Curtiss-Wright Corporation (CW) Q3 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Curtiss-Wright Third Quarter 2015 Financial Results Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jim Ryan, Director of Investor Relations. Sir, you may begin.

Thank you Camra and good morning everyone. Welcome to Curtiss-Wright's third quarter 2015 earnings conference call. Joining me on the call today are Dave Adams, our Chairman and Chief Executive Officer; and Glenn Tynan, our Vice President and Chief Financial Officer. Our call today is being webcast and the press release as well as a copy of today's financial presentation are available for download through the Investor Relations section of our company website at www.curtisswright.com. A replay of this call also can be found on the website. Please note today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. Forward-looking statements always involve risks and uncertainties, and we detail those risks and uncertainties in our public filings with the SEC. In addition, certain non-GAAP financial measures will be discussed on the call today. A reconciliation is available in the earnings release and at the end of this presentation and will be available on the company’s website. Finally, our discussions today of current and future results except for cash flow, are on a continuing operations basis which excludes all previously announced divestitures. In addition, any references to organic growth, exclude the effects of foreign currency translation, acquisitions and divestitures unless otherwise noted. Now I'd like to turn the call over to Dave to get things started. Dave.

Thank you, Jim. Good morning everyone. For our agenda today I’ll begin with a brief update on recent events followed by Glenn, who will provide a more thorough revenue of our third quarter financial performance along with updates to our 2015 guidance. Then I’ll return to provide some additional commentary on our capital allocation strategy and updates on the AP1000 RCP and margin expansion programs before we wrap-up and move to Q&A. Overall we experienced a challenging quarter as has been the case throughout 2015. Lower oil prices and weaker economic conditions continue to disrupt several of our industrial businesses. As you saw we lowered our sales guidance for the year to reflect the ongoing weakness that these particular businesses are experiencing. Despite market conditions, we are maintaining our EPS guidance for the year at $3.80 to $3.90. We are also increasing our operating margin guidance range up to 13.5% to 13.6% as we continue to execute on the One Curtiss-Wright strategy that we embarked upon in 2013. So as you can see, although faced with some external headwinds, our team remains focused on controlling cost and driving strong margin expansion. Our overall results continue to reflect the solid execution of our One Curtiss-Wright initiative, as those actions continue to bear fruit. We remain on track for a great finish to 2015 with 90 to 100 basis point margin improvement and double digit EPS growth. In addition we repurchased $88 million worth of stock in the third quarter, ramping year-to-date share repurchases through September 30 to $185 million. This activity reflects our continued commitment to steady share repurchases, which also included some opportunistic buying. Finally, we hope that you would have seen in the press release issued last night that fully qualifies our AP1000 Reactor Coolant Pump. This is an exciting step for Curtiss-Wright and I’ll come back to address this further a bit later in the call. Now I’d like to turn the call over to Glenn to provide a more thorough revenue of our quarterly performance.

