Twin Disc Inc (TWIN) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Twin Disc 2008 third quarter financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded Tuesday April 22, 2008.

I would now like to turn the call over to Stan Berger of SM Berger. Please go ahead, sir.

Thank you, Eric. On behalf of the management of Twin Disc, we are extremely pleased that you have taken the time to participate in our call and thank you for joining us to discuss the Company's fiscal 2008 third quarter financial results and business outlook. Before I introduce management, I would like to remind everyone that certain statements made during the course of this conference call, especially those that state management's intentions, hopes, beliefs, expectations, or predictions for the future are forward-looking statements. It is important to remember that the Company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's annual report on Form 10-K, copies of which may be obtained by contacting either the Company or the SEC.

By now, you should have received a copy of the news release, which was issued this morning before the market opened. If you have not received a copy, please call Pauline Collins at 262-638-4000 and she will send a copy to you. Hosting the call today are Michael Batten, Twin Disc's Chairman, President and Chief Executive Officer; and Christopher Eperjesy, the Company's Vice President of Finance, Chief Financial Officer and Treasurer. At this time, I will turn the call over to Michael Batten. Mike?

Thanks, Stan, and good afternoon to everyone. Welcome to our third quarter conference call. As Stan has indicated, I will start with a brief statement and then both Chris and I will be available to answer questions. Reported net sales for the quarter at $85.8 million were about equal to those reported last year of $86.4 million. Year-to-date net, sales totaled $241.3 million, up 6.6%, from $226 million in the same period last year. Foreign currency translation impacted sales favorably in the third quarter and nine months by $6.6 million, and $14.1 million respectively. Continued strength in our global markets for commercial marine and mega yachts was offset by softness in oil and gas transmission and industrial markets. Net earnings for the third quarter were $7.9 million, or $0.70 per diluted share, compared with $7.5 million or $0.64 per diluted share for the same three months a year ago.

Two favorable tax adjustments totaling $1.8 million were included in the third quarter. Approximately $1 million represented the impact of a recently enacted reduction in the Italian corporate tax rate, and the remainder reflected a favorable return to a provision adjustment related primarily to foreign tax credits. Year-to-date net earnings totaled $17.2 million, or $1.51 per diluted share, contrasted with $16.7 million or $1.43 per diluted share for first nine months of last year. Excuse me. Gross margins for the third quarter held at 31%, down from 32.6% reported in the same three months a year ago.

Year-to-date, gross margins were 31.4%, down from 31-point -- 32.2% recorded in the same period last year. Third quarter profitability was impacted by lower volumes, reduced sales of higher margin projects, higher sales of lower margin projects and higher material costs. These were partially offset by higher pricing, expanded outsourcing and lower pension expense. The weakening of the U.S. dollar versus the Euro continues to put pressure on the sales of our Belgium operation and their sales into North American market, however, this situation has enhanced the competitiveness of our domestic operation in their sales of products overseas.

Marketing, engineering, and administrative expenses, as a percentage of sales, were 17.4% in the third quarter, as contrasted to 18.4% a year ago. The reduction was driven primarily by a favorable adjustment for stock-based compensation in the amount of $2.3 million, that was partially offset by higher expenses due to foreign currency translation, and the implementation of Company's new global ERP system. Year-to-date, ME&A expenses were 19.5% of sales for both nine month fiscal periods. We continue to invest in our business. In the third quarter, we spent $3.8 million on CapEx and year-to-date, the total was $10.6 million. We much expect to spend another $5 million in the fourth quarter.

We are comfortable with our balance sheet and capital structure. As of March 28, total debt was $57.4 million, compared to $43.9 million at last fiscal year-end. Our total debt-to-capitalization ratio is at 30.9%. Overall, we are pleased with the results of the third quarter. They compare well against the same period last year, which was the best third quarter in the Company's history. Demand for our commercial and high-end pleasure craft marine products continues to increase. Sales and orders for marine transmissions from the Pacific Basin and the U.S. Gulf Coast and marine propulsion boat management systems for the European mega yacht market remain strong.

