Curtiss-Wright Corp (CW) 2013 Q3 法說會逐字稿

Good day. Welcome to the Curtiss-Wright third quarter 2013 financial results conference call. (Operator Instructions).

I would now like to introduce your host for today's conference, Mr. Martin Benante.

Well thank you, Katherine. Good morning everyone. Welcome to the Curtiss-Wright's third quarter 2013 earnings conference call. Joining me on the call today are Dave Adams, our President and Chief Executive Officer and Glenn Tynan, our Vice President and Chief Financial Officer.

On the previous call we announced the Company's leadership transition plan whereby Dave Adams ascended to the roll of CEO, and as a result, I want to officially pass the baton to Dave to lead Curtiss-Wright's future earnings conference calls. I have generally enjoyed the experience that has taken place over the past 14 years, including the opportunity to discuss our successes and challenges as we have grown to a successful $2.5 billion corporation. The interaction with the investment community has been extremely rewarding.

I want to thank all of you for your continued interesting in Curtiss-Wright over the years and I am confident that you will be in great hands with Dave and our new management team. Now I would like to turn the call over to Glenn for our review of our financial performance. Glenn?

Thank you, Marty. Our call today is being webcast and the press release as well as a copy of today's 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. We detail those risks and uncertainties in our public filing 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 an overview of the third quarter 2013 performance and financial outlook followed by Dave who will provide an update on our recent acquisitions and integration status before we open the call for questions.

Overall our third quarter results were solid. Adjusting for the one time items that impacted our 2012 results, namely the strike, AP1000 investments and lower associated compensation costs in Flow Control and restructuring costs in all three segments, operating income was up 40% on a 25% increase in sales leading to a 140 basis point operating margin improvement to 10.5%. Our organic operating margin which excludes acquisitions and affects was 11.1%, up 200 basis points from adjusted 2012.

Overall our diluted EPS was $0.76 for the quarter, exceeding our expectations. These results reflect the benefits of our previously implemented restructuring and operational initiatives, most notably in the Controls and Surface Technologies segments. Our seven acquisitions that were completed in Q4 2012 and Q1 2013 contributed more than $100 million in sales, $6 million in operating income, 90 basis points in operating margin dilution and $0.04 accretion to diluted earnings per share in the third quarter.

Next I want to provide some color on the segment drivers of third quarter operating income and margin. Operating income for Q3 2012 adjusted for the aforementioned one time items is shown in the fourth column of this table shaded in blue. The majority of the one time impacts occurred in the Flow Control segment.

So comparing to last year adjusted for those one time items, current year operating income increased 15% while operating margin decreased 50 basis points year-over-year to 8%. However this decrease is primarily due to acquisitions as organic operating margin was 8.6% in the current quarter, up 10 basis points compared to adjusted 2012.

In the Controls segment operating income was up 41% and operating margin was up 200 basis points to 15.3% compared to adjusted 2012. Organic operating margin was 15.8% in the quarter, an improvement of 250 basis points from adjusted 2012. However, current year results benefited from lower pension costs at their UK unit. Excluding the impact of this one time item in 2013, Controls' operating margin was 14.2%, a 90 basis point improvement over the 2012 adjusted margin of 13.3% despite a 2% drop in organic sales.

And finally, in the Surface Technologies segment operating income was up 30% and operating margin was up 200 basis points to 15.3% compared to adjusted 2012. However organic operating margin was 16.8% in the quarter for an improvement of 350 basis points compared to adjusted 2012. These results were driven by the benefit of prior restructuring activities as well as continued improvements in operational efficiencies.

Moving on to our end markets, I will begin in our commercial end markets which collectively grew 43% during the third quarter. This growth is based on strong overall contributions from our acquisitions and solid organic growth of 17% in the commercial aerospace market. This has been one of our strongest markets as we continue to benefit from the ongoing strength of the OEM cycle and production rate increases across most Boeing and Airbus platforms.

Within the power generation market we experience healthy organic growth from existing operating reactors through a combination of our solid installed base of products and services and the emerging requirements of the NRC's tier one regulations. We have achieved strong growth despite fewer planned outages in 2013 which we expect to rebound in 2014.

Meanwhile, sales in the oil and gas and general industrial markets were primarily led by acquisitions, although we did experience some pockets of strength particularly for global MRO products supporting ongoing refinery maintenance needs in the oil and gas sector. Our oral guidance within our commercial markets remains unchanged at growth of 30% to 34%.

