Curtiss-Wright Corp (CW) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Curtiss-Wright third quarter 2015 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 introduce your host for today's conference, Mr. Jim Ryan, Director of Investor Relations. Sir, you may begin.

Thank you, Tamara, and good morning, everyone. Welcome to Curtiss-Wright's third quarter 2015 earnings conference call. Joining me on the call today are Dave Adams, our Chairman and Chief Executive Officer, and Glenn Tynan, our Vice President and Chief Financial Officer.

Our call today is being webcast, and the press release as well as a 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 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.

Finally, our discussions today of current and future results, except for cash flow, are on a continuing operations basis, which excludes all previously announced divestitures. In addition, any references to organic growth exclude the effects of foreign currency translation, acquisitions and divestitures, unless otherwise noted.

Now I'd like to turn the call over to Dave to get things started. Dave?

Thank you, Jim. Good morning, everyone. For our agenda today, I'll begin with a brief update on recent events, followed by Glenn, who will provide a more thorough review of our third quarter financial performance along with updates to our 2015 guidance. Then I'll return to provide some additional commentary on our capital allocation strategy and updates on the AP1000 RCP and margin expansion programs before we wrap up and move to Q&A.

Overall, we experienced a challenging quarter. As has been the case throughout 2015, lower oil prices and weaker economic conditions continued to disrupt several of our industrial businesses. As you saw, we lowered our sales guidance for the year to reflect the ongoing weakness that these particular businesses are experiencing.

Despite market conditions, we're maintaining our EPS guidance for the year at $3.80 to $3.90. We are also increasing our operating margin guidance range up to 13.5% to 13.6%, as we continue to execute on the One Curtiss-Wright strategy that we embarked upon in 2013.

So, as you can see, although faced with some external headwinds, our team remains focused on controlling costs and driving strong margin expansion. Our overall results continue to reflect the solid execution of our One Curtiss-Wright initiative as those actions continue to bear fruit. We remain on track for a great finish to 2015 with 90 to 100 basis point margin improvement and double-digit EPS growth.

In addition, we repurchased $88 million worth of stock in the third quarter, ramping year-to-date share repurchases through September 30th to $185 million. This activity reflects our continued commitment to steady share repurchases, which also included some opportunistic buying.

Finally, we hope that you have seen the press release issued last night that fully qualifies our AP1000 reactor coolant pump. This is an exciting step for Curtiss-Wright, and I'll come back to address this further a bit later in the call.

Now I'd like to turn the call over to Glenn to provide a more thorough review of our quarterly performance.

Thank you, Dave, and good morning, everyone. I'll begin this morning by adding some additional perspective to our third quarter EPS results. Our diluted earnings per share of $0.80 includes a one-time pension settlement charge of approximately $7 million, or $0.10 a share, related to our former Chairman, who retired earlier this year following a 37-year career at Curtiss-Wright. Although this charge has been in our full-year guidance, we have not previously indicated when it would occur. As a result, you may need to update your quarterly projections accordingly to reflect this charge in the third quarter.

The quarter was also affected by the timing of the receipt of the next China AP1000 order. Although we originally expected to receive the order in the third quarter, this did not occur and has now shifted to the fourth quarter. This represents a shift of our $0.05 of EPS between quarters -- hence, our pro forma diluted EPS for the third quarter is $0.95.

Finally, our third quarter results also reflect the ongoing weakness in our industrial end markets, which significantly impacted our commercial industrial segment sales and profitability for the quarter. Although some of the shortfall is due to timing that we expect to recover in the fourth quarter, we have reduced the full-year sales and operating income guidance for this segment.

Partially offsetting this reduction is an increase to our full-year operating income and margin guidance in the defense segment. In addition, we have tweaked some non-operational projections, which enabled us to maintain our full-year EPS guidance of $3.80 to $3.90.

Turning to our third quarter sales by end market, higher overall sales in our defense markets were more than offset by a decline in overall sales in our commercial markets. In the defense market, sales increased 3% overall and 5% organically, which excludes FX and acquisitions. This improvement was primarily due to higher revenues in aerospace defense, which increased 16% over the prior year.

We experienced higher sales of ISR-related embedded computing products, in particular on the F-16 and Joint Strike Fighter programs, as well as a slight uptick in helicopter sales led by the Seahawk program. And naval defense sales increased 2% compared to the prior year, primarily due to higher sales on the Block IV build of Virginia-class submarines. Total aircraft carrier revenues were essentially flat for the period, as higher production of the CVN-79 program was offset by the winding down on the CVN-78 program.

Meanwhile, ground defense sales decreased 22% due to lower revenue on the Abrams, Bradley and various ground communication programs. That decline in sales more than offset continued solid demand for our turret drive stabilization systems.

In the commercial market, sales decreased 11% overall and 9% organically. In commercial aerospace, sales declined 12%, primarily driven by lower demand for avionics and flight test equipment for helicopters and regional jets. In addition, we experienced lower shot peen sales to Airbus, and our sales to Boeing remained essentially flat year over year, as expected, as most production levels were unchanged from 2014.