Global demand for our marine product line has helped to offset the softness in our industrial and oil and gas transmission products and augment growing demand om military and airport rescue and firefighting vehicles. Our six-month backlog of orders has reached a record high. We are encouraged by recent order activity in both our industrial and oil and gas transmission markets. We expect that our foreign sales will exceed domestic sales this year and have a stabilizing effect on revenues. In addition, we will remain focused on lowering our operating costs, continuing to develop and enhance our product portfolio and modernizing our manufacturing operations as well as expanding our global outsourcing program.

The final three months should be another good quarter and we remain optimistic about the fiscal year 2009. That concludes the prepared remarks for today and Chris and I are ready to take questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Our first question comes from Robert [Smythy] with the Abernathy Group.

Hello. I just wanted to get an idea of -- well, first, what do you guys consider to be your proper capital structure, your target capital structure?

Well, I think we're pretty much as where we are right now on an operating basis, 30%, 31%, low 30's of total capitalization is a comfortable area for us to be in. Now, that does not mean that we cannot go out and look at acquisitions, which is what we are doing. And as a result of making an acquisition go above the 30. What we're looking at is keeping enough of our powder dry so that we can make those kinds of acquisitions.

I suppose I could ask you on any color on which segment or divisions do you want to make an acquisition in?

Well, we are looking at all of the areas. We are not targeting one particular one or another. We are active in marine as well as land-based opportunities.

And just one last question, can you give some color on what part of your marine businesses were doing -- you felt were the strongest and the weakest in the last quarter and how you project those to go going forward?

Sure. The strongest part of our marine business is a combination of our commercial marine sales into the oil and gas markets around the world. That would be driven by demand from the U.S. Gulf Coast, as well as the Pacific Basin. So our sales in those areas have gone extremely well and continue to do well and the forecast is for that to remain at high levels that we're seeing. The other part of the marine demand is coming from the European mega yacht market, particularly Italy, but not necessarily exclusively there. And we see that demand for mega yachts continues to grow and will remain at high levels for this foreseeable future.

So you don't see any weakness there at all?

Do we see any weakness where?

In the mega yacht market specifically?

No.

Great.

Not in the European market segment. In the U.S. segment, the buyers -- the production is going on in Italy and in Europe, the UK. The North American market, as you know in the smaller horsepower range has been very soft and -- but the mega yacht market has remained strong.

Thanks a lot, guys. Congratulations for the quarter.

Thank you.

(OPERATOR INSTRUCTIONS) The next question comes from Harris Hall with Round Hill Asset Management. Please go ahead.

Congratulations on the quarter, gentlemen.

Thank you, Harris.

Several questions. One, I noticed inventory was up 18%. What was the constant dollar change and can you give us a little color on what is going on there?

Sure. Our inventories are up in part from -- I will let Chris handle the currency effect. But in pure operating terms, our inventories were up both in our domestic manufacturing operations and our European manufacturing operations. In part, due to -- here in the U.S. an issue that we had on a particular quality problem that has been resolved and we are resuming shipments and expect inventories to decline in the fourth quarter. In the European situation, we had a supplier issue, which also has been resolved and we expect inventories to begin to decline there as well, as shipments resume. So, that's from an operating side. Chris will address the currency.

Yes, Harris, about roughly a 1/3 of what you are seeing as an increase there was purely driven by foreign exchange. The other 2/3 goes to the comments that Mike just made.

So this is not an unplanned kind of obsolescence issue?

No, this is clearly not an obsolescence or slow-moving issue.

Okay. The next question, you provide some pretty positive backlog numbers. How much of your business is kind of longer term backlog related, versus kind of book-to-order?

Well, what you are seeing in the backlog is a backlog that is -- are orders to be shipped in the next six months. And we do have backlog that goes out beyond that. That is primarily in our transmission product line, because just the longer lead times that are necessary with the more sophisticated product. But most of the backlog that we had is in the -- what you see. It is largely being driven at the moment by the marine market, both commercial and mega yacht. And so the improvement is occurring there.