Thank you Dave and good morning everyone. I’ll begin this morning by adding some additional perspective to our third quarter EPS results. Our diluted earnings per share of $0.80 includes a one-time pension settlement charge of approximately $7 million or $0.10 a share related to our former Chairman who retired earlier this year following a 37 year career at Curtiss-Wright. Although this charge has been in our full year guidance, we have not previously indicated when it would occur. As a result you may need to update your quarterly projections accordingly to reflect this charge in the third quarter. The quarter was also affected by the timing of the receipt of the next China AP1000 order. Although we originally expected to receive the order in the third quarter, this did not occur and has now shifted to the fourth quarter. This result represents a shift of about $0.05 of EPS between quarters. Hence our pro-forma diluted EPS for the third quarter is $0.95. Finally, our third quarter results also reflect the ongoing weakness in our industrial end market, which significantly impacted our commercial industrial segment sales and profitability for the quarter. Although some of this short fall is due to timing that we expect to recovery in the fourth quarter, we have reduced the full year sales and operating income guidance for this segment. Partially offsetting this reduction is an increase to our full year operating income and margin guidance in the Defense segment. In addition, we have tweaked some non-operational projections which enables us to maintain our full year EPS guidance of $3.80 to $3.90. Turning to our third quarter sales by end market, higher overall sales in our Defense markets were more than offset by a decline in overall sales in our commercial markets. In the Defense market sales increased 3% overall and 5% organically, which excludes FX and acquisitions. This improvement was primarily due to higher revenues in aerospace defense, which increased 16% over the prior year. We experienced higher sales of ISR related embedded computing products, in particular on the F-16 and joint Strike Fighter programs, as well as a slight up-tick in helicopter sales led by the Seahawk program. In Naval, defense sales increased 2% compared to the prior year, primarily due to higher sales on the Block 4 build of Virginia-class submarines. Total aircraft carrier revenues were essentially flat for the period as higher production of CVN-79 program was offset by the winding down on the CVN-78 program. Meanwhile ground defense sales decreased 22% due to lower revenue on the Abrams, Bradley and various ground communication programs. That decline in sales more than offset continued solid demand for our turret drive stabilization systems. In the commercial market, sales decreased 11% overall and 9% organically. In commercial aerospace sales declined 12%, primarily driven by lower demand for avionics and flight test equipment for helicopters and regional jets. In addition we experienced lower shot-peening sales to Airbus and our sales to Boeing remained essentially flat year-over-year as expected as most production levels were unchanged in 2014. In power generation sales decrease primarily driven by reduced demand in the nuclear aftermarket business based on ongoing differed maintenance spending by domestic plant operators. AP1000 program revenues were essentially flat in the quarter compared to last year. And finally, general and industrial sales declined 9% overall and 5% organically as the strong dollar negatively impacted sales in this market by approximately $6 million. Our performance in this end market continues to be influenced by the low oil price environment, as well as weaker economic conditions in general. In industrial valves we continue to experience weaker project sales in the oil and gas and petrochemical markets. Across the industry ongoing reductions in capital expenditures have led to larger than expected declines in projects related demand, and as a result these projects have shifted to the right. And finally in industrial vehicles we experienced lower sales of products for off highway vehicles, primarily based on the continued weakness in the global agricultural market. Moving on I will discuss the key drivers of our third quarter operating income and margin performance. In the commercial industrial segment, lower sales led to an operating income decline of 21%, while operating margin decreased 250 basis points to 13.8%. These reductions were driven by a combination of lower sales of industrial valves and surface treatment services and the associated under absorption of overhead costs. Partially offsetting these declines were higher profitability in industrial vehicles despite lower sales due to ongoing operational and margin improvement initiatives. In the Defense segment operating income was up 13% and operating margin was up 400 basis points to 21.7%. Segment operating income included a $3 million favorable impact on FX. Although not shown on the chart, excluding the FX impact, organic operating income was essentially flat on a 5% decrease in organic sales, resulting in an organic operating margin improvement of 80 basis points to 18.5%. This performance was driven by continued solid growth in our embedded computing business and ongoing operational margin improvement initiatives. Next in the power segment, operating income was up 22% and operating margin was up 230 basis points to 11.7%. As expected, our results reflect improvement in operating income and