In power generation, sales decreased (inaudible), primarily driven by reduced demand in the nuclear aftermarket business based on ongoing deferred maintenance spending by domestic plant operators. AP1000 program revenues were essentially flat in the quarter compared to last year.

And finally, general industrial sales declined 9% overall and 5% organically, as the strong dollar negatively impacted sales in this market by approximately $6 million. Our performance in this end market continues to be influenced by the low oil price environment as well as weaker economic conditions in general.

In industrial valves, we continue to experience weaker project sales in the oil and gas and petrochemical markets. Across the industry, ongoing reductions in capital expenditures have led to larger-than-expected declines in projects-related demand, and as a result, these projects have shifted to the right. And finally, in industrial vehicles, we experienced lower sales of products for off-highway vehicles, primarily based on the continued weakness in the global agricultural market.

Moving on, I will discuss the key drivers of our third quarter operating income and margin performance. In the commercial industrial segment, lower sales led to an operating income decline of 21%, while operating margin decreased 250 basis points to 13.8%. These reductions were driven by a combination of lower sales of industrial valves and surface treatment services and the association under-absorption of overhead costs. Partially offsetting these declines were higher profitability in industrial vehicles despite lower sales due to ongoing operational and margin improvement initiatives.

In the defense segment, operating income was up 13% and operating margin was up 400 basis points to 21.7%. Segment operating income included a $3 million favorable impact of FX. Although not shown on the chart, excluding the FX impact, organic operating income was essentially flat on a 5% decrease in organic sales, resulting in an organic operating margin improvement of 80 basis points to 18.5%. This performance was driven by continued solid growth in our embedded computing business and ongoing operational margin improvement initiatives.

Next, in the power segment, operating income was up 22% and operating margin was up 230 basis points to 11.7%. As expected, our results reflect improvement in operating income and margin now that we've moved beyond the significant expenditures related to testing and design modifications for our AP1000 reactor coolant pumps. We also generated higher profitability in our nuclear aftermarket business despite lower sales volumes due to ongoing margin improvement initiatives.

In summary, overall Curtiss-Wright operating income declined 14% in the third quarter, which led to a 120-basis point decline in margin to 12.1%. However, our results were significantly impacted by the aforementioned pension charge. Excluding the impact of this charge, third quarter operating income declined only 4%, while operating margin increased 20 basis points to 13.5%.

And finally, it is worth noting that on a year-to-date basis, total operating margin increased 10 basis points to 12.5%, further illustrating the resilience of our business model and the benefits of our diversified end market strategy despite the continuing challenging facing our industrial businesses.

Moving on to our financial outlook, beginning with our end market sales -- I'll start with the defense markets. Following a strong third quarter in the aerospace defense market, current full-year guidance growth rates would imply expectations for lower sales in this market in the fourth quarter. This is primarily due to timing of production on various helicopter and ISR programs, as defense sales tend to be lumpy quarter to quarter.

Our full-year guidance in the aerospace defense market remains unchanged, as we continue to expect solid growth of 2% to 6% over 2014. Growth rates for our ground and naval defense markets also remain unchanged. As a result, overall defense market guidance remains unchanged and is expected to grow between 2% and 4%.

Moving on to the commercial markets, I'll start in the general industrial market. As you have seen by our year-to-date results, we have experienced steady headwinds in our industrial businesses, particularly within the energy markets. So as third quarter sales deteriorated more than expected, we have lowered our full-year general industrial end market guidance to be down 4% to 8%.

Elsewhere within commercial aerospace, and as noted earlier, our third quarter results reflected lower revenues related to avionics and flight test equipment. As a result, we reduced the full-year expectations for this end market and now expect sales to decline between 2% and 6% in 2015. These reductions to our commercial aerospace and general industrial sales have lowered overall commercial market guidance to be down 3% to 5%.

To sum up, and as a result of the aforementioned adjustments to our commercial end markets, we now expect overall Curtiss-Wright 2015 sales growth to be flat to down 2%. In the appendix, you will find the updated 2015 end market sales (inaudible).

Continuing with our financial outlook by segment, we have revised our expectations within the commercial industrial segment to reflect the end market sales guidance changes in the general industrial market discussed previously. As a result, we have trimmed our segment sales growth expectations to be down 1% to 3%. We also reduced the operating income associated with the lower sales. However, due to our cost mitigation actions, we are holding the operating margin guidance range at 14.9% to 15%.

In the defense segment, we are lowering our sales outlook due to the expected weakness in avionics and flight test equipment as noted earlier and now anticipate full-year segment sales to be nearly flat with 2014.

Turning to our operating income guidance, based on the strong year-to-date performance and the benefit of FX along with continued solid demand for our turret drive stabilization systems, we have increased our profitability expectations for this segment and now expect operating margin to expand another 110 basis points to range from 19.1% to 19.2%, which would reflect a 220- to 230-basis point margin improvement over 2014.

And finally, in the power segment, we are maintaining our current sales and profitability expectations, which include our assumption that the new China order will be received in the fourth quarter.

