Curtiss-Wright Corporation (CW) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Curtiss-Wright Third Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Mr. Martin Benante. You may begin.

Well, thank you, Katharine, and good morning, everyone. Welcome to Curtiss-Wright's third quarter 2013 earnings conference call. Joining me on the call today are Dave Adams, our President and Chief Executive Officer; and Glenn Tynan, our Vice President and Chief Financial Officer. On the previous call, we announced the company's leadership transition plan whereby Dave Adams assented to the role of CEO. And as a result, I want to officially pass the baton to Dave to lead Curtiss-Wright's future earnings conference calls. I've generally enjoyed the experience that has taken place over the past 14 years, including the opportunity to discuss our successes and challenges as we have grown to a successful $2.5 billion corporation. The interaction with the investment community has been extremely rewarding. I want to thank all of you for your continued interest in Curtiss-Wright over the years, and I'm confident that you will be in great hands with Dave and our new management team leading the way. And now, I'd like to turn the call over to Glenn for a review of our financial performance. Glenn?

Thank you, Marty. Our call today is being webcast. And the press release, as well as a copy of today's 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 detailed those risks and uncertainties in our public filings with the SEC. In addition, certain non-GAAP financial measures will be discussed on the call today. A reconciliation is available in the earnings release, and at the end of this presentation, and will be available on the company's website. For our agenda today, I will provide you with an overview of Curtiss-Wright's third quarter 2013 performance and financial outlook, followed by Dave who will provide an update on our recent acquisitions and integration status before we open the call for questions. Overall, our third quarter results were solid. Adjusting for the onetime items that impacted our 2012 results, namely the strike, AP1000 investments and lower associated compensation costs and flow control and restructuring cost in all 3 segments, operating income was up 40% on a 25% increase in sales, leading to a 140-basis-point operating margin improvement to 10.5%. Our organic operating margin, which excludes acquisitions and FX, was 11.1%, up 200 basis points from adjusted 2012. Overall, our diluted EPS was $0.76 for the quarter, exceeding our expectations. These results reflect the benefits of our previously implemented restructuring and operational improvement initiatives, most notably, in the Controls and Surface Technologies segments. Our 7 acquisitions that were completed in Q4 2012 and Q1 2013 contributed more than $100 million in sales, $6 million in operating income, 90 basis points in operating margin dilution and $0.04 accretion to diluted earnings per share in the third quarter. Next, I want to provide some color on the segment drivers of third quarter operating income and margin. Operating income for Q3 2012 adjusted for the aforementioned onetime items is shown in the fourth column of this table shaded in blue. The majority of the onetime impacts occurred in the Flow Control segment. So comparing to last year, adjusted for those onetime items, current year operating income increased 15%, while operating margin decreased 50 basis points year-over-year to 8%. However, this decrease is primarily due to acquisitions as organic operating margin was 8.6% in the current quarter, up 10 basis points compared to adjusted 2012. In the Controls segment, operating income was up 41% and operating margin was up 200 basis points to 15.3% compared to adjusted 2012. Organic operating margin was 15.8% in the quarter, an improvement of 250 basis points from adjusted 2012. However, current year results benefited from lower pension costs at our U.K. unit. Excluding the impact of this onetime item in 2013, Controls' operating margin was 14.2%, a 90-basis-point improvement over the 2012 adjusted margin of 13.3% despite a 2% drop in organic sales. And finally, in the Surface Technologies segment, operating income was up 30% and operating margin was up 200 basis points to 15.3% compared to adjusted 2012. However, organic operating margin was 16.8% in the quarter or an improvement of 350 basis points compared to adjusted 2012. These results were driven by the benefit of prior restructuring activities, as well as continued improvements in operational efficiencies. Moving on to our end markets, I'll begin in our commercial end markets which collectively grew 43% during the third quarter. This growth is based on strong overall contributions from our acquisitions and solid organic growth of 17% in the commercial aerospace market. This has been one of our strongest markets as we continue to benefit from the ongoing strength of the OEM cycle and production rate increases across most Boeing and Airbus platforms. Within the power generation market, we experienced healthy organic growth from existing operating reactors through a combination of our solid installed base of products and services and the emerging requirements of the NRC's Tier 1 regulations. We have achieved strong growth despite fewer planned outages in 2013, which we expect to rebound in 2014. Meanwhile, sales in the oil and gas and general industrial markets were primarily led by acquisitions, although we did experience some pockets of strength particularly for global MRO products supporting ongoing refinery maintenance needs in the oil and gas sector. Our overall guidance within our commercial markets remains unchanged at growth of 30% to 34%. Moving on, third quarter sales in defense decreased 3% overall mainly due to lower demand from several programs within the aerospace and ground defense markets continuing the trend from the first half of the year. In the naval defense market, increased revenues were driven by the Virginia Class submarine and Ford Class aircraft carrier programs as expected, providing confidence in our full year sales guidance in this end market. Meanwhile, our outlook in the aerospace and ground defense markets continue to reflect lower incoming order rates. As a result, our 2013 guidance for total defense sales remains unchanged at flat to down 4% and does not include any specific impact for sequestration at this time. You can find the complete table of our guidance by end market in the appendix, as well as in the earnings press release. Moving on to our financial outlook, full year 2013 sales growth of 18% to 20% remains unchanged from our previous guidance, as does our guidance for operating income, operating margin and diluted earnings per share. In addition, we expect our recent acquisitions of Arens Controls and Parvus to contribute an additional $20 million in sales in the fourth quarter and approximately $0.03 in EPS dilutions, which we expect to be somewhat dilutive to the Controls segment's full year operating margin. However, despite this dilution, we do expect to be near the high-end of our guidance range for full year 2013 sales and diluted earnings per share. Year-to-date, we have produced strong cash flow from operations of nearly $135 million that led to a $77 million in free cash flow during the first 9 months of 2013. This is an all-time record high for us at this point in the year. As a result of the strong year-to-date performance and our expectations for continued improvements in working capital in capital allocations during the fourth quarter, we again raised our free cash flow guidance by $10 million to a range of $110 million to $120 million for 2013. Now I'd like to turn the call over to Dave to provide some updates on our recent acquisitions and future outlook. Dave?