margins that as we moved beyond the significant expenditures related to testing and design modification for our AP1000 Reactor Coolant Pumps. We also generated higher profitability in our nuclear after-market business despite lower sales volumes due to ongoing margin improvement initiatives. In summary, overall Curtiss-Wright operating income declined 14% in the third quarter, which led to 120 basis point decline in margin to 12.1%. However our results were significantly impacted by the aforementioned pension charge. Excluding the impact of this charge, third quarter operating income declined only 4%, while operating margin increased 20% basis points to 13.5%. And finally it is worth noting that on a year-to-date basis total operating margin increased 10 basis points to 12.5%, further illustrating the resilience of our business model and the benefits of our diversified end market strategy, despite the continuing challenges facing our industrial businesses. Moving on to our financial outlook beginning with our end market sales; I’ll start with the Defense markets. Following a strong third quarter in the aerospace defense market, current full year guidance growth rates would imply expectations below our sales in this market in the fourth quarter. This is primarily due to timing of product on various helicopter and ISR programs as defense sales tends to be lumpy quarter-to-quarter. Our full year guidance in the aerospace defense market remains unchanged as we continue to expect solid growth of 2% to 6% over 2014. Growth rates for our ground and naval defense markets also remain unchanged. As a result, overall defense market guidance remains unchanged and is expected to growth between 2% and 4%. Moving on to the commercial markets, I’ll start in the general industry market. As you had seen by our year-to-date results, we have experienced steady headwinds in our industrial businesses, particularly within the energy markets. So as third quarter sales deteriorated more than expected, we have lowered our full year general industrial end market guidance to be down 4% to 8%. Elsewhere within commercial aerospace and as noted earlier, our third quarter results reflected lower revenues related to avionics flight test equipment. As a result, we reduced the full year expectations for this end market and now expect sales to decline between 2% and 6% in 2015. These reductions to our commercial aerospace and general industrial sales have lowered overall commercial market guidance to be down 3% to 5%. To sum up, and as a result of the aforementioned adjustments to our commercial end markets, we now expect overall Curtiss-Wright 2015 sales growth to be flat to down 2%. In the appendix you will find the updated 2015 end market sales waterfall. Continuing with our financial outlook by segment, we have revised our expectations within the commercial, industrial segment to reflect the end market sales guidance changes in the general industrial market discussed previously. As a result we have trimmed our segment sales growth expectations to be down 1% to 3%. We also reduced the operating income associated with the lower sales. However due to our cost mitigation actions, we are holding the operating margin guidance range at 14.9% to 15%. In the defense segment we are lowering our sales outlook due to the expected weakness in avionics and flight test equipment as noted earlier, and now anticipate full year segment sales to be nearly flat with 2014. Turning to our operating income guidance, based on the strong year-to-date performance and the benefit of FX, along with the continued solid demand for our turret drive stabilization systems, we have increased our profitability expectations for this segment and now expect operating margins to expand another 110 basis points to range from 19.1% to 19.2%, which would reflect a 220 to 230 basis point margin improvement over 2014. And finally in the power segment, we are maintaining our current sales and profitability expectations, which include our assumption that the new channel order will be received in the fourth quarter. Overall we remain focused on aggressively controlling costs given the current macro environment and as a result of the solid profitability improvement in the defense segment, we are increasing our overall Curtiss-Wright operating margin guidance to reflect 90 to 100 basis points in operating margin expansion in 2015. Moving on, we have updated some of our non-operational guidance expectations as indicated due to better than expected year-to-date results for interest expense and the effective tax rate. We’ve also reduced full year diluted shares outstanding to 47.6 million shares based on current share repurchase expectations. These adjustments help to offset the reduction in overall segment operating income guidance noted earlier. And as a result, our 2015 guidance for diluted earnings per share remains at a range of $3.80 to $3.90, which represents double digit EPS growth over 2014. Next to our cash flow, our third quarter free cash flow was $98 million, nearly double the prior year’s result, due primarily to improve collections as well as the receipt of the large income tax refund. We are reiterating our free cash flow position for the full year 2015 as we continue to expect an adjusted free cash flow level similar to our very strong 2014 results, which reflects the previously announced $145 million pension contribution. Now I’d like to turn the call back over to Dave to provide the summary and some closing comments. Dave.

