Enovis Corp (ENOV) 2010 Q3 法說會逐字稿

Thank you. Good morning, everyone, and thanks for joining us today. My name is Mitzi Reynolds and I'm the VP of Investor Relations. On our call today we have Clay Kiefaber, our President and CEO, and Scott Brannan, our Chief Financial Officer.

I'd like to note that the preliminary results for the three and nine months ended October 1, 2010 and the preliminary restated results for the three and nine months ended October 2, 2009 reflect management's best estimate of corrections related to the overstatement of the Company's pension liability described in the Form 8K filed with the SEC on October 25, 2010. The corrections resulted in a $0.01 increase in EPS for the first nine months of 2010 and a $0.01 increase in EPS for the first nine months of 2009.

We plan to file our third quarter 10-Q, as well as our amended and restated 2009 10-K and 10-Qs for the first two quarters of this year during the fourth quarter. Our preliminary earnings release is available in the investor section of our website, colfaxcorp.com. We will also be using a slide presentation to supplement today's call which can also be found on the investor section of our website. Both the audio of this call and the slide presentation will be archived on the website later today and will be available until the next quarterly call.

During this call we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statements that we might make today. The forward-looking statements speak only as of today and we do not assume any obligation or intent to update them except as required by law.

With respect to any non-GAAP financial measures during the call today, the accompanying information required by SEC Regulation G relating to those measures can be found in our earnings press release under the investor section of the Colfax website. Now I'd like to turn it over to Clay.

Thanks, Mitzi. Good morning, everyone. I'll begin with an overview of the business and then I'll follow with a discussion of our results and guidance. Then I'll update you on the strategic priorities and then we'll open it up for questions.

We're pleased to report stronger than expected results for the quarter. The environment is continuing to improve. Most of our end markets are showing continued signs of solid recovery across most regions. Both sales and orders on an organic basis were up for the first time since the third quarter of 2008. We expect the fourth quarter to follow its historical seasonal pattern and result in the strongest sales and earnings quarter.

Earnings will be driven by our oil and gas, general industrial, and defense businesses as well as productivity improvements partially offset by our lower margin commercial marine projects. We've made progress on our strategic improvement priorities including CBS, the development of our new VOC-aligned products, the alignment of the global functional organization, and the development of our Asian strategy.

In August we acquired Baric Systems. Baric is a premier supplier of engineered fluid handling systems primarily for the oil and gas market and this is going to enable us to grow our oil systems business worldwide. We are pleased with our progress this year toward our long term goal of driving sustained sales and earnings growth.

Now for a look at the quarter, sales for the third quarter were $132 million, up 6% on an organic basis from the prior year which excludes the impact of currency and acquisitions and were up 3% in total. The increase in sales for the quarter was led by higher deliveries in the power gen, general industrial, and commercial marine end markets. Orders were $124 million, up 8% on an organic basis and up 6% in total. We had robust growth in oil and gas which was up 31%, and general industrial which was up 19% on an organic basis.

On a year to date basis, organic sales were down 5%. As a reminder, we were still growing in the first quarter of 2009 when sales were up 18% organically. Organic orders increased 10% and were driven by strength in commercial marine and general industrial. Sequentially, organic sales were up 5% while organic orders were down 22%.

Historically, the third quarter has been a less robust quarter due to capital spending patterns and the European holiday season. Backlog was $351 million at the end of the quarter including $42 million related to Baric. The gross profit margin was relatively flat for the quarter and the year to date period while the adjusted operating margin declined primarily due to one time expenses associated with the Baric acquisition. While we had strong operational performance, it was offset by a combination of unfavorable mix and price which I'll speak to in a moment.

Adjusted net income was down slightly for the quarter and totaled $10 million or $0.22 per share compared to $0.24 per share last year. Currency and $1 million of Baric one time acquisition costs had a negative impact of about $0.03 on the quarter.