Thanks, Glenn. Similar to last quarter, I want to take a few minutes to review some of our recent acquisitions. Let's start Parvus which was a highly sought-after business pursued by numerous embedded computing competitors. Curtiss-Wright was deemed to be the best fit for Parvus based on our leading distribution network, solid infrastructure and geographic fit which we believe will help fuel the global expansion of the products. This business builds a rugged computed market space need for Curtiss-Wright adding size, weight, power and cost, or SWaP-C, optimize subsystem capabilities in an area that we have been looking to grow. Their compact modules nicely complement Curtiss-Wright's existing range of larger, higher performance commercial-off-the-shelf, or COTS, solutions. Parvus provides opportunities to extend our combined technologies into new complementary markets, in particular, the industrial markets where we continue to differentiate and diversify our business. Parvus' ability to address the lower cost segments of the defense market should open up potential new opportunities in this market such as tactical wheeled vehicle platforms and upgrade programs for both the U.S. Army and the U.S. Marine Corps. In addition, our expansion into the rugged industrial market will be enabled through Parvus' rapid development processes and experience providing rapid integrations of commercial electronics into low-cost, deployable rugged systems. Integration is underway and we're on plan thus far. Next, to Arens Controls which further strengthens and grows our industrial Controls business and provides increased penetration within the commercial and the off-road vehicle markets. Arens is the market leader in the U.S. for highly-engineered electronic shift controls for automatic transmissions used on heavy trucks and buses. The company also designs and manufactures power management and traction systems which will provide us with an entrée into the emerging hybrid vehicle market. Arens strengthens Curtiss-Wright's position in 2 key industrial market areas. First, Arens supplies market-leading products to the medium and heavy truck and bus markets that are complementary to Williams Controls products and customer base. Second, Arens supplies throttle and hydraulic control products to the off-road vehicle market that are complementary to the Penny and Giles and Williams sensor product line, again going into the same industrial customer base. In addition, we expect to reduce Arens' future costs by leveraging Curtiss-Wright's existing China manufacturing and sourcing arrangements. Sales and marketing team integration has begun and we're on plan thus far. Continuing with the industrial market theme, I want to provide a quick update on our other acquisitions in the space. For Williams, we are expecting to leverage their facility in India for selected product transfers and new business awards, further enhancing our global industrial presence. We're also exploring new opportunities with expanding product offerings and growth into the utility vehicle segment. For PG Drives, we continue to expand our global industrial presence with new applications in Russia and Germany. Moving forward, we will continue to leverage Curtiss-Wright's supply chain across all of our industrial Controls businesses. We also expect new opportunities for supply chain synergies to arise with the recent Arens and Parvus acquisitions. Overall, the combination of these industrial acquisitions broadens our total addressable market for industrial controls and brings Curtiss-Wright one step closer towards our vision in this key market to be the supplier of choice for operator control subsystems and critical drivetrain components in specialty vehicles. Next, to Cimarron, which continues to track well ahead of plan in terms of integration. As previously noted, we are using our existing Houston operations to support Cimarron's rapidly growing demand. Our existing sites have been ramping up quickly and we are implementing a lean operating system that has contributed to record sales in Q3 for Cimarron. This year, we have absorbed $3 million in transfer and learning curve costs. As noted on our protocol, we believe this integration initiative has the potential to improve Flow Control's profitability starting in 2014. The implementation of lean principles is expected to help lower total cost, improve throughput and reduce lead time in order to support the increased demand for several of our product lines. Over time, our goal is to reduce total cost by 10% while doubling capacity and halving lead time. Next, an update on our emission control devices business where the last of their 5 devices has passed EPA testing and its certification application has been submitted to the government. We expect it will be one of the first fabricators certified to meet the EPA's new standard governing the destruction of harmful vapors. As a testament to this growing portion of the business, Cimarron received an order for our high valve emission control devices for delivery in December. Overall, Cimarron continues to provide solid opportunities to expand our sales in the upstream oil and gas market and is an