Overall, we remain focused on aggressively controlling costs given the current macro environment, and as a result of the solid profitability in the defense segment, we are increasing our overall Curtiss-Wright operating margin guidance to reflect 90 to 100 basis points in operating margin expansion in 2015.

Moving on, we have updated some of our non-operational guidance expectations as indicated due to better-than-expected year-to-date results for interest expense and the effective tax rate. We've also reduced full-year diluted shares outstanding to 47.6 million shares based on current share repurchase expectations. These adjustments help to offset the reduction in overall segment operating income guidance noted earlier. And as a result, our 2015 guidance for diluted earnings per share remains at a range of $3.80 to $3.90, which represents double-digit EPS growth over 2014.

Next, to our cash flow -- our third quarter free cash flow was $98 million, nearly double the prior's year's result due primarily to improved collections as well as the receipt of the large income tax refund. We are reiterating our free cash flow position for full-year 2015, as we continue to expect an adjusted free cash flow level similar to our very strong 2014 results, which reflects the previously announced $145 million pension contribution.

Now, I'd like to turn the call back over to Dave to provide the summary and some closing comments. Dave?

Thanks, Glenn. Curtiss-Wright remains committed to maintaining a balanced capital allocation strategy between operational requirements, returning capital to our shareholders and strategic acquisitions. As a reminder, our 2015 use of capital for our operational needs includes ongoing CapEx requirements as well as the $145 million pension payment made early this year.

In addition, we are steadily working through the $300 million share repurchase program that was authorized by our Board of Directors last year. For reference, we indicated that the initial $200 million would be executed via a 10b5-1 plan along with an additional $100 million available for opportunistic share repurchases. In the third quarter, we repurchased $88 million in stock, buying $50 million in steady repurchases via the 10b5-1 plan and another $38 million opportunistically. Given the current share price, we believe that our stock buyback program is the best use of our free cash flow at this time.

Through yesterday's trading, we have purchased more than $200 million in shares thus far in 2015. Looking ahead, we expect to complete the balance of our $300 million share repurchase program in the fourth quarter.

Regarding acquisitions, we continue to have a solid pipeline of candidates. It's about strategic fit with our current lines of business and the growth that they can bring to Curtiss-Wright in the future. We remain focused on acquiring businesses and-or product lines that immediately contribute to our long-term profitability expectations and will not be dilutive to our long-term financial metrics.

As you've likely noted, our year-to-date acquisition activity has been lighter than usual. As a result, we've increased our focus on share repurchases, and the waiting has certainly shifted to return of capital in 2015.

I'll remind you that while our capital allocation process may fluctuate year by year, longer term, we remain committed to a balanced capital allocation strategy. Overall, we're confident that the progress we're making to more efficiently manage working capital and improve cash flow will benefit our shareholders over the long run.

Next, I'd like to spend a few minutes providing a status update on the AP1000 RCP program. As I noted at the start of the call, we issued a joint press release last night between Curtiss-Wright, Westinghouse and State Nuclear Power Technology Corporation of China, or SNPTC.

I'm excited to report that we have successfully completed the required design modifications, final testing and post-test inspection on our pumps. As a result, we announced that our reactor coolant pump has reached full qualification both by our customer and the Chinese following months of rigorous testing.

You might recall that earlier in the year, we successfully completed the engineering and endurance testing on our pumps. Most recently, we satisfactorily completed newly required testing from the National Nuclear Safety Administration, or NNSA, which is the Chinese equivalent of the US NRC, going a step further to prove out the successful operation of our RCPs.

We now have a fully-qualified design that meets all specifications in support of a 60-year lifespan. The first production unit is packaged and ready to go, as you can see on the slide, and the second unit is in process. Transportation has been scheduled, and we are preparing to ship these first two pumps to China in November. We believe there is a potential to ship two additional pumps by year end. We are pleased to reach these key milestones on such an exciting nuclear program, and it's a testament to our team's persistence and fortitude.

Negotiations on the next China AP1000 RCP order are ongoing. Now that we have demonstrated a successful design with rigorous hardware testing on our first-of-a-kind RCP, we firmly believe that we'll have a contract in hand once all parties agree on contract terms, including the number of plants, pumps and pricing.

Should the receipt of this order be delayed beyond the fourth quarter, we still believe that we will be able to achieve our full-year 2015 EPS guidance. The timing of receipt of this order will be dictated by China's need for nuclear power. We look forward to continuing to support China's nuclear power needs for years to come.

Overall, the demand for the AP1000 power plant remains strong, as it is expected to be a critical element in the construction of new nuclear power plants in China, Europe and the US. We remain confident that Curtiss-Wright will play a long-term role in support of this nuclear industry expansion.

In summary, we're pleased with the strength in our defense markets, which offset some of the challenges impeding our commercial markets. We expect 90 to 100 basis points in operating margin expansion in 2015, up to a new range of 13.5% to 13.6% led by our ongoing margin improvement initiatives supporting the One Curtiss-Wright vision. This puts us ahead of plan for the year and reflects our team's continued strong execution.