Moving on, third quarter sales in defense decreased 3% overall mainly due to lower demand from several programs within the aerospace and ground defense markets continuing the trend from the first half of the year. In the navel defense market increased revenues were driven by the Virginia class submarine and Ford Class aircraft carrier programs, as expected, providing confidence in our full year sales guidance in this end market.

Meanwhile our outlook in the aerospace and ground defense markets continue to reflect lower incoming order rates. As a result, our 2013 guidance for total defense sales remains unchanged at flat to down 4% and does not include any specific impact or sequestration at this time. You can find the complete table of our guidance by end market in the appendix as well as in the earnings press release.

Moving on to our financial outlook. Full year 2013 sales growth of 18% to 20% remains unchanged from our previous guidance as does our guidance for operating income, operating margin and diluted earnings per share. In addition, we expect our recent acquisitions of Arens Controls and Parvus to contribute an additional $20 million in sales in the fourth quarter and approximately $0.03 in EPS dilution which we expect to be somewhat dilutive to the Controls segment's full year operating margin. However, despite this dilution we do expect the high end of the guidance range for full year 2013 sales and diluted earnings per share.

Year-to-date we have produced strong cash flow from operations of nearly $135 million that led to a $77 million in free cash flow during the first nine months of 2013. This is an all-time record high for us at this point in the year.

As a result of the strong year-to-date performance and our expectations for continued improvements in working capital and capital allocation during the fourth quarter, we again raised our free cash flow guidance by $10 million to a range of $110 million to $120 million for 2013. Now, I would like to turn the call over to Dave to provide some updates on our recent acquisitions and future outlook. Dave?

Thanks, Glenn. Similar to last quarter, I want to take a few minutes to review some of our recent acquisitions. Let's start with Parvus which was a highly sought after business pursued by numerous and vetted computing competitors.

Curtiss-Wright was deemed to be the best fit for Parvus based on our leading distribution network, solid infrastructure and geographic fit which we believe will help fuel the global expansion of their products. This business filled a rugged computed market space need for Curtiss-Wright adding size, weight, power and cost for [a swap c] optimized subsistent capabilities in an area that we have been looking to grow. Their compact modules nicely compliment Curtiss-Wright's existing range of larger, higher performance commercial off-the-shelf [forward cut] solutions. Parvus provides opportunities to extend combined technologies into new complimentary markets, in particular the industrial markets, where we continue to differentiate and diversify our business.

Parvus' ability to address the lower cost segments of the defense market should open up potential new opportunities in this market such as tactical [wheeled] vehicle platforms and upgrades programs for both the US Army and US Marine Corps. In addition, our expansion into the rugged industrial market will be enabled through Parvus' rapid development processes and experience providing rapid integration of commercial electronics into low cost deployable rugged systems. Integration is underway and we are on plan thus far.

Next, to Arens Controls which further strengthens and grows our industrial Controls business and provides increased penetration within the commercial and off-road vehicle markets. Arens is the market leader in the US for highly engineered electronic shift controls for automatic transmissions used on heavy trucks and buses.

The company also designs and manufactures power management and traction systems which will provide us with an entree into the emerging hybrid vehicle market. Arens strengthens Curtiss-Wright's position in two key industrial market areas.

First Arens supplies market leading products to the medium and heavy truck and bus markets that are complimentary to Williams Controls products and customer base. Second, Arens supplies throttle and hydraulic control products to the off-road vehicle markets that are complimentary to the [pinion job] and Williams sensor product line, again, going into the same industrial customer base.

In addition, we expect to reduce Arens future costs by leveraging Curtiss-Wright's existing China manufacturing and sourcing arrangements. Sales and marketing team integration has begun and we are on plan thus far.

Continuing with the industrial market theme, I want provide a quick update on other acquisitions in this space. For Williams we're expecting to leverage their facility in India for selected product transfers and new business awards further enhancing our global industrial presence. We are also exploring new opportunities with expanding product offerings and growth into utility vehicle segment.

For PG Drives we continue to expand our global industrial presence with new applications in Russia and Germany. Moving forward we will continue to leverage Curtiss-Wright's supply chain across all of our industrial Controls businesses. We also expect new opportunities for supply chain synergies to arise with the recent Arens and Parvus acquisitions. Overall, the combination of these industrial acquisitions broadens our total addressable market for industrial Controls and brings Curtiss-Wright one step closer toward our vision in this key market to be the supplier of choice for operator controlled subsystems and critical drive train components in specialty vehicles.