Thanks Glenn. Curtiss-Wright remains committed to maintaining a balanced capital allocation strategy between operational requirements, returning capital to our shareholders and strategic acquisitions. As a reminder, our 2015 use of capital for operational needs includes ongoing CapEx requirements, as well as the $145 million pension payment made early this year. In addition we are steadily working through the $300 million share repurchase program that was authorized by our Board of Directors last year. For reference we indicated that the initial $200 million will be executed via a 10b5-1 along with an additional $100 million available for opportunistic share repurchases. In the third quarter we repurchased $88 million in stock, buying $50 million in steady repurchases via the 10b5-1 plan and another $38 million opportunistically. Given the current share price, we believe that our stock buyback program is the best use of our free cash flow at this time. Through yesterday’s trading, we have purchased more than $200 million in shares thus far in 2015. Looking ahead, we expect to complete the balance of our $300 million share repurchase program in the fourth quarter. Regarding acquisitions we continue to have a solid pipeline of candidates. It’s about strategic fit with our current lines of business and the growth that they can bring to Curtiss-Wright in the future. We remain focused on acquiring businesses and/or product lines that immediately contribute to our long term profitability expectations and will not be diluted to our long term financial metrics. As you likely noted, our year-to-date acquisition activity has been lighter than usual. As a result we’ve increased our focus on share repurchases and the weighting has certainly shifted to return of capital in 2015. I’ll remind you that while our capital allocation process may fluctuate year-by-year, longer term we remain committed to a balanced capital allocation strategy. Overall, we’re confident that the progress we’re making to more efficiently manage working capital and improve cash flow will benefit our shareholders over the long run. Next I like to spend a few minutes providing a status update on the AP1000 RCP program. As I noted at the start of the call, we issued a joint press release last night between Curtiss-Wright, Westinghouse and State and Nuclear Power Technology Corporation of China or SNPTC. I’m excited to report that we have successfully completed the required design modifications, final testing and post test inspection on our pumps. As a result we announced that our reactor coolant pump has reached full qualification, both by our customer and the Chinese following months of rigorous testing. You might recall that earlier in the year we successfully completed the engineering and endurance testing on our pumps. Most recently we satisfactorily completed newly required testing from the National Nuclear Safety Administration or NNSA, which is the Chinese equivalent of the US NRC, going a step further to prove out the successful operation of our RCPs. We now have a fully qualified design that meets all specifications in support of the 60 year life span. The first production unit is packaged and ready to go as you can see on the slide and the second unit is in process. Transportation has been scheduled and we are preparing to ship these first two pumps to China in November. We believe there is a potential to ship two additional pumps by year end. We are pleased to reach these key milestones on such an exciting nuclear program and it’s a testament to our team’s persistence and fortitude. Negotiations on the next China AP1000 RCP order are ongoing. Now that we have demonstrated a successful design with rigorous hardware testing on our first of a kind RCP, we firmly believe that we’ll have a contract in hand once all parties agree on contract terms, including the number of plants, pumps and pricing. Should the receipt of this order be delayed beyond the fourth quarter, we still believe that we will be able to achieve our full year 2015 EPS guidance. The timing of receipt of this order will be dictated by China’s need for nuclear power. We look forward to continuing to support China’s nuclear power needs for years to come. Overall, the demand for the AC1000 power plant remains strong as it is expected to be a critical element in the construction of new nuclear power plants in China, Europe and the U.S. We remain confident that Curtiss-Wright will play a long term role in support of this nuclear industry expansion. In summary, we’re pleased with the strength in our defense markets, which offset some of the challenges impeding our commercial markets. We expect 90 to 100 basis points in operating margin expansion in 2015, up to a new range of 13.5% to 13.6% led by our ongoing margin improvement initiatives supporting the One Curtiss-Wright vision. This puts us ahead of plans for the year and reflects our team’s continued strong execution. As a reminder, we are aiming to reach and then maintain our position in the upper quartile of our peer group for all of our long term financial metrics. We are intently focused on driving synergies and producing significant cost savings and I am very confident that we will reach our goals. These actions, along with our continued commitment to return capital to shareholders through steady share repurchases are expected to drive double digit EPS growth in 2015. We remain optimistic that the steps we are taking in 2015 will drive strong shareholder returns for years to come. At this time I’d like to open up today’s conference call for questions.