As a reminder, we are aiming to reach and then maintain our position in the upper quartile of our peer group for all of our long-term financial metrics. We are intently focused on driving synergies and producing significant cost savings, and I'm very confident that we will reach our goals.

These actions along with our continued commitment to return capital to shareholders through steady share repurchases are expected to drive double-digit EPS growth in 2015. We remain optimistic that the steps we are taking in 2015 will drive strong shareholder returns for years to come.

At this time, I would like to open up today's conference call for questions.

Thank you. (Operator Instructions). Michael Ciarmoli, KeyBanc Capital.

So maybe, Dave, just to stay on that topic, on the AP1000, how do you make the guidance if the order slips into first quarter next year? Where else are you going to pick up any additional upside?

Well, we've got a nice range there. The order, as we've discussed in the past, is worth roughly 13 in sales, 3 off income, so we still think it's within range. And as always, we work as hard as we can to do whatever we can to remain in that category and take care of some of those issues that come up from time to time, so we view it as -- it'd be great to have it as planned, but if it doesn't happen, then we still feel pretty confident we're going to do what we said we're going to do.

And do you guys just have shipping the two pumps in the full year, or are you actually thinking you can get the four pumps shipped in the full year? I know you said there's a chance you can get four out of the door.

Well, we're planning on shipping two. They ship in pairs, and so we're planning on shipping two in November. The ship has already been called. As you said in the picture, we've got them packaged -- one of them, anyway. The second one is nearing that process. And then the follow-on two we've got planned -- our manufacturing plans are to package those up and get them out in December, and if we can get any more out, then we're certainly going to do it.

Okay. And can you give us -- I mean, what's the -- I know you guys were optimistic on getting this signed. You're seemingly adding that little bit of language that the timing of the order is going to be dictated by China's needs for nuclear energy. I mean, what is the hold up at this point? It sounded like for a couple months now the I's were dotted, the T's were crossed. I mean, what's -- can you kind of give us any insight into what are the puts and takes right now?

Yes, it's interesting, Mike -- I think we've all learned a lot over the last ten years I think we've been talking about this and more recently two years that I've been talking about it on every call, and what we have -- well, we certainly came to the conclusion that we needed to present our customers with a qualified unit. That has now happened, and that was extremely exciting for us. It was great news.

It was coincidental that we just got it signed off, the quality sign-offs and so forth from both our customers, and that included meetings in China and included the results from all the testing. And as I indicated, we were asked to perform additional tests, and as a user, I don't blame our customers for doing that.

And so now finally we are at the point where -- I'd say we're in uncharted waters in that I don't recall having been in a situation where we've got a qualified unit, we've got everything signed off in that regard, we're shipping the hardware out, and now I can say that we've done our part. The units will get there, they'll plug them in, they'll work, and what happens next -- well, we're in the negotiations with the Chinese. We've been negotiating for the last year or two, and it sort of -- it heats up as you get closer towards this stage in the cycle.

And as we worded in my prepared remarks, I'm not really sure what happens from here. We do expect an order. I know the Chinese want to place an order. I know that they need the pumps, we need them -- it's a great mutual relationship. We need to arrive at mutually agreeable commercial terms, and that's yet to come.

We have trips planned in the near future to continue the negotiations, and as far as I'm concerned, as long as we meet those requirements that everybody is mutually agreeable with the terms and so forth, then we'll move out and we'll continue to progress on this program, which is -- it's huge for us and for the Chinese and the world, in one respect. It's a fantastic market for us and fantastic program, so we're as excited about is as we ever were. It's just I don't have anything new to say right now other than it's in the hands of our customers to negotiate with us and arrive at a successful conclusion to that.

Got it. That's helpful. And then you -- obviously, you guys are doing a great job controlling what you can control internally. Costs -- you can't control the end markets. You've got a real meaningful ramp here in operating margins into the fourth quarter. Can you just shed some light on what's changing or what you're doing? I mean, it just seems like you're really stepping up the internal cost controls there. How we should think about the level of operating margin you're going to achieve in the fourth quarter, going into next year, even -- which is going to be pretty impressive given the constrained top-line volume environment.

Yes. Sure, Mike. I mean, if you look at the fourth quarter, it's not a typical ramp. I would say it's probably a little accentuated with a few things from the third quarter that shift to the fourth quarter as well, but you can tell we're looking at $70 million in incremental sales, $30 million in profit, so it's definitely one of our better fourth quarter ramps.

So I'll just go through the segments -- in commercial industrial, I mean, they're going to benefit from their sales volume. They're also going to have a big bump in their margin for their -- they're probably the furthest along in our operating margin improvement programs, and we've -- I think we've said that in the past as well. And they're also going to benefit from favorable sales mix. They're going to have in the fourth quarter high sales in their higher-margin sensors products as well as the valves in the fourth quarter.

And I will say such a combination in the volume, their cost-reduction initiatives and favorable mix for industrial, and I will say 75% of the industrial segment -- commercial industrial segment sales are in backlog already as of September.