Now moving on to the end markets, all changes in sales and orders referenced are on an organic basis. Please reference the slides for additional details. In commercial marine, sales were up for the quarter, primarily due to customers taking delivery sooner than anticipated as well as working through our past due backlog. Orders were flat for the quarter due to higher cancellations. Excluding cancellations, orders were up 14%. Year to date sales were down while orders were up significantly.

Cancellations were $4 million in the third quarter compared to $1 million in the third quarter of 2009 and $3 million in the second quarter of 2010. On a year to date basis, cancellations have declined from $19 million for the first nine months of 2009 to $10 million for the first nine months of 2010.

This end market has been under a lot of pricing pressure. The orders we've taken since the middle of last year were at lower margins than in the past and we've been working through that backlog this year. While order pricing has recently improved, we continue delivering those lower margin projects into next year. We've analyzed our commercial marine business and are taking the necessary actions to improve margins and grow the higher value added portions of this business while culling the less profitable ones.

For 2010 we expect sales to be at similar levels and orders to be up significantly in this market compared to 2009 levels. Looking into next year, we're expecting sales to be at similar levels to 2010.

In oil and gas, sales were down for the quarter and year to date over last year as quoting activity has only recently translated into bookings. Orders were up for the quarter and year to date periods. These projects tend to be large and can cause uneven order and shipment patterns leading to inconsistent period comparisons.

Our midstream business, which is pipeline transport and storage, is doing well. We're seeing new projects as well as expansions coming online. We see particular strength in Latin America. Additionally, our average size job has increased significantly due to larger project size and the components we're supplying. Our higher margin refinery business, which is mainly lubrication systems, is also coming back. Most of the new projects are in the Middle East, Asia, and India.

Our acquisition of Baric Systems during the quarter enhances our refinery capabilities and expands our customer base in the Middle East in particular. Based on current activity levels we expect to see continued improvement in orders in fourth quarter which will position us well for 2011 in this market. For 2010 we expect orders to be up significantly for the year and sales to be down versus 2009. Longer term, we expect sales and orders in this market to grow significantly.

Turning now to power generation, sales were up over 20% for the quarter and are relatively flat year to date. We saw orders decline for the quarter and year to date primarily due to a policy decision to exit certain business in the Middle East. That was a decision we made earlier this year. This continues to be -- there continues to be a fundamental under supply of electricity worldwide. We're optimistic about the long term growth projects for power generation. In the near term, we're evaluating our product offerings and pruning less profitable and lower value added business. We're optimistic about the long term prospects of this market as we move forward from a lower base.

We expect sales in 2010 to be at similar levels and we expect orders to be flat to down modestly. While we've seen improvement in the power gen market, we expect sales to be down in this market in 2011 given the discontinuation of the business noted. We will transition this systems business to higher margin spec applications in place of the current to print business as we move forward.

Our next end market is defense where we're seeing very positive trends in the US and the rest of the world. Defense now represents about 10% of our business. Sales were down for the quarter but up year to date over 2009. Orders were up slightly for the quarter but down for the year to date period due to a difficult comparison in 2009 when we booked $32 million in orders related to a Virginia class submarine program for the year to date period.

We expect sales to up but orders to be down in defense for 2010. While this business can be uneven on a quarterly basis as well as an annual basis, the long term outlook is one of sustained and steady sales growth. For 2011 we expect sales to up while orders will continue to be down due to the timing of shipbuilding programs which can be highly variable.

Now for a look at the general industrial end market. Both sales and orders were up for the quarter and year to date compared to 2009. We've seen particular strength in the chemical and diesel engine submarkets compared to last year. The growth we've seen in general industrial has been broad based globally as well. We expect significant growth in orders in 2010 and we expect sales to be at similar levels to modestly up compared to 2009 in the general industrial market. Assuming modest continued economic improvement, we would expect sales and orders to be up in 2011 over 2010.

Moving onto the balance sheet, our financial condition remains strong. At the end of the quarter we had a net debt of $42 million including cash of $43 million with $133 million available under our revolver. We continue to focus on improving working capital efficiency. For the nine months, our working capital to annualized sales ratio improved to 22% from 25% and this includes Baric in 2009 and was primarily driven by a reduction in inventory. Since the beginning of the year, we've reduced inventory on hand by 19 days or 22%.