So can we read into that backlog -- is it fair to assume positive sales growth for the next two quarters because of that?

Well, I think that what we're going to see is certainly we are going to at least maintain our levels of activity, of -- what we're seeing is a filling of backlog out into next fiscal year. That is encouraging and gives us good comfort about how the year 2009 is going to unfold.

Okay. The fact that you are six month backlog is up over where it was a year ago, does not necessarily translate into you would expect sales to be above where they were a year ago?

It's a correct statement that there's not always a direct correlation.

Okay. And then on the sale, the sales were down 8% in constant dollars. How should we look at that? Is the weakness in the industrial and the oil and gas business overwhelming the presumably positive sales growth you are getting in the marine business?

We are seeing that there's a greater decline in the oil and gas and industrial year-to-date, for say in the last two quarters, but much of that decline is being absorbed by growth in the marine sector.

Would you be willing to quantify it for us, in any kind of ranges?

No, we don't release that information, Harris.

Okay. Okay. Great. That's very helpful. Thank you.

Okay. Fine. Thanks.

Our next question comes from Tim [Griffith] with Rockwood Investment Partners. Please go ahead.

I was curious if you can speak to what percentage of your business was related to the mega yacht segment in the quarter?

We don't publish that information, Tim. But clearly it's a growing segment of our business with our move over recent years with our Rolla acquisition and our BCS acquisition, in Switzerland and Italy added to our Arneson business that we had the surface dry business. We've made major moves into this market area. And so we see it as a good area for us going out into the future.

What's the thinking behind not disclosing the percentage? I'm sure it's for competitive reasons, but can you --?

That's clearly it. We're a public Company and our competitors are either large divisions of very large companies or companies that don't disclose their information. So all we're doing is giving away our competitive posture to them where we don't have the quid pro quo.

Okay. And you think that could affect your pricing potentially, or what would be the downside of them knowing that?

Well, not only the pricing but the actual values and the size of the market that we're in. And also where we're getting margin.

Okay. Moving to something else, is there any currency exchange effect on your cost of goods sold number? Obviously, there is on the top line but --?

Chris will address that.

Yes. We have a good guy in translation, and then the bad guy is the sales of the Belgium production, which are in Euro costs and U.S. dollars into the U.S. That increase is not inconsistent with the revenue increase. So, in other words, it's relatively stable margin translations. So I don't have exact number in my head but it's consistent with the growth in revenue.

And maybe help us with the model there. What was the percentage decline in volume for the quarter?

It's the 8% that you talked about without FX.

It's the 8%. Okay.

Or sorry, Harris mentioned.

Got it. Okay. And is there anything you can attribute the decline in the oil and gas business to specifically for the quarter? Is there anything you can contribute specifically the oil and gas decline in the quarter to?

Well, actually our rate of shipments were comparable -- was comparable or even better than the second quarter. The comparison is really how outstanding the third quarter last year was. So the third quarter last year was a knockout quarter. If you go back and take a look at it, and basically that's where the negative comparison comes. But our shipments -- we are still shipping products into oil and gas, both on a land-based side and on a marine transmission side. The marine transmission business is still up but the fracturing rig or the pressure pumping market is where the softness occurred. But as I indicated in my remarks, we are seeing order activity picking up and we're encouraged by what we see and hear.

So is it fair to assume that pressure pumping for your quarter was down year-over-year for the industry in general between your record quarter, third quarter of '07?

Yes.

Okay. All right. That's all I had. Thank you.

Thank you, Tim.

Our next question comes from Jerry Heffernan with Lord Abbett and Company. Please go ahead.

I'd like to concentrate on the pressure pumping business a little bit also. The previous questioner was asking about what has happened. I was most interested in your commentary in the press release of you'r encouraged by what appears to be re-emerging activity in the oil and gas markets. Would that be in oil and gas pressure pumping frac business or is that a accelerating or a further growing business in oil and gas marine?