Defense is kind of a little bit the opposite thing. They had a pretty good increase in sales, so they'll get some benefit from the volume and absorption, not as much but a little bit from margin improvement, but they're going to be negatively impacted in the fourth quarter by mix, as we're seeing a shift from what we benefited from in the third quarter of the higher-margin (inaudible) products to more sales of the lower-margin systems products in the fourth quarter. So they've got the same thing going on, but their mix there is a little bit different than commercial industrial, and I'll say 81% of the defense segment's fourth quarter sales are in backlog as of September 30th.

And in power, the largest increase in sales, which of course includes the order, includes more domestic production, that we're back on the production trail, and a pick-up in our aftermarket sales, which is not atypical for the nuclear aftermarket. The fourth quarter is a typically higher maintenance quarter following some large output quarters in the third and the second, so fairly typical with the exception of the new order, so, again, in volume they'll have margin improvement.

The other thing impacting the power segment in the fourth quarter is they also will benefit from a supplement technology transfer agreement that they signed in the fourth quarter, which will add to their margins for sure. And just, again, keeping in their -- 70% of their orders are in backlog as of September 30th, 75% if you include the order, which we haven't gotten yet, but that's in our sales number.

And then, of course, corporate we're not -- if you're looking from the third quarter, even the nine months into the fourth quarter, we're not going to have a pension charge again and we're also expecting some lower corporate spending, so it's a combination of all of the above.

Got it. That's helpful. I'll jump back in the queue, guys. Thanks.

Myles Walton, Deutsche Bank.

The first one I have is maybe a follow up. Glenn, you mentioned the supplemental tech transfer. Can you size that in terms of the impact to the fourth quarter and kind of put it in context as it relates to -- you had these before. How different is this new one?

Yes, it's just an -- it's actually an extension. We're continuing to -- the original one I think ran out or is in the process of running out, so they -- we've had a few of these come along, but I think it's $2 million or $3 million in the quarter, somewhere in that range. I don't have the exact number.

And is this something that is an ongoing stream, or is it kind of one time for the quarter?

That's a one time for the quarter, yes.

In the commercial segment, can you talk about the (inaudible) the margins on a year-on-year basis? You talk about some of the declines in the surface treatment, and I'm just looking at kind of the decremental margins on the volume declines. It looks like the decrementals were about 50%, and I'm just kind of curious was that -- I know surface treatment is a pretty volume-sensitive business. Is that where most of the declines occurred in the quarter year on year?

Certainly -- as you know, certainly -- you hit it on the head. It is volume-sensitive. That is a big piece of it, and the other piece was probably in our general industrial businesses with vehicles and the values -- all three contributing with surface temperature

Okay. And then on industrial in general in the segment -- the commercial industrial segment, it's been hard for everybody forecast what general industrial is going to do, and that's shown up in your guidance through the course of the year. As you look kind of from here going forward, what markets are deteriorating, finding footing and then kind of starting to turn the corner for growth? Can you just give us a snapshot within the segments as it looks forward?

I'll give you just the general overview of my perspective, Myles. I think the -- like you said, the stuff that we have no control over, the oil prices and so forth, that is certainly driving everything down. Outlook-wise, I would look for some potential refinery MRO possibly maintaining. It did pretty good in the first half. We're not sure what it's going to do in the last quarter here and then in the next six months or so. Chemical processing -- I would expect that it would probably pick up a little bit, less of a risk associated with the gas side.

Certainly we look at the destocking that everybody has experienced, we being among those and ours more recently than many other industrials, and I think that for the most part, that hopefully is pretty much behind us. But we're watching that carefully, because a lot of our products and fast turn and some would -- they've destocked, and it can have a nice effect up or, on the other hand, it could affect us rather quickly down, as it did in Q3.

I'm not sure our outlook in off-highway in Europe and on-highway -- that has been waning for a while. They're still sort of teetering on what they think they're going to be doing with their economically. But domestic looks pretty good. It's really fueled by the efficient -- fuel-efficient sort of technologies that are emerging that the fleet reparations and-or fleet replacements are encouraging the use of today. So we do drive on new product introductions and, especially in this area, might help pick that up for us, so we're feeling pretty good there. We talked about international projects pretty slow, and that just wanes along with the gas prices.

And then, lastly, I'd say medical mobility as part of that general industrial has been a pretty nice segment for us, and we've seen growth there. We think that we'll continue to see that. And while it's not a huge piece, it is -- it's nice to have something that has some real positive momentum to it.

Okay. And the last one for you, Glenn. So as I look at the cash flow generation, it was great in the quarter, and it looks like kind of year on year, you're expecting roughly a flat 4Q in terms of free cash flow generation versus last year. How much, if at all, is aided the order from China and, B, an extra two pumps going out the door material or not material to kind of overachieving versus your actual guidance?

Yes, the (inaudible) due to shipping part. The shipment doesn't really have any impact on our cash flow, but the order right now we -- again, some of it comes down to the actual timing, of course, but generally we're saying we would probably -- it would have around a $20 million impact on our full-year guidance if we do not get the order.