excellent example of generating synergies from an acquisition. We remain encouraged that this integration, along with our continued focus on improving operational efficiencies, will help improve Flow Control's overall profitability in the long run. Finally, our remaining acquisitions are attracting the end line with plan in terms of integration. We'll share more details about these exciting acquisitions in December. Next, I'd like to highlight some of the key macro factors affecting our end market. I'll begin in power generation starting with the AP1000 program. We continue to make solid progress in the production and shipment of our reactor coolant pumps, or RCPs, for both the China and U.S. reactors. During the third quarter, we shipped 2 RCPs required for Sanmen Unit 1 in China, meeting our customer's schedule for the first plant. We are working to get 4 to 6 additional pumps ready for shipment to China in the fourth quarter. In addition, we have successfully completed production testing of the first domestic pump. We have negotiated a 2-year extension of the technology transfer agreement from our initial 2007 contract and are awaiting sign off by our Chinese customer. Regarding our next AP1000 order, we expect to receive a follow-on order from China in the very near future. Our mutual goal is to have a formally signed agreement in place by the end of the year. In addition, I want to provide some highlights regarding our aftermarket nuclear business. As it pertains to Fukushima response initiatives, we have captured more than $14 million in new awards resulting from NRC orders 1, 2 and 3 and have $30 million in proposals outstanding. The timing of those awards is expected to occur within the next 12 to 24 months. We were also awarded over $13 million in new orders in the third quarter specifically related to assisting plants in solving their obsolescence issues. We have nearly $20 million in additional proposals that we expect to be awarded by year end. Overall, we continue to experience increased sales and strong demand for Curtiss-Wright equipment in support of existing operating reactors despite fewer outages than last year. Next, to the defense market, starting with an update in aerospace and ground defense. We continue to experience improved profitability in these markets, most visible within our Controls segment despite the anticipated declines in sales. This is a function of our restructuring actions that began in 2012 to address the lower intake of order rates, a trend we expect to continue in the future. Clearly, we remain in an uncertain budget environment. As we've previously noted, while there haven't been any specific platforms that have been cut as a result of sequestration, we have seen a widespread indirect impact on Curtiss-Wright through lower incoming order rates. As announced here, the DoD will be operating under a continuing resolution for the foreseeable future, this trend is likely to continue. The most significant hurdles to overcome are likely to be the funding for new start programs and potential for in sourcing by the primes. We will continue to prudently monitor the ongoing budget negotiations and react appropriately including further restructuring if warranted. As for the fiscal 2014 defense budget request, the naval defense outlook appears to be very positive as shipbuilding remains near the top of the DoD's priorities, while the picture in aerospace and ground defense remains less certain. Despite the uncertainty, we expect our leverage in the commercial markets at 70% of our projected 2013 total sales will more than offset any anticipated impacts from sequestration in the defense markets. So to recap, we're pleased with the solid year-to-date performance of our organic businesses, as well as our recent acquisitions. This performance, along with our continued focus on improving operating margin, keeps us on track for strong double-digit increases for the top and bottom line in 2013. We expect the combination of these factors to provide momentum for further improvement heading into 2014 and we will provide more visibility on our future expectations in December. Effective with this morning's announcement, and in recognition of the significant contributions for the profitable growth and consistent operating margin expansion of Curtiss-Wright Controls, Tom Quinly has been promoted to Chief Operating Officer of Curtiss-Wright. I would like to publicly congratulate Tom on his new position and wish him continued success at Curtiss-Wright. Overall, with continued dedication and focus of our management teams to generate margin expansion and improve cash flow positions Curtiss-Wright very well for the future. Furthermore, we expect our growth to be complemented by a disciplined and balanced capital allocation strategy. Finally, we will be hosting an Investor Day in New York on December 11, which will include a preview of our 2014 guidance, as well as our margin expansion and capital deployment opportunities. Please be on the lookout for the agenda and registration details in the next few days and we hope that you can attend. At this time, I would like to open up today's conference call for questions.