SG&A expense was $30 million for the quarter. Excluding the impact of currency and acquisitions, SG&A was up $2 million driven by higher volume related commission expenses and increased incentive comp expense.

Regarding asbestos litigation, we received a ruling from the Superior Court of New Jersey that we had been expecting. During the quarter, the Court ruled that certain primary policies were exhausted and ordered the court appointed special allocation master to allocate historical asbestos related payments against the subsidiary's insurance portfolio and submit the model to the Court by November 17th. This allocation will determine which insurers actually owe us for costs we paid in the past as well as costs we may pay in the future.

Our interpretation of the ruling resulted in us reducing recoverables by approximately $1.9 million in the quarter, but moves us closer to resolution. During the quarter we also reached an agreement in principal with an excess carrier that had written $1.4 million in limits that we had previously considered insolvent. We recorded a gain of $700,000 and expect to receive the cash in the fourth quarter. We continue to expect to have resolution on both of our subsidiaries' coverage litigation matters within the next 6 to 12 months.

During the quarter, we announced the relocation of our corporate headquarters to Maryland. We expect to incur $2 million of costs related to this move.

In summary, our markets are showing signs of solid continued recovery. We're encouraged by the strength we've seen and are increasing our guidance accordingly. We now expect organic sales to be down 2% to flat versus our previous guidance of down 2% to 5% from 2009 which translates into an organic increase in the fourth quarter in the range of 7% to 15%. We're expecting adjusted EPS to be in the range of $0.83 to $0.88 versus our previous guidance of $0.70 to $0.77 which includes a currency benefit of $0.03. We don't expect Baric to impact 2010 earnings but we do expect it to be slightly accretive in the fourth quarter.

As we look at 2011, we expect oil and gas, defense, and general industrial to all grow nicely next year while we expect commercial marine to be relatively flat and power generation to decline from 2010 levels. For details on our other assumptions, please see the slides.

Now I'd like to give you a brief update on the progress with our strategic priorities. Just to review, our strategic priorities are to utilize the voice of the customer process to drive differentiated product development, to grow Asia, to align into a global functional organization, and to intensify our applications of CBS tools, most notably in Europe and Asia. So let's start by taking about voice of the customer.

We had an energizing session in Monroe last month where we had each end market manager present their assessment of our end market product needs based on VOC. This was a candid assessment of our strengths, our product and service opportunities, and the suggestion for developmental priorities. All this with an intense focus on the development of differentiated solutions.

An excellent example of this is the SMART three screw solution, the world's largest, for a pipeline application in Latin America. It pumps 85,000 gallons a day for a very critical application. Additionally, our two screw product line required immediate attention and through the establishment of a global team focused on the development of VOC aligned products, we have now begun to develop a more simplified product line.

We had to start with the basics and rationalize the models across multiple brands within Colfax. The result was a 65% reduction in models and a 90% reduction in pitches to achieve the same product coverage for our current two screw flow and pressure range.

Next, we're adding some products to the lineup which we believe, based on customer research, will enable us to expand our current market coverage. All this will be completed within the next six months. One focused Colfax team is making this happen and the solutions will lead to more growth in the oil and gas end market.

The next priority is Asia. We continue to formulate our strategy while we prepare operationally to grow this market. The two screw product line enhancements will be critical along with an improved supply chain model to served the local needs.

Next, we're continuing our transition to the global functional organization and we're discovering improvement opportunities every day as a result of this new organizational structure. Global sourcing in particular continues to find opportunities while we're consolidating our supplier base. We reduced the number of direct material suppliers by about 50% since the beginning of the year and are now evaluating our higher volume materials.

Our global product development focus continues as well as we focus on high impact projects across Colfax. I'm pleased with the progress that we're making in applying our CBS toolbox as well. The most recent PD review showed significant improvement as we drilled down to review the point of impact action plans and the accompanying countermeasures. We are planning our strings of kaizen better as well so that we insure a linkage to our strategies. Radolfzell in particular has shown a significant improvement in productivity as we continue to work to reduce the complexities and improve our on-time complete performance.