On the cash flow.

If we get it late, it could be less than that, but generally speaking, if the question is if it's out, it's about $20 million on free cash flow, yes.

Okay. Great. Thanks.

Kristine Liwag, Bank of America Merrill Lynch.

Using the low end of your full-year 2015 outlook in commercial industrials, this kind of implies that 3Q 2015 is the bottom in commercial industrial sales. Can you provide some color on momentum of orders in that end market? And should we see sequential improvement in commercial industrial sales past 4Q?

Well, I would say in the commercial industrial, the quarter was not our best quarter for orders. Year to date -- I mean, I think we're down 9% in that segment in the quarter, 5% year to date, so a little bit better, and our current estimate for the year is 3%, so it is trending in the right direction. Obviously, that would imply the fourth quarter would be a little pickup for that. I couldn't tell you exactly where that's coming from at this, but I think it would be -- there are some naval valves and industrial valves, I would imagine.

Sure. And a follow up on the surface technology weakness -- is this the same headwind that you had previously highlighted in shot peening because of movement in customer facilities, or is this something new?

This is the same one that we talked about before, Kristine.

And at what point does that stop becoming a headwind?

I think it really runs out at the end of 2016, and maybe there's a tiny bit left in 2017.

And lastly, for the AP1000, can you please remind us how many reactor coolant pumps there are in a nuclear reactor and then the pricing range per coolant?

Well, there's -- just, yes, as a reminder, there are eight pumps -- four pumps per reactor, two reactors at a plant site, so for any site, it's eight pumps for us. The price on the Chinese order was approximately $12.5 million a pump. The pricing on the domestic order, which we received the year after the Chinese order, was about $15 million -- approximately $15 million a pump. And obviously, we're not at liberty to talk about anything in the future other than to say we expect it to be better than the domestic order.

Sure. And then if you do get the order in 4Q, how quickly will you see revenue pick up in 2016 if you do get that order?

Pretty quickly. I mean, I guess if we got the order on December 31st, it might be tough, but if it's reasonably in the quarter -- November and December -- we should be able to meet that 13 and 3 or just shy of it. It's all going to come down to the actual timing. When we say Q4, if it was October 1, I'd say we're very confident we'd hit that. If it's December 19th, it's less confident, if you know what I mean.

Sure. And maybe a last question, if I can sneak one more in. When you look at the timeline of order to last delivery, is that stretching over one year, two years? What's kind of that timeframe?

On the AP1000?

Yes.

It's really hard -- well, it's really hard to gauge the very first pump because you've got the order --

I guess what I'm trying to find out is the cadence of that. I mean, it's eight pumps, so over what timeframe will you realize revenue for that order?

Oh, okay. Okay, that's -- I'd say it's probably a five-year period, and it will be recognized using percent complete accounting, and it'll occur -- like the easiest way to put it is like a bell curve. It'll ramp up in years one, two and three and ramp down in years four and five.

Great. Thank you.

George Godfrey, CL King.

A question on the balanced capital allocation. When you're thinking about as we go into 2016, 2017 and 2018, more of a three-year view, when you say balanced, do you think 50-50 in terms of capital return versus capital invested, or is it 60-40? How do you think about putting more granularity on the balance?

It's really -- it's one-third, one-third, one-third is what we've said, George. It's one-third to internal investment, one-third to acquisitions and one-third to shareholder returns. Now, that's our strategy going in. Year over year, things can change. We went into this year similarly with that approach, but the acquisitions were a little lighter than we expected this year, so we shifted more of the allocation to the share repurchases. Next year, it could go the other way.

But generally speaking, when we start the year, that's our allocation of our available cash -- one-third to internal, one-third to acquisition and one-third to shareholder returns.

Got it. And the tax rate for this year at 31%, is that something you think goes forward into the next couple of years?

That's probably a good proxy at this point. I couldn't tell you one way -- as you could tell if you go back historically, it does move around a little bit, but it's usually 31% or 32% we start the year out, and if some things go our way, we get the benefit, like we did this year. So I'd say 31%, 32% is a good place to be.

Got it. And then, lastly, do you have the ending headcount, Dave, exactly?

I do not. I know we put in our press release approximately 9000 employees. That's probably the best number to use.

Okay. Great. Thank you.

Sam Pearlstein, Wells Fargo.

And I apologize if I ask something that you've already addressed, because I guess we got put into a different queue, so I missed some of the -- the introduction at the beginning. But following onto that capital allocation question, I guess just can you talk about -- how does the end market weakness and pressure on kind of earnings and valuation impact your thinking about bolt-ons? Does it shift your focus of which markets are more attractive, or does it make buybacks more appealing? How do you just think about it in light of some of the market weakness?

Generally what we do, we look strategically at it, first off, long term, and you'll look at the weakness -- if that opens an opportunity for technology -- and I'll be specific, not on a fixer-upper, because as I've said before, from an inquisitive perspective, we're not really into fixer-uppers. But if it were to open up from a price perspective on selling price on a property, that might help us or entice us.