[Operator Instructions] Our first question comes from Steve Levenson with Stifel. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Sorry to argue with what you all have been doing over the last year, I'm just wondering if there are any holes you think you still have to fill through M&A or if there is much more in the way of R&D going to internally develop other products that you need to completely round out the line?

Are you talking '13 or just generally? Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Generally. Certainly, not -- beyond the end of this year, please.

Sure, yes, for sure. We continue a robust R&D program within the Curtiss-Wright. And especially in those areas that we see, not necessarily leapfrogging technologies, but potential use of new technologies. For example on the defense side, you look at what's required in the future and you compare what we did with Parvus as being a very strategic acquisition. And we see a need for a different type of business that we can address which will expand our total available market. And that is in a different area in both as I described, the industrial and on the military side, products that are lower cost, more power, size, weight and power, as I described. And R&D is spent towards that sort of an area because it does address the total available market. In terms of acquisitions, both Parvus and Arens are both great examples of what we lay out as a strategic road map in terms of growth. Arens really addresses the industrial side and how we're going to capture the cabin as it were the Controls within the cabin of off-road vehicles and large vehicles. And that strategy will continue. We see a robust market there. We see growth in the future. And as I described with Parvus, it plays in as well and in the industrial side and in some of the military. So you're going to see a continued application of strategic spend on the R&D side, and certainly, a very strategic outlook in area of acquisitions. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okay, thanks. And in terms of the R&D, do you think it's going to stay at the same level of sales or is there a likelihood that it could increase a little bit?

So far, we're pretty much staying the course where we're at. When you look at that annually, you look at the spend and the sales in the defense side and we continue to be very robust on the defense side. But we look at that as a percentage of sales, and so it fluctuates.

Our next question comes from Michael Ciarmoli.

Just to -- Glenn, maybe for clarification. The Control margin is very solid in the quarter, and I think you said there was some pension benefit and that was just one time. But what should we think, I mean, this is kind of the best margin performance you put up in Controls in quite some time. I mean, how should we look at this run rate going forward here?

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

Okay. And then what about, just looking at kind of this quarter's earnings, what's implied for next quarter? It certainly looks like, when I look at the acquisition contribution, I think the margins on the acquired revenues year-to-date are about 4%. It seems like the annual earnings power of the company is going to kind of be north of the run rate you're tracking for this year, once you strip out those acquisition-related costs, you'll get some margin expansion next year. I mean, is that -- I'm just trying to get a sense of how we should be thinking about maybe an earnings starting point or bridging the gap into '14 when you roll off some of the acquisition dilution, you probably get some pension tailwinds. Can you give us any help there or any color? And I know, your quarterly earnings are usually a bit more back-end loaded so not fair to take these 2 quarters and run rate it. But can you give us any kind of color on what the expectations are, even for maybe the acquired margins. I mean, again, you got 6% contribution or margin in the quarter from the acquisitions, but maybe what can we expect?

Well, we're still, again, just to put the year in perspective from the recent acquisitions, we're still looking at around 12% accretion for the year. Again, most of that is going to come in the fourth quarter, or sometime in between the third quarter and fourth quarter. But we're still on target for that. Again we would expect to see even more -- the fourth quarter will probably be the most indicative of how those acquisitions will start to perform going forward. And we would expect improvement from there as we go into 2014. But of course, we will give you all the color at our Investor Day in December, Mike. Pensions, we're definitely expecting some tailwinds there. We just don't know how much. We will again, have that pretty much nailed down for the Investor Day. But yes, we would expect margin expansion in those acquisitions as well as the pension headwinds for sure.