Next to Cimarron, which continues to track well ahead of plan in terms of integration. As previously noted, we are using our existing Houston operations to support Cimarron's rapidly growing demand. Our existing sites have been ramping up quickly, and we are implementing a lean operating system that has contributed to record sales in Q3 for Cimarron.

This year we have absorbed $3 million in transfer and learning curve costs. As noted on our prior call, we believe this integration initiative has the potential to improve Flow Control's profitability starting in 2014. The implementation of lean principals is expected to help lower total costs, improve through put and reduce lead time in order to support the increased demand for several of our product lines. Over time, our goal is to reduce total cost by 10% while doubling capacity and having lead time.

Next, an update on our emission control devices business where the last of their five devices has passed EPA testing and it's certification application has been submitted to the government. We expect to be one of the first fabricators certified to meet the EPA's new standard governing the destruction of harmful vapors.

As a testament to this growing portion of the business, Cimarron received an order for our high [ball] emission control devices for delivery in December. Overall, Cimarron continues to provide solid opportunities to expand our sales in the upstream oil and gas market and is an excellent example of generating synergies from an acquisition. We remain encouraged that this integration along with our continued focus on improving operational efficiencies will help improve Flow Control's overall profitability in the long run.

Finally, our remaining acquisitions are tracking in line with plan in terms of integration. We will share more details about these exciting acquisitions in December.

Next I would like to highlight some of the key macro factors affecting our end markets. I will begin in power generations starting with the AP1000 program. We continue to make solid progress in the production and shipment of our reactor coolant pumps for our RCPs for both the China and US reactors.

During the third quarter we shipped two RCPs required for Sanmen Unit1 in China, meeting our customer's schedule for the first plan. We are working to get four to six additional pumps ready for shipment to China in the fourth quarter.

In addition, we have successfully completed production testing of the first domestic pump. We have negotiated a two year extension of the technology transfer agreement from our initial 2007 contract and are awaiting sign-off by our Chinese customer.

Regarding our next AP1000 order, we expect to receive a follow-on order from China in the very near future. Our mutual goal is to have a formally signed agreement in place by the end of the year.

In addition, I want to provide some highlights regarding our after market nuclear business. As it pertains to the Fukushima response initiative, we have captured more than $14 million in new awards resulting from NRC orders one, two and three, and have $30 million in proposals outstanding. The timing of those awards is expected to occur within the next 12 to 24 months.

We were also awarded over $13 million in new orders in the third quarter specifically related to assisting plants in solving their obsolescence issues. We have nearly $20 million in additional proposals that we expect to be awarded by year end. Overall, we continue to experience increased sales and strong demand for Curtiss-Wright equipment in support of existing operating reactors despite fewer outages than last year.

Next to the defense market starting with an update in aerospace and ground defense. We continue to experience improved profitability in these markets most visible within our Controls segment despite the anticipated declines in sale.

This is a function of our restructuring action that began in 2012 to address the lower intake of order rates, a trend we expect to continue in the future. Clearly we remain in an uncertain budget environment.

As we have previously noted, while there haven't been any specific platforms that have been cut as a result of sequestration, we have seen a widespread indirect impact on Curtiss-Wright through lower incoming order rates. As it now appears that the DoD will be operating under continuing resolution for the foreseeable future, this trend is likely to continue.

The most significant hurdles to overcome are likely to be the funding for new start programs and potential for in- sourcing by the prime. We will continue to prudently monitor the ongoing budget negotiations and react appropriately including further restructuring if warranted.

As for the fiscal 2014 defense budget requests, the naval defense outlook appears to be very positive as ship building remains near the top of the DoD's priorities while the picture in aerospace and ground defense remains less certain. Despite the uncertainty we expect our leverage in the commercial market at 70% of our projected 2013 total sales to more than offset any anticipated impacts from sequestration in the defense markets.

So to recap, we are pleased with the solid year-to-date performance of our organic businesses as well as our recent acquisitions. This performance along with our continued focus on improving operating margin keeps us on track for strong double digit increases to the top and bottom line in 2013. We expect the combination of these factors to provide momentum for further improvement heading into 2014 and we will provide more visibility on our future expectations in December.