Well, it's actually both. We're seeing the -- to talk specifically to the pressure pumping side of the business, as I have just mentioned in the previous question, we are seeing orders and inquiries increasing for production in the new fiscal year -- our 2009 fiscal year. So, we are filling our order boards with our transmissions to go forward into next fiscal year. That we see is an encouraging sign. There is some tightness recurring in the market, availability and so we are encouraged to see that. Clearly on the marine side, there is an awful lot of activity that is going on not only in the U.S. Gulf Coast, but in the Pacific Basin, where we are shipping our marine transmissions to applications that will go into offshore oil, [crew boats] and supply vessels.

Okay. And is it primarily for the crew supply vessels? What about -- I believe it's a -- the propulsion-type product or product that you have for the propulsion aspect of dynamic positioning of drill ships and rigs?

Yes, the products that we are shipping in the marine market are what we call QuickShift enabled and that enhancement, that QuickShift function is what allows for dynamic positioning to occur, at least in our marine transmission. It gives you the instantaneous shift that is required to maneuver the vessel with the performance that we are talking about. So it's -- all of our transmissions are now enabled with QuickShift. So virtually anything that goes out in the commercial marine area can be used for dynamic positioning.

Okay. Thanks. Could you -- and I apologize, I missed the -- a good part of your opening comments. Could you just address the topic of share repurchase? Certainly if we look at the basic shares out, year-over-year, it's down 427,000 or 428,000. I think you completed a par for 1,000 share buy back. You did state that you are happy with the capital position of the Company as it stands right now, with the 30% debt-to-cap. But if you could just approach the topic, the big picture, where you sit as a corporation in regards to share repurchase, the balance sheet and how you balance CapEx going forward in light of that? And a share price here, it says -- which seems to be relatively attractive or certainly seems to be more attractive than I think anything you could pay -- any valuations you would pay for acquisitions.

Well, from as you say the big picture point of view, our view is this, that we have been involved in the repurchase of our shares. We demonstrated that through last summer and up until the window closed in the third quarter. And so Chris can give you the details if you wish of those purchases. So, I think they were in the press release. From a strategic point of view, here's the balancing that we are doing. We are actively involved in evaluating and negotiating acquisitions. And quite frankly, our preference is to grow the Company and move the Company in directions that these acquisitions would help us drive to. We think that our shareholder value, long term, is enhanced by that kind of activity.

Let's go back. The things that are doing well for us right now, in the mega yacht market, just as an example, are a combination of the Rolla acquisition and before that the Ardeson acquisition and the BCS acquisition. So we wouldn't have the value that that is bringing to the shareholders if we weren't moving ahead in that front. Similarly, we would argue that that's -- long term the best use of shareholders' money, is to grow the company in areas that will generate earnings in excess of our cost of capital and quite handsomely.

Yes, we can buy back shares of stock, which we are prone to do from time to time, as we feel that the stock price is very low and a value enhancer in that regard. But we are not going to be in the position of applying all of our debt capacity to just stock buyback. Yes, it enhances the value of the shares on a short-term basis but it doesn't necessarily address the long-term value enhancement and value creation of the Company.

Thank you very much for covering that.

Okay.

Our next question comes from Joe Norton with Singular Research. Please go ahead.

I would like to go back to the backlog issue because I'm still not exactly understanding this. It seems in the past that there has been a pretty good correlation between -- there's always been 6%, 8% growth in backlog and that's translated into revenue. And then suddenly this quarter, that is not the case and yet the backlog continues to go up. So is there -- are you seeing order cancellations? Is there some change in the composure of the backlog that it's stuff that's taking longer to build? I don't understand why the disconnect between sales growth and backlog.

Right. The backlog as a single number is not necessarily something that can be used to translate to what the volume is going to be. For example, at $125 million of backlog, for six months, you can't double that and say we are going to be $250 million. Okay? That's one point.