Thank you. [Operator Instructions] And our first question comes from the line of Mike Ciarmoli with KeyBanc Capital Market. Your line is now open.

Hey, good morning guys. Thanks for taking my questions.

Good morning Mike.

Hi Mike.

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

Well, we’ve got a nice range there. The order as we’ve discussed in the past is worth roughly 13 sales, three op income. So we still think it’s within range and as always we work as hard as we can to do whatever we can to remain in that category and take there some of those issues that come up from time to time. So we view it as – it will be great to have it as planned, but if it doesn’t happen, then we still feel pretty confident. We are going to do what we said we are going to do.

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

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

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

Yes, it’s interesting Mike. I think we’ve all learned a lot over the last 10 years. I think we’ve been talking about this and more recently two years that I‘ve been talking about it on every call and maybe what we have – we certainly came to a conclusion that we needed to present our customers with a qualified unit. That has now happened and that was extremely exciting for us. It was great news. It was coincidental that we just got it signed off, the quality sign offs and so forth from both our customers and that included meetings in China and it included the results from all the testing, and as I indicated, we were asked to perform additional tests and as a user, I don’t blame our customers for doing that. So now finally we are at the point where I’d say we are unchartered waters and that I don’t recall having been in a situation where we’ve got the qualified unit, we’ve got everything signed off in that regard, we’re shipping the hardware out and now I can say that we’ve done our part, but units will get there, [indiscernible] work and what happens next? Well we’re in the negotiations with the Chinese. We’ve been negotiating for the last year or two and this sort of heats up as you get closer towards this stage in the cycle and as we were in my prepared remarks. I’m not really sure what happens from here. We do expect an order. I know the Chinese want to place an order. I know that they need the pumps, we need them, it’s a great mutual relationship. We need to arrive at mutually agreeable commercial terms and that’s yet to come where we have trips planned in the near future to continue the negotiations and as far as I am concerned, as long as we meet those requirements that’s everybody is mutually agreeable with the terms and so forth, then we’ll move out and we’ll continue to progress on this program, which is its huge for us and for the Chinese and the world in one respect, it’s a fantastic market for us, it’s a fantastic program. So we’re as excited about it as we ever were. It’s just I don’t have anything new to tell you right now other than its in the hands of our customers to negotiate with us and arrive at the successful conclusion for that.

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

Yes, sure Mike. I mean if you look at the fourth quarter, it’s not a typical ramp. I would say it’s probably a little accentuated with a few things from the third quarter that shift to the fourth quarter as well, but you can tell we are looking at $70 million incremental sales, $30 million in profit, so it’s definitely one of our better fourth quarter ramps. So I’ll just go through the segments in commercial and industrial. I mean they are going to benefit from the sales volumes. They are also going to have a big bump in their margin there. They are probably the furthest along in our operating margin improvement programs and I think we’ve said that in the past as well and they are also going to benefit from favorable sales mix. They are going to have in the fourth quarter higher sales in their higher margin sensors products, as well as the valves in the fourth quarter. I will say, so it’s a combination in the volume. They are cost reduction initiatives and favorable mix for industrial and I will say 75% of the commercial industrial segment sales are in backlog already as of September. Defense is kind of a little bit the opposite thing. They have a pretty good increase in sales so they’ll get some benefit from the volume and absorption. Not as much, but a little bit from margin improvement, but they are going to be negatively impacted in the fourth quarter by mix as we are seeing a shift from what we benefited from in the third quarter of the higher margin cost products to more sales of the lower margin systems products in the fourth quarter. So they’ve got the same thing going on, but their mix is a little bit different than commercial and industrial and I’ll say 81% of the defense segment’s fourth quarter sales are in backlog as of September 30. And then Power, the largest increase in sales, which of course includes the new order, it includes a more domestic production and then we’re back on the production trail and a pick-up in our aftermarket sales, which is not atypical for the nuclear aftermarket fourth quarter is a typically higher maintenance quarter following some large output quarters in the third and the second. So, fairly typical with the exception of the new order. So again, they have volumes, they will have margin improvement. The other thing impacting the power segment in the fourth quarter is they also will benefit from a supplemental technology transfer agreement that they signed in the fourth quarter, which will add to their margins for sure, and just again keeping in that, 70% of their orders are in backlog as of September 30. 75% if you include the order we haven’t gotten yet, but that’s in our sales report. And then of course corporate went up. If you’re looking from the third quarter, even the nine months into the fourth, we’re not going to have a pension charge again and we’re also expecting some lower corporate spending. So it’s a combination of all of the above.

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

Thanks Mike.

Thank you. And our next question comes from the line of Myles Walton with Deutsche Bank. Your line is now open.

Good morning and thanks for taking the question.

Good morning Myles.

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

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

And is this something that is an ongoing stream or is it a kind of one-time for the quarter and then…

That’s a one-time for the quarter.

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

So the thought is certainly you hit it on the head. It is volume sensitive, that is a big piece of it and the other piece was generally in our industrial business with vehicles and the valves. All there contributed with surface temperature.