Effective with this morning's announcement and in recognition of his significant contributions to the profitable growth and consistent operating margin expansion of Curtiss-Wright Controls, Thomas Quinly has been promoted to Chief Operating Officer of Curtiss-Wright. I would like to publicly congratulate Tom on his new position and wish him continued success at Curtiss-Wright.

Overall the continued dedication and focus of our management teams to generate margin expansion and improve cash flow positions for Curtiss-Wright positions us very well for the future. Furthermore we expect our growth to be complimented by our disciplined and balanced capital allocation strategy.

Finally, we will be hosting an Investor Day in New York on December 11 which will include a preview of our 2014 guidance as well as our margin expansion and capital deployment opportunities. Please be on the lookout for the agenda and registration details in the next few days and we hope that you can attend. At this time I would like to open up today's conference call for questions.

Thank you. (Operator Instructions). Our first question comes from Stephen Levenson with Stifel. Your line is open.

Good morning, everybody.

Hi, Steve.

Morning, Steve.

It is hard to argue with what you have been doing over the last year. I am wondering if there are any holes you think you have to fill through M&A or if there is much more in the way of R&D going to internally develop other products that you need to completely round out the line?

Are you talking 2013, or just generally?

Generally. Certainly beyond the end of this year, please.

We continue a robust R&D program within Curtiss-Wright. Especially in those areas that we see not necessarily leap frogging technologies, but potential use of new technologies. For example, on the defense side you look at what is required in the future and compare what we did with Parvus as being a very strategic acquisition.

We see a need for a different type of business that we can address which will expand our total available market. That is in a different area as I described in both the industrial and military side of products that are lower cost, more power, size, weight and power as I described. R&D is spent toward that sort of an area because it does address the total available market.

In terms of acquisition, both Parvus and Arens are great examples of what we lay out as a strategic road map in terms of growth. Arens really addresses the industrial side and how we are going to capture the cabin as it were, the controls within the cabin of off-road vehicles and large vehicles. That strategy will continue.

We see a robust market there. We see growth in the future.

As I described with Parvus, it plays in as well in the industrial side and then some of the military. So you are going to see a continued application of strategic spend on the R&D side and certainly a very strategic outlook in the area of acquisitions.

Thanks. And then in terms of R&D, is it going to stay at the same levels of sales or is there a likelihood it could it increase a little bit?

So far we are pretty much staying the course where we are at. We look at that annually. You look at the spend and the sales on the defense side.

We continue to be very robust on the defense side. We look at that as percentage of sales, and so it fluctuates.

Thank you very much.

Thank you. Our next question comes from Michael Ciarmoli. Your line is open.

Good morning, guys.

Good morning.

Good morning, Mike.

It is just to Glenn for clarification. The Controls margins were very solid in the quarter. I think you said there was some pension benefit and that was just one time. What should we think? This is the best margin performance you put up in Controls in quite some time. How should we look at this run rate going forward here?

Well, when you take the pension out it is about $14 million. Sometimes it is a little bit of timing. We are sticking with their full year guidance, so that will indicate the fourth quarter will be somewhat a little bit less than the third quarter. Again, at this point I would stick with our guidance for the year in terms of our margins.

Okay. And then what about just looking at this quarter's earnings, what is implied for next quarter? It certainly looks like when I look at the acquisition contribution, I think the margins on the acquired revenues year-to-date are about 4%.

It seems like the annual earnings power of the Company is going to be north of the run rate you are tracking for this year once you strip out those acquisition-related costs you will get some margin expansion next year. I am just trying to get a sense of how we should think about an earning starting point or bridging the gap into 2014 when you roll-off some of the acquisition dilution you probably get some pension tail winds. Can you give us any help there or any color?

I know your quarterly earnings are usually a little bit more back end loaded, so not fair to take these two quarters and run rate it. Can you give us any color on what the expectations are even for maybe the acquired margins? You have 6% contribution or margin in the quarter from the acquisitions. Maybe what can we expect?

To put the year in perspective. From the recent acquisitions we are still looking at and around 12% accretion for the year. Most of that is going to come in the fourth quarter. There is some timing between the third and fourth quarter, but we are still on target for that.

We would expect to see even more. The fourth quarter will probably be the most indicative of how those acquisitions will start to perform going forward. We would expect improvement from there as we go into 2014.

We will give you all that color at our Investor Day in December, Mike. Pensions, we are definitely expecting some tail winds there. We just don't know how much.

We will, again, have that pretty much nailed down for the Investor Day. But yes, we would expect margin expansion in those acquisitions as well as the pension headwinds for sure.