Our strategies are pretty well set in terms of where we want to grow. I've said in the past I like industrial, and I still do. Yes, we've got a little bit of a headwind right now, and so does the rest of the world, but we'll get over it, and if something were to open up in that area, then it'd be great. Now, we -- again, that's largely dependent on selling price and outlook on that market. I do feel very bullish that the markets will come back and it's just a matter of time, I think.

And then on the other aspect, on the share repo side, we certainly weigh these things, and that's what we did this year. We've walked away from a couple of acquisitions because the business model for the acquisition versus share repo didn't -- it weighed in favor of share repo, and it was -- in the case of one specific one I'm thinking about, the price was just too high, and so we elected to just migrate from that, and knowing that, we decided, look, let's just buy more of ourselves.

That's the best investment that we can make right now in that regard, but long term is still the overall objective and strategy for us, and that's the way we look at it. It's a long-term play, but as you've seen and I indicated earlier on my script, we have $100 million in opportunistic monies that we have been utilizing, and kind of where we see our stock at a great spot, then we'll acquire that.

And then, on the other hand, if we do find something towards the year end that's looking like a nice business or product line that does come in and meet the parameters that we've set forth for acquisitions, then we'd look strongly at that. So it's kind of a weighing factor, Sam. I don't know if that answered your question, but that's generic.

It does. I guess I'm just trying to think about how you accelerated the buyback and bought a little bit more this year than you originally intended and just thinking about how to plan for next year as to how you think about that. And I know, Glenn, you just said a third, a third, a third, but I'm just wondering if it shifts the dynamics at all given acquisition prices or anything else.

No, I don't think so. I mean, when we go through, we'll do some -- presumably, we'll do a 10b5-1 plan for next year. We haven't come up with those numbers yet. We're assessing where we think we'll be next year and for how we're going to allocate our capital. But we're in that process, and we'll be talking to you more about that, obviously, on the next call, but I think we're establishing the parameters around that now.

It's neither -- the pricing, let's say, of acquisitions aren't going to drive us in any one direction unless and until, as I indicated, it becomes on par with investing in ourselves and-or it's a very compelling strategic reason.

Okay. And then just if you can answer one question, which you might have addressed already, was just on the defense side. Compared to where you were in July, revenues are down a little bit, but profits and margins are up. Is that a mix issue? Are there some EAC adjustments that helped bump the margins up? What was it that drove the profits up higher even on lower revenues?

Well, let's spin back to the second quarter. For the first half, the margins in that segment were only at like 18.3%, which is right in line with our guidance, so the real -- our guidance adjustment really came on the heels of the third quarter shrink, which brought year to date up to 19.4%.

And it was a mix issue, Sam. We had a very high percentage of our higher-margin (inaudible) sales in the third quarter, and it's going to flip a little bit in the fourth quarter and we're going to have a different mix in shift -- shift in mix to lower margin or not as high margin systems business, and therefore we have lowered the -- raised the guidance based on the year-to-date results, essentially.

Thanks.

Jim Foung, Gabelli & Company.

I was wondering if you could comment on the Westinghouse purchase of CB&I's nuclear plant construction business. I was wondering how that would impact your business with Westinghouse and whether it's positive or negative for you.

No, that's -- thanks for asking about that, Jimmy. There is no impact to us. We've reached out and talked to our people, and we're completely agnostic to that transaction.

So you wouldn't see maybe any potential benefit that you could sell more products now that Westinghouse is in complete control of the whole process?

Now, if they are able to sell more, obviously we'll be the benefactor of that, but it's nothing that we can foresee, and we don't know their plans for that operation and that segment of their business now, so -- and maybe it's early days, but on the first flush, it certainly wouldn't impact us from any negative perspective. I would love to think that if they could sell more, it would definitely benefit us. So other than that, there's no manufacturing operational impact.

Okay. And then just shifting gears just to commercial aerospace with Boeing, I guess production was kind of flat year over year, but wouldn't you see that picking up further because of your shipments to Boeing?

I believe there are expected run rate increases next year, so I would expect to see -- I don't know what they are exactly today, but I think we will see some -- we should see a pick-up in rates next year.

Okay. So fourth quarter you're expecting kind of the same, kind of flat to flat, but then you start seeing the higher numbers in 2016, then.

Yes.

Okay, great. Thank you.

Ryan Cassil, Seaport Global.

On the AP1000 order, you said at this point everyone wants to get it done, but it's coming down to, really, negotiations. Is price the big sticking point here? Are there other perhaps logistical factors outside of price that are really in focus?

It's generally a full set of commercial terms, and that includes everything from price to lead time to terms to warranty. It's a big deal, and this is a big program. It'll be a very nice order, and it means a lot to both ourselves, the Chinese and Westinghouse, so a lot of time and energy goes into something like this.

Okay. Okay. And as you go through this process with the customer, have you gotten any additional visibility -- I know you're focused on getting this order, but have you gotten additional visibility on other orders perhaps behind this one as well as you've worked with them?