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

I’ll give you just the general overview of my perspective Myles. Like you said, I mean the stuff that we have no control over, the oil prices and so forth, that is certainly driving everything down. Outlook was, I would look for some potential refinery MRO, possibly maintaining – it did pretty good on the first half. We’re not sure what it’s going to do in the last quarter here and in the next six months or so. Chemical processing I would expect would probably pick up a little bit with less of a risk associated with the gas side. Certainly we look at the destocking that everybody has experienced; we being among those and our more recently have then – many other industrial and I think that for the most part that hopefully it is pretty much behind us, but we’re watching that carefully, because a lot of our products are fast turned and some was they’ve destocked and generally can have a nice effect up or on the other hand it could affect us rather quickly down as it did in Q3. I’m not sure outlook in off highway in Europe and on highway that has been waning for a while. They are still sort of tethering on what they think they are going to be doing with their economy, but domestic looks pretty good. It’s really fueled by the fuel efficient sort of technologies that are emerging, that the fleet preparations and/or fleet replacements are encouraging the use of today. So we do drive on new product introductions and especially in this area it might help pick that up for us, so we’re feeling pretty good there. We talked about international projects pretty slow and that just wanes along with the gas prices. And then lastly I’d say medical mobility as part of that general industrial. It’s been a pretty nice segment for us and we’ve seen growth there. We think that we’ll continue to see that. While it’s not a huge piece, it’s nice to have something that has some real positive momentum to it.

Okay, and the last one for you Glenn. So as I look at the cash flow generations, it was great in the quarter and it looks like kind of year-over-year you’re expecting roughly a flat 4Q into the free cash flow generation versus last year. How much if at all is A, the order from China and B, with the extra two pumps going out the door, material or not material to kind of over achieving versus your cash and guidance?

Yes, the shipping part, the shipment doesn’t really have any impact on our cash flow, but the order right now, again somewhere it comes down to the actual timing, whereas for general we’re saying we would probably, we would have around a $20 million impact on our full year guidance if we do not get the order.

On the cash flow.

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

Great. Thanks guys.

Thank you. And our next question comes from the line of Kristine Liwag with Bank of America Merrill Lynch. Your line is now open.

Hi, good morning guys.

Hi Kristine.

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

Well, I would say in the commercial industrial the quarter was not our best quarter for orders. Year-to-date I think we’re down 9% in that segment in the quarter, 5% year-to-date. So a little bit better and our current estimate for the year is 3%. So it is trending in the right direction. Obviously 2015 [ph] fourth quarter will be a little pick up for that. I couldn’t tell you exactly where that’s coming from at this – but I think it would be just some naval valves and industrial valves for that.

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

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

And at what point does that stop becoming a headwind?

I think it really runs out at the end of ’16 and maybe there’s a tiny bit left at ’17.

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

Just to remind, there is eight pumps, four pumps per reactors, two reactors at a plant site, so for any site its eight pumps for us. The price on the Chinese order was approximately $12.5 million a pump. The pricing on the domestic order which we received the year after the Chinese order was about $15 million approximately, $15 million a pump and obviously we’re not at liberty to talk about anything in the future, other than say we expect it to be better than domestic orders.

Sure. And then if you do get the order in 4Q, how quickly will you see revenue pick up in ’16 if you do get that order?

Pretty quickly. I guess if we got the order on December 31, it might be tough, but if its reasonably in the quarter, November and December, we should be able to meet that 13 and three or just shy of it. It’s all going to come back to the actual timing now. When we say Q4, if it was October 1 I’d say we are very confident, we’ll hit that. December 19, its less confident, if you know what I mean.

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

On the AP1000?

Yes.

It’s really hard to gauge the very first pump, because we got the order…

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

Oh okay. It’s used – I’d say it’s probably a five year period and it’s directly managed using a percent complete accounting and it will occur like – we used to do it if it is like a bell curve. It will ramp up in year one, two and three and ramp down in year four and five.

Great, thank you.

Thank you. And our next question comes from the line of George Godfrey with CL King. Your line is now open.

Thank you for taking the questions.

Good morning.