The second point is that our backlog is really driven by a multiple of product lines that have different lead times. And so the -- the lead time -- let's say the service part could be one week or less and never really make it in and out of the backlog. On the other hand, the other end of the spectrum is a transmission that may have a nine month or greater backlog and so it doesn't even show up in the six month backlog until it's been in our total backlog for three months. If you use nine months as an example.

So -- and then you have products that fall in between that are, perhaps, a little bit more normal. So our industrial -- our after-market is the fastest turning. Our next is the industrial products that we produce. The next longer lead time would be our marine products and then the longest lead time is the transmission product line, which is typically nine months or so for order entry. In the case of the buildup over the last couple years of the pressure pumping business, the backlog grew well ahead because it was all transmission. And so what we're seeing in our backlog these days is a change. The backlog in the pressure pumping or fracturing rig market has -- we have shipped that backlog and it -- and so some of it is coming back and going back into our -- translating into sales. And our marine business is growing, which tends to have that shorter backlog. So the --.

So it's kind of -- we are seeing a shift more to the marine and away from the transmissions and the industrial?

Right. The marine backlog is in effect replacing the transmission backlog.

Okay. That helps. And then going back to the marine and the mega yachts. In the past, you've talked about very strong demand from emerging markets and you didn't mention that today. So is that segment slowing in the yacht business?

It was -- I probably should have said it. Forgive me for that. That's really where the demand is coming from in large measure, that is that the -- there is continuing high wealth demands from the U.S. and Europe but it is the fastest growth rates coming from the Russians, the Chinese and continued support from the Middle East and even India.

Okay. So when you were talking about Italy, are you just meaning that's where you are selling it out of or --?

That's right. In other words our customer base is primarily the Italian mega yacht community but also includes the UK and the U.S. But Italy has become the largest producer of mega yachts in the world.

So, then the crashing stock markets and the emerging markets is not really affecting the wealth effect that you guys have seen?

That's right. You are dealing with people who are exceedingly wealthy. And they are not going to be terribly affected by what's happening in terms of normal economy or even, well yes, a terrible market crash might give some pause but you are talking about people if you can afford to buy, $50 million to $100 million yacht, you are pretty well insulated.

Okay. Got it. And then the last thing, just on the tax rate, I don't know if you said. Should we just go back to a normal tax rate in the fourth quarter or what should we be thinking about for tax breaks?

I'll let Chris answer that.

You'll notice last year's fourth quarter also wasn't normal. There was some noise then. The two adjustments that were made in this quarter, the $1 million for the Italian corporate tax rate and the roughly, let's call it $800,000, although there's some rounding in there related to the return to provision adjustment, are just that, they're one-time adjustments. However, the first one really relates to setting up to the deferred tax asset related to the corporate tax rate change in Italy. That is basically for timing differences, which will happen in the future.

So they are both one-time items, however, starting in fiscal '09, which is when the Italian change takes effect is when you will start to see it flow through in the normal operating results for our Italian operations. So, you will see an effect. And effectively what happened is that change brings it more in line with the U.S. corporate rate. And I think if you go back and look at our income tax footnote, you can roughly see what that magnitude of difference is. But roughly, it's a 5% reduction in the Italian corporate tax rate. 5 percentage points, so actual point reduction.

So that could take the overall rate down a couple of points.

It will take it down by something. I don't know that we know exactly because it's dependent on the mix of where the earnings are coming from.

But that's '09, so, for the fourth quarter should we go back to kind of the 39.5%?

It's not going to be an unusual quarter in that you won't -- you shouldn't see any significant, unusual adjustments.

Okay. Good. Very good. Thanks a lot.

Thanks, Joe.

Our next question comes from Ephraim Fields with Clarus Capital. Please go ahead.

Mike you tend to be a conservative person by nature, so I was pleased to see you commenting about the re-emerging activity in the oil and gas markets. I had two questions, one is can you tell me what you're looking at that gives you that enthusiasm? And number two, could you speak directionally about the margins that you get in those businesses as opposed to the other businesses that you are also in?