Let me just add, Mike, that you're -- as you saw it and there was the announcement on Tom, and just kind of addressing 2 points. One on Controls has done well. Well, that's why we've promoted Tom. And Tom's going to do a great job for us in the area of margin expansion because that's a key performance goal for him going forward in the next several years and also, the entire team. So we're basically inculcating that culture across the enterprise and it's a margin expansion culture. And so I do believe that -- well, I know you're going to see some improvements, that's what we're talking about and that's a major goal for all of us.

Okay, perfect. That's helpful. And then just a last one for me and then I'll jump off here. I've seen some reports on the AP1000 that China has, in fact, reversed engineered the Westinghouse design and they were looking to potentially sell direct to Pakistan. Can you give us any color there, just given the technology transfer, it seems like it hasn't been progressing that fast. Just trying to make heads or tails out of what I've been reading with some of these broader reports?

Sure. Thanks for the questions. We saw those -- that media play also a couple of times, a few weeks ago and in more recently. And we have reconfirmed, as we did back a few weeks ago, that there's no truth to that rumor. The parts that -- if any are being sold by China are gen 2. And our AP1000 is a generation 3. And so, if there is any truth to it, it's not our AP1000. And then just adding to that, as I indicated on the call just a minute ago, we have just recently negotiated our next evolution in technology transfer agreement. And it's a 2-year agreement, and that occurred within the last 7 days. So it really talks to the perspective that technology transfer is required and that nobody's ready, from that perspective, in China to be able to do what it is that is purported to be said in this media piece. As an addition to that, we have an agreement with the Chinese that there is no sharing or tech transfer outside of that market. So we feel very strongly that this is bogus and we have confirmed that with our customer.

Our next question comes from Myles Walton with Deutsche Bank.

Glenn, so first 9 months, great cash performance. And no good deed goes unpunished, why is it going down in the fourth quarter when seasonally I don't think you've ever done that?

Well, I think you hit on -- we're trying to be a little conservative, a little cautious in that. And that's really the only answer. We don't expect our -- necessarily our fourth quarter to be lowest. But we just want to make sure everything falls into place. There's a couple of things on the AP1000, some big cash payments we just want to make sure they show up. And if they do, we'll probably meet. If they don't, then we'll probably meet.

So if you sign this Chinese order though -- a couple of questions with respect to that. One is does it come with an advance? Two is what is the size? And then three, Dave, you talked about the licensing agreement. And as I recall, there are 2 parts of the licensing agreement. One was tied directly to the hardware, and the other was a long-term license that went through 2022. Is it a 2-year extension on both the hardware piece of the license which I think was like $5 million of EBIT per year, as well as the longer-term $3 million a year type pure technology IP license beyond 2022?

So this is just the continuation of our recently expired 5-year agreement for additional 2 years. And then relative to the -- with the order size and advance payment, we are in negotiations at this point. We don't know what that's going to be and because we've been asked for many different variables, the X amount content in country X that we would supply. So we're just not in a position to address that at this point. But I can tell you, there are feet on the ground over there now and have been over the last several weeks in negotiating this.

Okay. And then the other one, flow control margins. So I think organic, if I'm using the kind of presentation the right way, was 8.6% margins in the quarter, and I think, if you correct for last year, it was maybe 9.5% or so.

8.5%, actually.

Correcting for last year, adding back the 22?

Yes, that'll be 8.5%.

Okay, organic margins last year?

Just the adjusted. If you adjust for the onetime items, it was 8.5% in the third quarter of '12 versus our organic '13 at 8.6%, up slightly.

Okay, okay. What is the potential margin of Flow Control? I imagine it's still under pretty good duress with not a lot of high CapEx oil and gas projects being run through it. I mean, how much drag are we seeing with respect to the oil and gas piece of the business?

Well, that is the biggest drag. We got some under absorption with lower volumes on some of these projects. But on the other hand, the other thing, we are transitioning the Cimarron product to our Cedar Crossing facility and going through that learning curve. I think we've talked about it for a couple of quarters now, I think it's $3 million to $4 million of learning curve cost that we will incur this year to get those products transitioned down there that will lead to expansion obviously next year. But...

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

That would -- yes -- no, it would be in the organic piece because it's our existing facility that's incurring the cost versus -- for product for Cimarron. But it's their incur -- the organic business is incurring the cost.