Good morning. A question on the balance capital allocation. When your thinking about as we go into the ’16, ’17 and ’18, more of a three year view, when you say balance, do you think 50/50 in terms of capital return versus capital invested or is it 60/40. How do you think about putting more granularity on the balance?

It’s really, it’s more or less its one-third, one-third, one-third, it’s what we’ve said George. It’s one-third to internal investment, one-third to acquisitions and one-third to shareholder returns. Now that’s our strategy going in. Year-over-year things can change as we went into this year similarly with that approach, but the acquisitions were little lighter than we expected this year, so we shifted more the allocation to the share repurchases. Next year it could go the other way. But generally speaking, when we start the year, that’s our allocation of our available cash, one-third to internal, one-third of acquisition and one-third to shareholders returns.

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

That’s probably a good proxy at this point. I couldn’t tell you when we – as you can tell if you go back historically, it does move around a little bit, but it’s usually 31 or 32 we start the year out. If some things go our way we get the benefit like we did this year. So I would say 31, 32 is a good place to be.

Got it and then lastly, you have the ending headcount there exactly.

I do not, I know we put in our press release approximately 9,000. That’s probably the best number to use.

Okay, great. Thank you.

Thanks.

Thank you. And our next question comes from the line of Sam Pearlstein with Wells Fargo. Your line is now open.

Good morning.

Good morning Sam.

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

Generally what we do, we look strategically at it first off long term and if you look at the weakness – if that opens an opportunity for a technology and I’ll be specific, not on a fixture upper, because as I said before from an accounted perspective we not really into fixer uppers. But if it were to open up from a price perspective on selling price on a property, that might help us or entice us. Our strategies are pretty well set in terms of where we want to grow. I’ve said in the past I like industrial and I still do. Yes, we got a little bit of a headwind right now, so does the rest of the world, but we’ll get over it and if something were to open up in that area, then that would be great. Now, again that’s largely depended on the selling price and outlook on that market. I do feel very bullish that the markets will come back and it’s just the matter of time. I think then on the other aspect, on the share repo side, we certainly weight these things, that’s what we did this year. We walked away from a couple of acquisitions because the business model for the acquisition versus share repo didn’t – it weighed in favor of share repo. And it was, in the case of one specific line thinking about price is just too high and so we elected to just migrate from that and knowing that we decided look, let’s just buy more of ourselves, that’s the best investment that we can make right in that regard. But long term it is still the overall objective and strategy for us and that’s the way we will look at it. It’s a long term play, but as you’ve seen and as I indicated earlier on my script, we have $100 million in opportunistic money that we have been utilizing and where we see or stock at a great spot then we’ll acquire that. And then on the other hand, if we do find something towards the year end that’s looking like a nice business or product line that does come in and meet the parameters that we set forth for acquisitions, we’ll look strongly at that. So it’s kind of weighing factors and I don’t know if that answered your question, but that’s general.

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

No, I don’t think so. We go through – presumably we’ll do 10b5-1 plan for next year. We haven’t come up with those numbers yet. We are assisting where we think we’ll be next year and how we are going to allocate our capital. So we are in that process and we will be talking more about that obviously on the next call. But I think we are establishing the parameters around that now. The pricing is, let’s say as acquisitions aren’t going to drive us in any one direction unless and until as I indication it becomes on par with investing in ourselves and/or it’s a very compelling strategic reason.

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

The spin back to the second quarter. For the first half, the margins in that segment were only like 18.3%, which was right in line with our guidance. So the real guidance adjustment, really came on the heels of the third quarter strength, which brought year-to-date up to 19.4% and it was a mix issue Sam. We had a very high percentage of our higher margins comps sales in the third quarter and its going to flip a little bit in the fourth quarter and we are going to different shift, mix and shift, shift and mix to a lower margin, not as a high margin systems businesses and therefore we have raised the guidance based on the year-to-date essentially.

Thanks.

Thank you. And our next question comes from the line of Jim Foung with Gabelli & Company. Your line is now open.

Hi, good morning.

Hi Jimmy.

Good morning Jimmy.

I was wondering if you could comment on, Westinghouse purchase of keeping a nice planned construction business. Are you showing it how that would impact your business with Westinghouse and whether it’s positive or negative for you.