The part rationalization process continues as we've now reduced the three screw part numbers by 11% with a goal of 40% by mid 2011. We're finding additional ways to simplify the front end ordering process to mitigate the comp complexity as well. It's exciting to see the involvement of all the associates in solving some of these complex problems and I look forward to updating you on the progress early next year.

Before opening it up for questions, I'd like to introduce you to Scott Brannan, our new CFO. While Scott's only been in his role for about 2.5 weeks, he's not new to Colfax. He joined our board in 2008 when we went public and served as head of the Audit Committee while he was on the board. Scott also worked for us in 2010 as the Director of International Finance working primarily with our German operations. Scott spent 12 years at Danaher in roles of increasing responsibility including CAO, Controller, and VP of Administration. We're delighted to have Scott, as well as Lynn Puckett, our new general counsel, join our team and help take Colfax to the next level.

Thanks, Clay. As Clay noted, Colfax is not new to me. I'm very excited about this opportunity and pleased to join the organization. I'm looking forward to working with Clay and the team.

And with that, we'll open it up for questions.

(Operator Instructions) Jim Lucas, Janney Montgomery Scott

Thanks. Good morning. I wanted to get a little bit more of an update. In your prepared remarks you were talking about evaluating a number of the projects and pruning as well as looking at the pricing and some of the lower margin backlog. Could you bring us up to date of where exactly you are in that portfolio review process of what's in the backlog today?

Yes. The main area of focus right now, as I referenced earlier in the year actually, has been Radolfsell, in particular the commercial marine business that we've had that really some of that started, I guess most of it was in last year. So that's where we've taken a harder look at the business in particularly. Along with the skids business which is in power generation which traditionally has been lower margin business as well. We think we have an opportunity, Jim, in terms of transitioning, especially the skids business, to more profitable systems business that's less to print for example and more to specification where we can add more value to it. And then getting back to commercial marine, we just need to go back and understand where we can really add value and also get more disciplined in terms of our pricing tactics and processes. And that's where we've been doing a lot of work since probably May of this year.

Okay. And then in terms of the acquisition pipeline, I mean Baric seems like a very good strategic acquisition and I was wondering, as you look at your current M&A backlog, I mean would you be looking at more of the Baric type acquisitions or do you have potentially bigger ones in the pipeline?

We're going to evaluate bolt-ons most certainly. We like those. We think as long as they're aligned and we're disciplined in terms of our strategy and they plug in nicely, that those are going to make sense. But we're also going to evaluate other types of acquisitions certainly as we move forward and look at additional platforms, those kind of things. But fundamentally our criteria is it's got to fit into an investment thesis that we have, something that's really tied to secular trends. We're looking for leading brands, typically more fragmented kinds of industries, niche players, we certainly want to be global. And also moving forward be able to mitigate some of the cyclicality. Those are the types of things that we look for.

We're real pleased with Baric and we think that fits in nicely in terms of the systems business as well as our, some of the opportunities that we see in oil and gas in particular, and we'll look for more acquisitions like that.

Okay, and finally I wanted to just delve in a little bit more on the oil and gas side given that was one of the last to turn for you and it sounds as if things are building nicely. Could you just bring us up to date of as you're looking at the project activity either from a bidding standpoint or current backlog, of what you're seeing geographically as well as midstream versus downstream?

Yes, as I said in the remarks, we've been seeing a lot of activity in Latin America in particular. That's typically where we're stronger. We're certainly with Baric looking to expand more to the Middle East, so we think that fits in,. That goes more downstream as you say, in terms of the refinery application. But we feel very good about oil and gas. We're seeing a lot of very positive movement out there across the globe really in terms of opportunities, certainly in Asia as well. And then not just in our real strength which is midstream as you know, but also looking at some of those downstream applications.

