse with September they hold payments kind of thing. We have down who we're expecting cash from and this happens to us regularly. So we expect to see the receivables come down in the fourth quarter significantly.

Perfect. Thanks a lot.

Welcome. All right.

(Operator Instructions). Our next question comes from Eric Hugel, Stephens Inc. Your line is open.

Hey, guys, just to follow-up, I guess, I just wanted to ask the question again, you answered differently when Myles asked the question with regards to the carrier refueling, you said you took it out, then you said you took the sub out. Could you clarify that?

I believe it was the sub refueling.

Okay.

Yes.

Can you talk about the impact of a carrier refueling? Do you have sort of meaningful content on one of those?

I'm not too sure what that amount would be.

Okay. On the AP1000, you talked about obviously, working through the pump and developing and delivering it. Is it fair to assume we shouldn't expect orders out of China for the next launch of AP1000s until you start delivering those pumps? Is that reasonable or might that happen before?

I think it could happen before that.

Okay.

I think that the confidence level of this pump being able to work is extremely high. So, I think that we started it, broad-scope negotiations and I think we're going to conclude it. We'll determine what the quantities and numbers will be in 2012.

Fair enough. Glenn, you gave a pension sensitivity number, 2 million for 25 bits on the discount rate. Do you have the numbers on return on assets and sort of where are you right now relative to your assumption?

Well, we're pretty close. We did true-up 2011 with a minor adjustment, 2012 is still a little up in the air. To give you -- I guess, $25 million movement in assets is about $1.5 million for us. Either way. We're pretty close on what we expected for this year at this point.

What is your return on asset expectation?

8.5%.

Close to 8.5% return. That's pretty good. Your interest expense guidance, has it gone up, about $3 million in the fourth quarter? Is that sort of acquisition-driven debt from acquisitions? Sort of what's going on there?

Well, I think we billed some in because we announced we're going to do a debt offering. And, which we haven't concluded yet. I think we have some in there for that. That's the reason for the increase in the fourth quarter.

Fair enough. Lastly, what's prompting the cut in the corporate expense line?

Mainly favorable trending in our medical expenses, swings one way one year; one way the next year. We're actually favorable this year. So as we get closer to the end of the year, and it is holding, we're starting to release that,That out.

Eric, let me just say it is a carrier refueling. Because we don't normally refuel submarines.

Okay. So it is the carrier --

Carrier.

-- you talked about, not the sub?

That's right.

Okay. And maybe, lastly, have you guys thought about -- you announced the share repurchase agreement and all of this stuff. Have you thought, maybe, about increasing the dividend?

We'll take that under advisement. We do, we review it regularly with our Board.

Great, guy , thanks.

Thank you.

Thank you.

I'm showing no further questions at this time. I would like to turn the call back to Management for closing remarks.

Before I officially wrap up the call I want to extend thank you for the investors that recently participated in our perception study. Your feedback was extremely valuable in helping our Management Team and Board of Directors to better understand your views and we intend to incorporate those suggestions into our -- as we move forward into 2012. Thank you for joining us today. I look forward to speaking to you again during our fourth quarter call. Thank you very much. Bye-bye.

Ladies and Gentlemen, that does conclude today's conference. You may disconnect and have a wonderful day.