Let me add, Mike, as you saw as I did the announcement on Tom I was addressing two points. One on Controls has done well. That is why we promoted Tom.

Tom is going to do a great job for us in the area of margin expansion. That is a key performance goal for him going forward in the next several years, and also, the entire team. We are basically inculcating the culture across the enterprise and it is a margin expansion culture.

I know you are going to see some improvements. That is what we are talking about. That is a major goal for all of us.

Okay. Perfect. That is helpful. The last one for me and I will jump off.

I have seen reports on the AP1000 that China has in fact reversed engineered the Westinghouse design and they were looking to potentially sell direct to Pakistan. Can you give us any color there just given the technology transfer?

It seems like it hasn't been progressing that fast. Trying to make heads or tails out of what I have been reading with some of these broader reports.

Sure. Thanks for the question. We saw that media play also a couple times. A few weeks ago, and then more recently.

We have re-confirmed as we did back a few weeks ago. There is no truth to that rumor.

The parts if any are being sold by China are gen-2. Our AP1000 is generation 3. If there is any truth to it, it's not our AP1000.

Adding to that, as I indicated on the call just a minute ago, we have just recently negotiated our next evolution in technology transfer agreement. It is a two year agreement. That occurred with in the last seven days.

It really talks to the perspective that technology transfer is required. Nobody is ready from that perspective in China to be able to do what it is that is purported to be said in this media piece.

In addition to that, we have an agreement with the Chinese that there is no sharing or tech transfer outside of that market. So we feel very strongly that this is bogus. We have confirmed that with our customer.

Perfect. Thanks, a lot guys. I will jump back in.

Thanks, Mike.

Thank you. Our next question comes from Myles Walton with Deutsche Bank. Your line is open.

Myles, are you there?

I am. Can you hear me now?

Yes. How you doing Myles?

Okay. Great. Thanks and good morning. Glenn, so first nine months great cash performance, and no good deed goes unpunished. Why is it going down in the fourth quarter when seasonally I don't think you have ever done that.

Well, I think you hit on -- we are trying to be a little conservative and cautious in that. That is really the only answer. We don't expect, necessarily, our fourth quarter to be the lowest, but we want to make sure everything falls into place.

There are a couple things on the AP1000, some big cash payments. We just want to make sure they show up, and if they do we will probably beat. If they don't, we will probably meet.

If you signed the Chinese order, though, a couple questions with respect to that. One, does it come with an advance? Two, what is the size?

Then three, Dave, you talked about the licensing agreement. As I recall, there are two parts to the licensing agreement.

One was tied directly to the hardware and the other was a long term license that went through 2022. Is it a two year extension on the hardware piece of the license which I think was about $5 million a wee bit per year, as well as the longer term $3 million a year type pure technology IP license beyond 2022?

This is just the continuation of our recently expired five year agreement for an additional two years. Then relative to what is with the order, size and advance payment, we are in negotiations at this point. We don't know what that is going to be.

Because we have been asked for many different variables. X amount content in country X that we would supply.

So we are not in a position to address that at this point. I can tell you there are feet over there now and have been over there the last several weeks negotiating this.

Then the other one. Flow Control margins. I think organics I am using the presentation the right way, was 8.6% margins in the quarter. If you correct for last year, it was maybe 9.5% or so.

8.5% actually.

Correcting for last year, adding back the [22]?

Yes. It would be 8.5%.

Organic margins last year?

Just the adjusted if we add just for one time items it was 8.5% in the third quarter of 2012 versus our organic 2013 at 8.6%, up slightly.

What is the potential margin of flow control? I imagine it is still under pretty good duress with not a lot of high CapEx oil and gas projects being run through it. How much drag are we seeing with respect to the oil and gas piece of the business?

Well, that is the biggest drag. We have got some under absorption due to the lower volumes on some of these projects. But on the other hand, we are transitioning the Cimarron product to our Cedar Crossing facility and going through that learning curve.

We talked about it for a couple quarters now. It is $3 million to $4 million of learning curve costs that we will incur this year to get those products transitioned down there. That will lead to expansion, obviously, next year.

That wouldn't be in the organic piece, right?

That would be in the organic piece. Because it is our existing facility that is incurring the cost for product for Cimarron. The organic business is incurring the cost.

Oh. Okay.