Our LSC business, for example, we're starting to see some good movement in terms of quotations and orders and those types of things. That has been off this year, so we're looking forward to that as we roll into next year. Certainly Houttuin as we expand our two screw applications, again, we feel that there's some opportunity in that business. So oil and gas as a sector, as we emphasized, are an end market that we feel very positive about.

Great. Thank you very much.

Darren Yip, Barclays Capital.

Good morning, guys. When we last talked down in Monroe, you guys talked about the initial stages of global sourcing, reducing suppliers from I think 2,000 to 500 at that point this year. Can you give us an update on how that's going?

Yes, we've taken the first significant actions in terms of reducing the overall supply as we said, probably by somewhere around 50% as I referenced. And that's to clean things up, Darren, and to really get organized so that now you can get down and start to cull that even more. What we're focused on currently is three of our top volume kinds of materials or parts and so we're looking to be able to consolidate within those particular parts and then see some of the savings that we expect along with consignment inventory and those kinds of things. We're going to be very methodical about starting with some key priorities like that and then just working down the list.

Okay, and then on a similar level, you guys have talked about the opportunities, 800 to 900 bps of opportunity at the Allweiler plant in Germany. I know that's a longer term opportunity, but I believe expectations for the year was around, product rationalization was around 20% for the year. Just curious to how that's progressing and I know it's a longer term goal, but just in terms of how we should think about margins next year with the progress you're making so far this year there.

Darren, the 20% you referenced, that was the target by the end of the year in terms of three screw and the ability to reduce those parts. We're currently at 11% which is a little bit ahead of plan, so we feel good about that. The ultimate goal is 40% by mid 2011 for that particular product line. So we're making good progress there.

It's important to understand how that flows ultimately to actually see some improvement in the margin. Once you work through that and come up with a solution, because it's pretty complicated on the frontend, you have to give customers an alternative that makes sense to them, and that's what takes so much time in trying to work through this particular puzzle. But once you do that and you actually have culled those parts, then it takes awhile to make its way all the way down to the shop floor and the impact on setup reduction, all those kind of things that are ultimately going to have an impact on those margins.

So it's -- I know everybody would like to know exactly what quarter is that going to hit and all those kind of things, but that's something that takes some time to work its way through the actual process. But we still feel very positive about that particular project in particular.

I think if you -- everybody keeps asking about the 800 to 900 basis points. That's great. I mean it's something we threw out there as a real challenge to get after, but ultimately what's going to happen is we need to focus on mix which we're doing, that's going to have a significant impact. We've been working hard to drive more general industrial in particular as well as aftermarket which makes a lot of sense. The pricing process, we've got an active project in place that's going to help us in terms of determining leakage with that, how we can put together better pricing strategies by end market. Aftermarket I talked about. The rationalization, global sourcing, continuous improvement in terms of kaizen, and then also the transition of some of our products to our [Whuzhi] facility as well.

In the short term in terms of what's been helping, certainly plant productivity is improved as evidenced by some of the comparisons of margins quarter to quarter as well as some of the short term global sourcing.

Got it. Thank you very much.

Jeff Hammond, KeyBanc Capital Market.

Good morning. Hey, Clay, you gave some good qualitative color around kind of trends into 2011 on the business. I wonder if you kind of shake it all up, what's kind of an initial growth rate to think about into '11?

Yes, Jeff, great question. We're working through our business planning process right now and we'll be in a much better position to do that after the first of the year. So I'd like to hold off on that. But I think you can tell -- I mean from what I said, oil and gas in terms of growth is certainly something that we feel good about right now based on some of the order and quotation activity that we have. General industrial we believe will continue to be strong. Defense will be steady. The thing to understand abut defense is you need to be very carful in looking at those order patterns because those programs happen from one year to the next. There are some major programs in 2012 for example, but we'll just continue to ship out of backlog and based on some of the orders that we got last year and this year. So that's really the way we see it from an end market standpoint.