Miles, when I look at that at a high level, I say to myself, out of the 3 segments, I look at what happens with Surface Tech, we know what happens with Surface Tech, and that is as volume goes up, margins looking great, fixed cost, all that stuff. Controls has done an outstanding job of moving up that chain. We'll continue to do so. I look at it as, this is my opportunity in the Flow Control side in terms of picking up some margin and it's going to be -- I'll just use one term, it's addition by subtraction and one regarding that is relative to what happened to us in oil and gas, our end market collapsed, that's changing. We are seeing some improvements there, some refinery giving us some orders. And internationally, as well as domestic, we're seeing some of the new products that are coming out that are being extremely well received at some of the refineries, domestically. And we haven't even touched Cimarron discussion with what can happen there and the improvements that we're making there in terms of price, in terms of cost side, and what we're doing in Houston to take up the underutilized factory. So I really see some opportunity there. And that's where you're going to see it, and obviously oil and gas is a drag right now, but it is slowly inching upward. And I expect that to pick up even more quickly as we get out of this downstream business and into the upstream. And we've got opportunities to continue to do that.

Do I have to -- just last question, do I have to see the backlog significantly expand in Flow Control for you to be able to realize that? Or are you able, to your point, to structurally lower the cost base into effectively deliver more with less?

Yes, we've absolutely -- we're delivering more with less. The backlog is there. There are opportunities. We've got some low-hanging fruit we're taking advantage of. And I'm certain that Tom's got that tattooed to his forehead right away.

Our next question comes from Elizabeth Grenfell from Bank of America.

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[Operator Instructions] Our next question comes from Tyler Hojo from Sidoti & Company. Tyler Hojo - Sidoti & Company, LLC: So just a first question. In regards to the 2 acquisitions that closed in October, those are adding, I think $20 million. Just curious if you could maybe comment on what the offset is in regards to the unchanged top line guidance?

The 60 businesses, a lot of them go up and down, if you can imagine. But we are at -- we were at the midpoint of the range before the recent acquisitions. And the $20 million pretty much put us at the top end of the range which is what we had said. So we're still pretty much in line. We have a lot of puts and takes but were still pretty much in line with our previous guidance, plus the acquisition because we said we'd be at the top end, and those acquisitions put us at the top end. Tyler Hojo - Sidoti & Company, LLC: Got it. Thanks for the clarification on that one. And then I was just curious, I think in Dave's prepared remarks, mentioned that one of kind of the impacts from the CR, potential concerns, was in sourcing from primes. I think I got that right. Just curious if you could maybe just discuss what products or platforms you feel are most vulnerable to that?

I'll tell you Tyler, what we have found, and this is through a lot of dialogue with our customer and a lot of dialogue with me, personally, with our VPs out in the field that run our businesses. And what I'm seeing is and what we have said before and I stick to it is, on the Navy side, it's looking really good. We see the 3 classes of ships that are continuing their build rates, something happens, it might be a little stretch here and there. But we're not seeing any major cancellation or anything in those regards with regard to submarines and aircraft carriers and DDGs. When we talk about the platforms wherein we have our electronics content, we have -- as I was talking to one of our vice presidents yesterday, we have over 2,000 worldwide customers with -- that represent over 500 programs. And we've aligned ourselves to have a wide breadth of products on all of different platforms that are represented by the 500 programs. Not one of which is greater than 4% of our total. No program represents greater than 4% of our total. So when we're asked the question, which we are often asked about what we expect in the sequestration, so forth, we don't have an answer. I will say, with regard to the outsourcing and in sourcing, I think I know what I said was the threat of in sourcing, we always watch that. But we also watch our design wins extremely carefully. We are relatively flat year-to-year design wins, and that's good because we had a good year last year on design wins. And given the environment that we're in now, I'm really happy to see that we are at least flat, if we'd have been down, I would have been more concerned. And that's through third quarter. And then I also see that what our customers are going through, if you look across the defense sector of the marketplace, you'll see the layoffs and the redundancies and so forth. Numbers are heavy and you guys read this stuff all the time. Numbers are very heavy in terms of people. We are seeing a little uptick in terms of interest from our customers in saying, listen, we don't have those internal resources any longer to do what it is that we once were able to do. Therefore, we need you to provide us with the commercial-off-the-shelf subsystem or let's say, moving up that food chain slightly to alleviate some of the fitness that they have in their bench strength in terms of technical development of the non-core type electronics that we considered core. So we look at it as a real opportunity. We've said that for a long time now. And it has panned out every year. So we're looking at it that way and I think, I guess, you could call it a cup half full, but I think it is. Tyler Hojo - Sidoti & Company, LLC: Okay, wonderful. Just maybe lastly for me. I think last conference call, we were talking about some greenfield investments in Surface Tech kind of hitting in the back half and maybe being a bit of a drag to margin. Could you maybe just update us on where we stand with some of those investments?