Sure. With respect to the demand -- we are seeing entry of orders, as I said, from customers in the oil and gas market for our fracturing rig transmission. So that is -- that's one basis that we're getting solid orders. Two, we are getting additional inquiries from customers that have been quiet for a period of time and they are talking about additional builds and we haven't heard that in a while. So, that adds to our outlook. We aren't counting our eggs, so to speak, but the fact that there's order inquiry, usually begins the process of order entry.

Right.

So, that's really what we're seeing. I'm aware of other people reporting perhaps some differing information but at this point, based on what we are seeing, just ourselves is the basis of where we are coming from. As to the margin question, we do get a better margin from the oil and gas markets, as we have indicated in our press release. And, of course, the margin rates of the demand that is replacing it is not as great. There's still good margins but not necessarily the ones that we have. And I think that that is also covered in the press release.

We are seeing reduced volume of higher margin products vis-a-vis the quarter. That would be our fracturing transmission. And we are seeing higher volumes of lower margin products, which would be our marine but certain aspects of our marine margins are pretty good. So I wouldn't -- I'm not embarrassed by those growth in margins either. It's just that some of them are not as good as we're giving up in the oil and gas vis-a-vis a year ago.

Okay.

But I do think that our -- the fact that we are maintaining a gross margin in excess of 30%, 31% is saying that the ongoing margin rate is still in pretty good shape.

All right. And my final question, as I know you have spent a lot of time and money on the ERP system. Could you just give us some color to the benefits that you hope to derive once it's all fully functioning?

Sure. A lot of it depends -- it's based on where we were. And you and the others may not know but we had as many as eight different platforms around the world. And through a multiple of manufacturing operations, acquisitions and distribution subsidiaries. And of course, as we came to Sarbanes-Oxley, that was pretty costly to have to generate individual Sarbanes-Oxley controls at each one of these. So we obviously made the decision to go to a global program, an ERP program, to; A, eliminate those ongoing costs of maintaining Sarbanes-Oxley. But in addition, there's going to be a benefit from the ability of our centralized and corporate financial control operation to be able to analyze information more quickly off of the standard charts and database to be able to go in and inquiry and get information. It will also reduce, to a certain extent -- not completely -- the head count that is required in each of these operations around the world. So we think that we're going to see value occur as we go into the system. And really, that's why we are paying the freight now now to get to that point of adding one common system, fewer people in the organization and ability to get information more quickly and on a standardized basis.

Great. Thank you very much.

Okay.

(OPERATOR INSTRUCTIONS) Our next question is a follow-up from Harris Hall. Please go ahead.

Thanks. Just a couple more things. The operating costs, obviously, you said those were reduced by stock option compensation, about $2.3 million. In backing that out, it's a little over $17 million the quarter and just looking at Q4, would that be a good run rate to use going forward or was there something special in last year's Q4? Or was that over $19 million? How should we think about operating costs going forward?

I will let Chris answer that, since you are getting into some of the numbers there.

I think you are asking about the ME&A in the third quarter, adjusted for the stock-based comp compared to the fourth quarter. It's not quite that simple to say yes or no because there's a number of factors including foreign exchange, which may or may not play an impact. And then also you have, again, the issue of what happens in the quarter in a stock-based comp. I would say that there's nothing significant that we are aware of today that is unusual from the existing operation of the Company. So in terms of our fixed cost structure. There may be something related again, to stock-based comp or some other anticipated item, but as of right now, there's no major changes that have been made or expected to be made in the fourth quarter, beyond the ERP implementation.

Was there anything special or one-time that happened about Q4, '07 that got you up over $19 million last year?

There was. And I don't have the number in front of me, I apologize. But there was a stock-based compensation adjustment in the fourth quarter of last year in the other direction. And actually, I do have it here. In the fourth quarter of last year, which I think we disclosed in last year's press release, there was roughly a $1 million adjustment, so up in stock-based compensation expense that would have flowed through ME&A in the fourth quarter of last year.