Okay, and then just a few questions on commercial marine. I guess one top level, do you feel better or worse, indifferent versus three moths ago? And if you're thinking flat in '11 for sales, does that feel better or worse? Within kind of the cancellation trend, up sequentially but down year over year, is that still -- how does that bounce around? And then just finally, you mentioned kind of lower margin running through. What does that look like in the backlog? How long does that comment stay with us?

Right. In terms of commercial marine, I'd say we feel about the same. We've been guarded and cautious but what I like to term probably more realistic about that particular end market. When you look at the fundamentals in terms of the ships on order, they're about the same, about 9,000 ships on order which is an increase of about 35% in the capacity. That's something that's just going to have to play out over the short term. Somebody is going to have to -- not somebody, but I mean there are a number of opinions out there in terms of how long that will actually take.

The long term trend for commercial marine we feel good about. In terms of the cancellations, the thing to note, we're at about $10 million this year versus $19 million last year. To let you know a little bit about the quarter, a couple million of those cancellations, those were actually requests to move into 2015. We're just not going to do that, so we took the initiative and cancelled those particular orders. A lot can happen in terms of costs and pricing over a period like that, so we thought that was a prudent thing to do and keep that clean.

But I would say our assumptions are about the same. We're going to be very, very conservative in our outlook on commercial marine. With regard to the lower margin business that we've been working off, throughout this year by the way, and mitigating some of that with productivity improvements, I think the way to look at that is probably another six to nine months for most of that to work its way through the process. There might be some tailers after that, but that's the way I would view that at this point.

Okay. And then final question, just on power gen, you mentioned exiting some business, how should we look at that in terms of impacting the order rates this quarter and the backlog? I mean was there some stuff pulled out, or?

No, we didn't pull anything out of the business because we needed to maintain our contracts. But we decided early on in the year as you know from the note in the Q, that we needed to get out of that business. We felt it was the right thing to do and we did it before we were required to by law I guess, Jeff, as you take a look at that. We didn't pull anything out of the backlog like I said, so we've been working through that.

Just a note, too, the skids business typically has been a lower margin business, so what we're doing is in conjunction obviously with not doing business with those certain countries, we're just moving forward with a different strategy in terms of going after higher margin systems business there in other parts of the world. And so we've got a relatively good project list that I took a look at last week and we're working hard to make that happen. And then in addition, as you know, we acquired Baric, so we're going to leverage that particular asset as well to help grow in that area.

Good. Just a follow on to that, the order decline of 17% this quarter, is that a function of we're walking away -- maybe just shed some light on how the underlying fundamentals of the business are in power gen, in that end market versus this order weakness being purposely not going after lower margins.

Yes, I look at it more, Jeff, as a reset if you will. Because we feel really good and we're seeing growth for example in the Americas in power gen, significant growth there. So it's just we're doing the right thing overall and we're going to be fine in the long term and we're going to transition through that, like I said, with the additional business. But in the rest of the world and the other markets and applications that we have, we feel good about that. We just got a little bit of a reset here.

Okay. Thanks a lot. Appreciate it.

John Inch, Merrill Lynch.

Thanks. Good morning, guys. So positive commentary aside, if you do look at the sequential trend, you had organic orders declining across the board and down 22%. I hear you on the sort of third quarter dynamic, but I'm also wondering, if you go back to the second quarter, was the second quarter itself maybe a little bit more robust because of say an early anticipation by your customers to sort of begin to sort of replenish? And so that in contrast, the third quarter isn't just about seasonality, there's actually -- you're just progressing into a much more slower run rate, if you will? I'm just curious. Like how do you parse kind of your positive commentary with sort of plunging order rates and book to bill?

Right. I think if you take a look at the second quarter, John, there's no question that the orders were up. In that quarter there may have been a little bit of pent up demand in there. But most certainly it was tougher comp from a sequential standpoint. If you take a look historically though, Q3 is less robust as I noted in terms of the actual order patterns there. The other thing was this year, the European vacations hit pretty hard. That was definitely significant in August and September. But what we've seen since is pretty solid in terms of recovery, in terms of growth, in terms of actual order activity. So that's -- when I take a look at it, we were watching it closely, especially the European vacation impact, and now we fell good based on what we're seeing in terms of current orders.