I can tell you that -- not from a specific order perspective, but I'll give you the color on what we see out there that is in the press, and you may have seen this also, but they're -- China's five-year plan is to build up to eight plants per year. Now, using Glenn's math there, that's -- if it were fully AP1000, and if they all used our RCPs and they all used the generation 3 that Westinghouse and ourselves have designed, then for us RCP-wise, that's eight per -- times eight plants per year.

Now, that's a huge number. I would not anticipate in my wildest dreams that they would be all AP1000s. I mean, maybe -- if they could, it would be fantastic, but the reality of it is -- will they make eight a year? Will they all be AP1000 type power plants? I don't know, but that's through 2020. Their goal is by -- is 110 power plants by the year 2030, so you can see China alone is huge. It dwarfs the balance of the world relative to its need for a clean energy source.

And we obviously would not take that and say -- look, we're going to have 110 times eight. No, that's just -- the math would be crazy, but it's a nice thought, nice dream. But in any case, that's what the outlook is like, and that's from their published periodicals over in China.

Right. And have you gotten any sense in talks that there's sort of follow through or commitment outside of what's in the press on that initiative?

No, only in casual conversations that they're very -- obviously very strong with us. The RCP everybody was waiting -- you can't imagine how long we've all waited for this successful conclusion to the fall testing and how delighted that everybody is now that this thing is done, so there's a big sigh of relief in that regard. And like I said, in the casual conversations, yes, there is plenty of opportunity out there for us that really makes the mind wander in terms of, wow, this could really be cool. I mean, it's a big deal, but nothing in concrete.

Okay. Okay, that sounds good. And then I think you talked about the possibility of shipping two additional pumps perhaps late in the quarter, and if I've heard you right, it could be about $25 million in sales, but is there much profitability that's kind of incrementally associated with those shipments?

Ryan, it's going to be the shipment isn't really -- we recognize sales in this program over the percent complete method that started in 2007, so we're really -- the shipment doesn't result in any material financial implications.

Got it. Okay, that's what I figured. And then moving to the industrial valves business, could you talk about just trends you've seen quarter-to-date here in Q4? Has that business picked up? It seems like you're assuming it does a little bit. And then any color on just pricing impacts, whether they're any different incrementally here as we move throughout the year?

I don't have any, say, mid-quarter feel at this point, but we are seeing a little bit of a pickup in the valves in the fourth quarter. That's one of those -- you know, relative to the third quarter, it's probably more of a timing issue than anything else. We are hearing that out there pricing is becoming an issue. We haven't had a major issue for us, but we hear it's out there. So other than that, I couldn't really -- we're in the process of looking beyond 2015 at this point. We're not really at a place that we can talk about that yet, but we will in February. But I can only talk to what we've seen in 2015 thus far.

Okay. So it sounds like not -- it's an issue, but you guys are managing it and there's some price baked into the expectations already.

Yes.

Okay. Thanks, guys. Appreciate it.

Michael Ciarmoli, KeyBanc Capital Markets.

One of mine got answered already, but just in terms of your ground vehicle business on defense, how are you guys thinking about any potential content on the JLTV? Can that -- and I'm thinking back. I know you guys had a lot of content back when the Future Combat System was out there. It seems like you've always gotten some nice wins, so can JLTV be a catalyst for that ground vehicle segment?

We're on the JLTV -- I wouldn't use the word catalyst. That implies something huge, in my mind in any case, but we are active on the JLTV, so I do see something positive coming out of that. Generally, what you find with us, because of the breadth of reach of our products, we are on pretty much everything that gets fielded to some degree -- a little embedded computing, just all sorts of different products (inaudible) type stuff.

And in this particular one, they're probably early days to count the chickens before they hatch, but it's not a huge number. You take Bradley -- we think Bradley is coming back sort of with opportunities there, and I think that the ground defense overseas in Europe, it's absolutely still moving in the direction that we're very, very happy with -- a huge bump last year, and it will continue for several more years. So just general ground defense -- I mean, that's a nice one to have. It will be a little bit lumpy from time to time.

Got it. Thanks, guys.

Steve Levenson, Stifel.

Just looking forward a little bit -- I know you're not giving guidance, but do you see changes in the discount rate that would affect pension accounting in 2016 that we should get a heads up on now?

Yes, it will probably move a quarter point, we're thinking, at this point.

A quarter point lower or higher?

Higher.

Higher. Okay, so maybe a little bit less pension expense next year. Okay, thanks very much.

(Operator Instructions). George Godfrey, CL King.

Just thinking -- again, I know you don't want to provide guidance, but conceptually, free cash flow in 2014 was about $265 million, the upper end of your adjusted free cash flow of $265 million. If revenue and net income were flat to slightly up, would you think free cash flow is at a similar level to these levels?

I mean, I think that's a fair assumption, yes.

Okay. Thank you.

Thank you, and I'm showing no further questions at this time. I would like to turn the conference back over to Mr. David Adams for any closing comments.

Thank you all for joining us today. We look forward to speaking with you again during our fourth quarter 2015 earnings call. Have a great day.

Bye-bye.

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