Yes. Yes, I will tell you that. They were about $800,000 drag in the third quarter, and we expect it to be another $600,000 probably in the fourth quarter. So that's an ongoing, as you know, an ongoing strategy of Surface Technologies. So I mean, it may fluctuate from year-to-year, but that is the current year numbers.

One thing, I just jump in there and answer that. We look at that carefully as well from the capital side and you consider some of the greenfields, we're migrating from heavy greenfields, meaning not as much of an investment going forward, whereas we might spend $5 million, $10 million on a flat and equipment. Now, we'll go in with maybe $1.5 million, $2 million and grow it strategically and over time. So it sort of not to "build it and it will come" completely, but build it partially and offer this or that service, and do so at a more moderated rate and amount. And then secondly, the other major emphasis for us that we took on is a strategic priority this year and last year was what we call shop and shop. And some of the monies that Glenn just described are as a result of shop and shop towards the back half of this year that have the long-term tail on the multi, multi millions of dollars, where we go in and join with a company of prime, for example, in their facility, we load it with our people and we provide the service and we just rent space. So it's much less brick-and-mortar expense and thereby giving us a better use of our capital.

Our next question comes from Elizabeth Grenfell of Bank of America.

Dave, I just had a question for you now that you've been in the role for several months. What are you seeing is the biggest challenges and the biggest surprises since you've taken the role?

Well, I've been here for almost 14 years at Curtiss-Wright. So I would say that there are no shocks to the system. And I've been in this job for a grand total of, yes, you're right, maybe 60 days. So I'm absorbing it quickly. But having worked closely with Marty over these years and the team, the management level of corporate, it's not unfamiliar territory to me. So for me, it's really a redefining moment for my vision and the culture that I want to inculcate. It's very similar to Marty's. And we're very operationally driven. I do see a very strong marching order from me as a shareholder as margin expansion. I look for -- really creating what we consider the improvement in shareholder value, and that's what it's all about, for me and my job. And like I said earlier, the one low-hanging fruit is in the area of one of our segments, and we've identified that. But it's more strategically looking at the acquisitions that we are going after and do they fit the structure, do they fit the roadmap that we've laid out. And really, it's that whole capital allocation plan. What are we spending our money on, how wisely are we using it. And where are the underperformers, what do we have to do with the underperformers to either bring them up to the level that we want to be, and I have made it clear that internally and externally, that I intend to produce upper quartile business margins and that's by a peer group that I will define. And that's the expectation for me and my team. So I don't -- like I said, I don't think there are any shockwaves that have hit. I haven't awakened in a cold sweat yet. So it's a good thing.

Right. And then to you point on, as the acquisitions meet the company's strategy. What metrics are you using in evaluating M&A? I mean, how are you looking at it besides if it fits strategically?

We look at it -- with all the financial metrics that you can imagine, and ROIC -- ROIC, rather, we have IRR that we look at, we do use return on capital and several different metrics that we weigh each one with. But it's really on what determines for the payback, what kind of dilution are we going to expect? And we're looking at the more as-reported basis, the GAAP ROIC and really, trying to identify how long is it going to take to accomplish orders we want to accomplish. And just with a firmer approach to where we're spending our money and what is it costing us to capture the benefit of that. It's all in the capital allocation strategy, which we will describe in more detail in December. And I think that you'll find some clarity that will come out there that will help to answer this question.

Our next question comes from -- a follow-up from Michael Ciarmoli from KeyBanc.

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

Well, first of all, our pension is going to increase quarter-to-quarter about $3 million in the fourth quarter, back to its normal run rate of about $8.5 million. We had a couple adjustments, onetime adjustments in Q2 and Q3. So that will be about $8.5 million. And we have forecast for an environmental charge in the fourth quarter and some FX transactional losses. So that will hit you pretty clear.

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

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

Bye-bye.

Bye.

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