But to break that down a little bit more just to help you understand the sequential orders, if you take a look at commercial marine, those cancellations that we talked about, we culled those out, I mean that you need to take into consideration. Oil and gas is just we feel very, very positive of that just in terms of what we're seeing in orders, so there really isn't any issue there. Power generation has more to do with exiting the business and the reset that I talked about. Defense you just have to throw out because the orders are very, very lumpy. They're linked to those programs. We got significant orders last year, we're working through that backlog. We feel great about how we're positioned for future programs as well and we're just going to continue to see steady growth we believe in terms of the actual sales and shipments. And in general industrial was pretty close actually when you look at the comparison to the previous quarter. So I think it's really important to try to understand those and put those in perspective.

Commercial marine you also talked I think about customers pulling forward some revenues. What was that all about and how significant was that?

I wouldn't say it was real significant, but some of them are starting to do that. We certainly -- what's been more notable is we've been working off those past dues. Remember early in the year I talked about the on time shipments and those kind of things? We put an awful lot of effort into improving those processes, being able to actually work off and ship that past due backlog.

Oaky, so you are agreeing though it was significant, but it wasn't a huge delta in the quarter. Is that the way to think about it?

Yes, I think that's good.

So how then do you get to kind of a flat outlook for commercial marine? It's not really clear. Like you've got book to bill plunging and sort of the dynamics in the industry don't seem to be particularly good. Why isn't it set up into next year sort of down in commercial marine just to kind of hedge your bets and be more conservative?

Well based on what we know right now in terms of the business that we've got, because we have certain parts -- we talked specifically more about Allweiler, but we've got other parts that have shown some growth in the business. But just based on what we see right now, we feel that that's a reasonable assumption and frankly conservative at this point.

Okay, so you expect book to bill then to kind of redress to more of a kind of a one times rate going forward, is that the point?

Yes, yes, yes.

Just lastly, could you talk about pricing trends in the backlog? I know that you're selectively trying to work through some legacy, lower priced projects I think you said over the next kind of few quarters. What's actually going on if you were to peel the onion with respect to the new business you're writing and the business that's in the backlog? Is pricing getting better or worse and maybe a little color around that?

Yes, commercial marine we already talked about that a little bit in terms of working through that. We have better pricing tactics and practices in place. Plus, as I said, we're working through a project right now in this quarter to really help us understand that and put in a more robust process that will lead to better strategies there.

Oil and gas the pricing has been pretty decent when we take a look at the projects that we've got that we're bidding on out there, because it's related more to the value that we're providing overall from a systems perspective. I think power gen in particular, I think power gen is pretty competitive right now. So I guess I wouldn't see that going one way or the other. Defense just continues to be good business for us and we're aligned and have the right kind of solutions there.

And then general industrial really breaks out. You've got different kinds of business, distributor business, which we are increasing price in that business, and then you've got other types of businesses more direct that are bid. So I would say if I had to put it into one particular --isolate it in one particular -- I'd say it's probably holding its own a little.

I'm sorry, I should have qualified. I mean raw costs potentially going against us, especially as the US dollar weakens, maybe you could just remind us about the price cost spread in your guidance this year. And do you feel that you can basically capture that or recapture those rising raw costs rolling into 2011?

Yeah, we do. We've been able to do most of that this year. I mean there's some, some outliers like copper for example that make it a little bit more challenging. But when you take a look at some of the opportunities that we feel we have in terms of consolidating suppliers and those kind of things, we're going to continue to fight that.

Okay. Thank you.

Mike Halloran, Robert W. Baird.

Good morning. When you think about your kind of core profitability from an incremental margin standpoint, your revenue was up a little bit this quarter if you back out the acquisition and currency related headwinds. Your margins are probably flattish year over year, but I know you have some mix, you have some pricing in there as well. So maybe you could talk a little bit about what your incremental profitability is looking like from a core standpoint and how to think about that going forward?

What comparison would you like? Are you looking at quarter over quarter or sequential?