Miles, when I look at that at a high level -- I say to myself -- out of the three segments, I look at what happens with Surface Tech. We know what happens with Surface Tech and that is that volume goes up and margins looking great, fixed costs. All that stuff. Controls has done an outstanding job of moving up that chain, and will continue to do so.

I look at it as this is my opportunity in the Flow Control side in terms of picking up some margin. It is going to be -- I will use one term. It is addition by subtraction in one regard.

That is relative to what happened to us in oil and gas our in market collapse, that's changing. We are seeing some improvement there, some refineries giving us some orders. Internationally as well as domestic, we are seeing some of new products that are coming out that are being extremely well received at the some of the refineries, domestically.

Haven't even touched on the Cimarron discussion with what can happen there and the improvements that we are making there in terms of price, in terms of our cost side, and what we are doing in Houston to take up the under-utilized factory. I see some opportunities there.

That is where you will see it. Obviously, oil and gas is a drag right now, but it is slowly inching upward.

I expect that to pick up more quickly as we get out of this downstream business and into the upstream. We have opportunities to continue to do that.

Last question. Do I have to see the backlog significantly expand in Flow Control for you to be able to realize that, or are you able to your point structurally lower the cost base and effectively deliver more with less?

Absolutely we are delivering more with less. The backlog is there. There are opportunities.

We have got some low-hanging fruit that we are taking advantage of. I am certain that Tom has got that tattooed to his forehead right away.

Okay. Thanks, guys.

Our next question comes from Elizabeth Grenfell from Bank of America. Your line is open.

Hi. Good morning.

Good morning.

Hi.

It looks like she jumped out of the queue. (Operator Instructions). Our next question comes from Tyler Hojo from Sidoti & Company. Your line is open. Tyler Hojo: Can you hear me?

Yes.

Yes, now we can.

Great. Good morning.

Just a first question. In regards to the two acquisitions that closed in October.

Those are adding $20 million. Just curious if you could maybe comment on what the offset is in regards to the unchanged top line guidance?

I'm sorry to go off hand. There are 60 businesses, a lot of them go up and down as you can imagine, but we were at the midpoint of the range before the recent acquisitions. The $20 million put us at the top end of the range which is what we had said.

We are still pretty much in line -- we have a lot of puts and takes -- but we are still pretty much in line with our previous guidance plus the acquisition. We said we would be at the top end, and those acquisitions put us at the top end.

Thanks for the clarification on that one. Then I was just curious. I think Dave's prepared remarks, mentioned that one kind of impacts from the CR potential concerns was insourcing from primes. I think I got that right. Curious if you could maybe just discuss what products or platforms you feel are most vulnerable to that?

I tell you, Tyler, what we have found -- and this is through a lot of dialogue with our customer and a lot of dialogue with me personally -- with our VPs out in the field that run our businesses. What I am seeing and what we have said before and I stick to it, on the Navy side it is looking really good.

We see the three classes of ships that are continuing their build rates. If something happens there might be a little stretchier there, but we are not seeing any major cancellations with regard to submarines and aircraft carriers and DDGs.

When we talk about the platforms wherein we have our electronics content -- I was talking to one of our vice presidents yesterday -- we have over 2,000 worldwide customers that represent over 500 programs. We have aligned ourselves to have the wide breadth of products upon all of the different platforms that are represented by the 500 programs, not one of which is greater than 4% of our total. So when we are asked the question which we are often asked about what we expect in the sequestration, and so forth, we don't have an answer.

I will say with regard to the outsourcing and insourcing. I know what I said was the threat of insourcing. We always watch that, but we also watch our design wins extremely carefully.

We are relatively flat year to year design wise and that is good because we had a good year last year on design wins. Given the environment we are in now, I am really happy to see we are at least flat. If we hade been down, I would have been more concerned at the net through third quarter.

Then I also see that what our customers are going through. If you look across the defense spectrum of the marketplace you will see layoffs and redundancies.

Numbers are heavy. You guys read this stuff all of time. Numbers are very heavy in terms of people.

We are seeing a little uptick in terms of interest from our customers in saying we don't have those internal resources any longer to do what it is we were once were able to do. Therefore we need you to provide us with the commercial off-the-shelf subsystem -- or moving up that food shape slightly -- to alleviate some of the thinness that they have in their bench strength in terms of technical development in non core electronics that we consider core.

We look at it is a real opportunity. We have said that for a long time now. It has panned out every year.

We are looking at it that way. I guess you could call it the cup half full, but I think it is.