Thanks for asking about that Jimmy. There is no impact to us. We’ve reached out and talked to our people and we are completely agnostic for the transaction.

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

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

Okay and then just shifting gears, just to the commercial aerospace with Boeing. Production was kind of flat year-over-year, but when do you see that picking up for you in terms of your shipment to Boeing.

I believe they are expected, primarily increases next year. I would expect to see – I don’t know where they are exactly, but I think we would will some – we shall see pickup in rates next year.

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

Yes.

Okay, great. Thank you.

Thanks Jimmy.

Thank you. And our next question comes from the line of Ryan Cassil with Seaport Global. Your line is now open.

Thanks for taking my question guys.

Good morning.

Good morning.

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

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

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

I can tell you not from a specific order perspective, but I’ll give you the color on what we see out there that is in the press and you may have seen this also. But the China five year plan is to build up to eight plants per year. Now using Glenn’s math there, if it were fully AP1000 and if they all used our RCPs and they all used the generation three that Westinghouse and ourselves have designed, then for us RCP wise that’s eight per, times eight plants per year. Now that’s a huge number. I would not anticipate in my wildest dreams that they would be all AP1000. I mean maybe if they could, it would be fantastic, but the reality of it is, will they make eight per year, will be they all be AP1000 type power plants, I don’t think, but that’s through 2020. Their goal is 110 power plants by the year 2030. So you can see China alone is huge. It dwarfs the balance of the world relative to its need for clean energy source and we obviously would not take that and say look, we are going to have a 110 times eight, so that, just the math would be crazy, but it’s a nice thought, nice dream. But in any case that’s what the outlook is like and that’s from their published periodicals over in China.

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

No, only in casual conversations that they are very, obviously very strong with us. They are RCP, everybody was waiting. You can imagine how long we’ve all waited for this successful conclusion for the processing and how delighted everybody is now that this thing is done. So there is a big sigh of relief in that regard and like I said, in the casual conversations, yes there is plenty of opportunity out there for us that really makes the mind wander in terms of wow, this could really be cool. I mean it’s a big deal, but nothing in concrete.

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

The shipment isn’t really – we recognize sales in this program over the percent complete, a method that started in 2007. So we are really, the shipment doesn’t result in any material financial implications.

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

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

Okay. So it sounds like it’s an issue, but you guys are managing and there is some price baked into the expectations already.

Yes.

Okay. Thanks guys. I appreciate it.

Thank you.

Thank you. And our next question is a follow-up from the line of Michael Ciarmoli with KeyBanc Capital Markets. Your line is now open.

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

We are on the JLTV. I wouldn’t say, I wouldn’t use the work catalyst. That implies something huge in my mind in any case, but we are active on a JLTV, so I do see something positive coming out of that. Generally, what you find with us, because of the breadth and reach of our products, we are pretty much everything that gets fielded to some degree, a lot, little, embedded computing, just all sorts of different products, secularized, archived stuff and in this particular one, they are probably early days to count the chickens before they hatch, but it’s not a huge number. When you take Bradley, we think Bradley is coming back sort of with opportunities there and I think that the ground defense overseas in Europe, it’s absolutely still moving in the direction that we are very, very happy with. A huge bump last year and it will continue to for several more years. So in just general a ground defense. I mean that’s a nice one to have. It will be a little bit lumpy from time-to-time.

Got it. Thanks guys.

Thanks.

Thanks Mike.

Thank you. And our next question is a follow-up from the line of Stephen Levenson with Stifel. Your line is now open.

Thanks. Good morning everybody.

Hey, good morning Steve.

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

Yes, we will probably more at quarter point is what we are thinking at this point.

A quarter point lower or higher?

Higher.

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

Welcome.

Thank you. [Operator Instructions]. And our next question is a follow-up from the line of George Godfrey with CL King. Your line is now open.

Thanks. Just thinking again, I know you don’t want to provide guidance, but conceptually free cash flow in ’14 was about $265 million, the upper end of your adjusted free cash flow $265 million. If revenue and net income were flat to slightly up, would you think free cash flow was at a similar level, these levels.

I think that’s a fair assumption, yes.

Okay. Thank you.

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

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

Bye-bye.

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