Honestly, I don't know if it really matters because the amount of incremental revenue drive for every incremental revenue dollar that you can pull through to the operating profit dollar, that's the incremental profitability I'm curious about. How much leverage are you getting in your core business if you strip out some of the moving parts?

Yes. Well one of the things that's important to understand right now is we've gone through the first half of the year where as you know we've been, we've had a decline in sales actually and then now we're coming back. So anything in terms of incremental revenue, especially as we get towards the end of the year, there isn't going to be a lot there in terms of the incremental revenues comparison to last year. So you need to take that into consideration as you look at the follow-through. But as we analyze it, say quarter to quarter, Q3 to Q3, as you look at the actual stripping out the acquisition costs as well as the impact of currency, and that's something that we always need to be careful of in looking at this, plus you add in some of the impact in terms of mix and price that we talked about, and I think that was only on about an $8 million increase in sales. The incremental revenue from an organic, or the incremental profit from an organic standpoint is somewhere around 6%, but then the price and mix more than helps us understand that difference.

What's interesting is when you look at Q2 to Q3, the incremental profitability we have is about 57% and that's something that we pay a lot of attention to right now because we're starting to see improvements in productivity. Most definitely some of the volume is helping there. But we feel pretty good about what's going there right now.

That makes sense. And then when you think about kind of what your core incremental profitability can look like as you actually start getting more consistent revenue growth with the cyclical uptick, how would you think about that?

30% to 35% is what we've been pretty consistent about communicating. And we still see that as a reasonable rate. Again, to emphasize, we've got to see some volume over and above just some of the limited incremental volume that we're starting to see right now.

I agree, I was just curious how much the mix and the pricing were impacting things. And then a question about the guidance. I believe last quarter you said that currency was going to be more of a $0.03 headwind. This quarter it seems like a $0.03 benefit. Where does that $0.06 differential fall? Is that kind of split between 3Q, 4Q or more in 4Q?

State that again if you wouldn't mind.

Maybe I'll back up then. This quarter you said the currency was going to be a $0.03 tailwind for your guidance. Last quarter I believe it was a headwind?

Yes.

And so if you just look at the incremental difference that currency is going to have on your guidance, call it a $0.06 benefit relative to when you previously gave the guidance, I'm just curious if that benefit falls mostly in the fourth quarter or if part of it was also in the third quarter.

Most of it would be in the fourth quarter.

Okay, Great. That's all I needed. Thanks for the time.

(Operator Instructions). Jason Feldman, UBS.

Good morning. So on 2011, I understand you're not necessarily ready to talk about revenue growth rates, just wondering though, are there any other -- any issues that we should be aware of when thinking about the change from 2010 to 2011 other than whatever revenue growth assumptions we're thinking about, maybe 30% to 35% incremental margins? I guess we probably won't have the one-time acquisition costs again of $1.7 million, but is there anything else like pension, one-time cost saving reversals, or any unusual items we should be aware of?

Again, that's something that we'll provide more guidance after the first of the year when we come out with our actual guidance. The only thing I can think of that we could talk about at this point would be the corporate offices, we talked about that move being about a $2 million cost.

Okay, although I guess net of the one-time acquisition charges this year, it's not all that much of a difference? On the acquisition itself, you said that you expected little EPS impact this year. Is that excluding the one-time charges, the one-time acquisition related charges? Or is it basically that the contribution in the latter part of the year will essentially offset that so it's net neutral?

Yes, that includes the one time costs. And then in the fourth quarter we expect some accretion.

Okay, got it. And then last question, general industrial, you mentioned the chemical and diesel area were particularly strong. Anything change relative to last quarter either geographically or in terms of end markets that are materially different in terms of strength or weakness?

No. In terms of those particular ones, I mean China certainly is strong as well as the US.

Okay. Thank you very much.

Thank you. I'm showing no further questions in the queue. I would now like to turn the conference back over to Miss Mitzi Reynolds. Ma'am, you may begin.

Thank you again for joining us today and we look forward to updating you next quarter.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.