So it wasn't just that you had pretty solid sales last year in the fourth quarter. It wasn't commissioned. It was really a one-time thing and we should kind of look at that $19 million number as an outlier? Is that fair.

I'd say yes but then we've had a number of outliers as a result of some of these movements. So, if you adjust for those stock-based compensation, then that would be a correct statement.

Okay. And then I know you were talking about volumes dipping down 8% in the quarter, but that -- sales volumes but that was actually just constant dollars. Can you give us any more color on pricing in units? I know you mentioned that some of your higher material prices were being offset by higher prices to final customer demand. Does that imply that units were down more than 8% or pricing was up or how should we look at ASB trends and unit trends?

The pricing that we put into effect was -- it was staggered through the year. Some of it occurring at the beginning of the fiscal year and some of it occurring at quarters and at mid-year, depending upon -- just based on different products. So we are in the process of raising prices again and we expect to fully offset any inflationary activity that we are experiencing.

Okay. So on balance, would you say that the average selling prices are higher than they were a year ago?

Our average prices are higher than they were a year ago? That's correct.

And then the last thing, you talked about Q3 being a tough comp from last year. Obviously, Q4 was even $4 million higher. Is there some seasonal factors going on or should we look at the comp with Q4 as $91 million in sales last year as a tough comp as well?

He's talking about sales.

Sales?

Right.

The third quarter of last year was a remarkable quarter and obviously we had just about everything going right in terms of shipping high margin product out the door and we had very few, if any what Chris calls noise in the quarter. As we look at the fourth quarter coming up, I'm not quite sure. We don't forecast what our specific numbers are going to be going out in the quarter or beyond but we ought to be in the ballpark with the fourth quarter next year -- I mean, this fourth quarter versus a year ago.

Well, my question was, the impressive fourth quarter you had last year, was that a function of seasonal issues where you normally have a big fourth quarter or was it, again, a tough comp where you have a record fourth quarter last year that you'd expect that to be a tough comp this fourth quarter?

Well, I think that last year was a very good year in the Company's history. And we started out this year with a very good first quarter and saw some softness occur in oil and gas in the second quarter, which is -- followed into the third quarter and is likely to continue into the fourth quarter at this year's rate of shipments rather than last year's rate of shipments. However, offsetting that has been the emergence of our commercial marine and mega yacht activity. Also, bolstered by military and our airport, rescue and firefighting activity that has picked up most of the slack to allow us to continue reporting numbers that are very respectable against last year. So that process is continuing into the fourth quarter. So, what you are going to see in the fourth quarter is very much a continuation of the trends that have been in place over the last couple of quarters anyway. And we're developing a fourth quarter that is going to be different than last year but is going to be a good quarter.

Okay. What I'm getting at is it looks historically like your fourth quarter has been your strongest quarter. Is there some seasonal issues there that lead to that or that just a coincidence?

I see. I'm sorry. I guess I'm a little dense today, but the fourth quarter tends to have more shipping days in it than the other quarters in the year. The first quarter starts out with a lot of vacation schedules, both our own and customers. And then second and third quarters tend to be more of a middle of a road. And the fourth quarter tends to be a better quarter in the year because it has more shipping days, typically. And there's a tendency on the part of customers to anticipate that there's going to be summer shutdowns or not -- the effect of summer vacation schedules, so they get their orders and want their shipments in hand by the end of June, so that they aren't waiting July or August.

Great. That's very helpful. I will let someone else on. Thanks.

Okay. Fine, Harris.

And at this time, gentlemen, I'm showing no further questions in the queue. I would like to turn the call back over to you for any concluding remarks you may have.

Well, thank you. And thank you, everyone, for attending the call today. We're -- as I said earlier, we are pleased with the results of the third quarter. We are optimistic about the balance of the year and see demand continuing into 2009. So we value your interest and the questions that you generate and hopefully responded to them adequately. Again, thanks a lot and we'll see you next quarter.

Ladies and gentlemen this does conclude the Twin Disc third quarter, 2008 financial results conference call. You may now disconnect and have a pleasant day.