Okay. Wonderful. Thanks for that color. Maybe last one for me. Last conference call we were talking about some greenfield investments in Surface Tech hitting in the back half and maybe being a bit of drag to margin. Could you update us on where we stand with some of those investments?

Yes. I will tell you that. They were about $800,000 drag in the third quarter and we expect it to be another $600,000 in the fourth quarter. That is an ongoing strategy of Surface Technology. It may fluctuate from year to year, but that is the current year numbers.

One thing, Tyler, just to jump in there and add to that. We look at that carefully as well from the capital side. If you consider some of the greenfields we are migrating from, heavy greenfields meaning not as much of an investment going forward.

Where as we might spend $5 million or $10 million on a plant and equipment. Now we will go in with maybe $1.5 million or $2 million and grow it strategically and over time. Not to build it and it will come completely, but build it partially and offer this or that service and do so at a more moderated rate and amount.

Secondly, the other major emphasis that we took on as a strategic priority this year, last year was what call [shop and shop]. Some of the money that Glenn just described are as a result of shop and shop toward the back half of this year that have long term tail on them.

Multi millions of dollars where we go in and join with a company of prime, for example, in their facility. We load it with our people and we provide the service and we just rent space. It is much less brick and mortar expense and thereby gives us a better use of our capital.

Great. Thanks a lot.

Our next question comes from Elizabeth Grenfell from Bank of America. Your line is open.

Hi again. Sorry about that earlier. Dave, I just had a question for you now that you have been in the role for several months. What are you seeing as the biggest challenges and some of the biggest surprises since you have taken the role?

I have been here for almost 14 years at Curtiss-Wright. I would say that there are no shocks to the system.

I have been in this job for a grand total of maybe 60 days. I am absorbing it quickly. Having worked closely with Marty all of these years and the team at the management level in corporate, it is not unfamiliar territory to me.

For me it is really a redefining moment for my vision and the culture that I want to inculcate. It is very similar to Marty's in we are very operationally driven.

I do see a very strong marching order from me as a shareholder; that is margin expansion. I look for really creating what we consider the improvement in shareholder value and that is what it is all about for me and my job.

Like I said earlier, the one low hanging fruit is in the area of one of our segments, and we have identified that. It is more strategically looking at the acquisitions that we are going after, and do they fit the structure. Do they fit the road map we laid out?

It really is that whole capital allocation plan. What are we spending our money on? How wisely are we using it?

Where are the under performers? What do we have to do to bring them up to the level we want to be? I have made it clear internally and externally that I intend to produce upper quartile business margins, and that is by a peer group that I will define, and that is the expectation for me and my team.

I don't think there are any shock waves that have hit. I haven't awakened in a cold sweat yet, so this is a good thing.

To your point on the acquisitions meeting the Company strategy. What metrics are you using to evaluate M&A? How are you looking it besides (inaudible -- technical difficulty) strategically?

With all of the financial metrics that you can imagine. ROSC. We have IRR that we look at.

We do use return on capital and several different metrics that we weigh each one with. It is really on what the term is for the pay back, what kind of dilution do we expect?

We are looking at the more as reported basis GAAP and ROIC, and really trying to identify how long is it going to take to accomplish what it is we want to accomplish? Just with a firmer approach to where we are spending our money and what is it costing us to capture the benefit of that? It is all in the capital allocation strategy which we will describe in more detail in December and I think you will find some clarity to come out there that will help to answer this question.

Thank you.

Our next question comes from a follow-up from Michael with KeyBanc. Your line is open.

Hey, thanks, guys. Thanks for taking the follow-up.

Glenn, just on the corporate expense. You still have $40 million out there for the year. It was just over $6 million in the quarter. What is going to cause that big jump up in fourth quarter?

First of all, our pension is going to increase quarter to quarter about $3 million in the fourth quarter back to its normal run rate of about $8.5 million. We had a couple adjustments. One time adjustments in Q2 and Q3. That will be about $8.5 million.

Then we have a forecast for an environmental charge in the fourth quarter, and some FX transactional losses. So that should get you pretty quick.

Okay. Perfect. Thanks a lot.

Thank you. I am showing no further questions at this time. I would now like to turn the call back to Mr. Martin Benante for any further remarks.

Thanks, Katherine. Thank you all for joining us today. We look forward to seeing you in December at our Investor Day in New York. Have a great day.

Goodbye.

Goodbye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.