Circor International Inc (CIR) 2002 Q4 法說會逐字稿

Good day, I'd like to welcome everyone to the CIRCOR International fourth quarter 2002 conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call to Ed McDowell.

Good morning, the objectives today are to review the company's performance, provide outlook on '03 and guidance for the first quarter. With me are David Bloss the Chairman and CEO of CIRCOR, Ken Smith, CFO and Vice President of Operations.

Before we start to administrative notes, first the slides we'll be referring to are available on CIRCOR's website at www.circor.com under the link of investor relations.

Second, today's discussion contain forward-looking statements also that involve known and unknown risks, uncertainties and other factors. For full discussion on the factors, we advise you to read about them in the '01 Form 10Q. Of course, actual results could differ material from those pressed or a implied in today's remarks.

Now David Bloss.

Good morning everyone and thanks for being with us on our fourth quarter conference call.

All in all. I'd have to say we've had a pretty decent year in the face of difficult economic conditions. Ken and Alan will take you through the detail but the headlines are basically that we've had an overall sales drop of a little over 3% of a year. EPS of a buck versus $1.04 in '01. Our free cash flow of over $16m, net almost $6m in pension funding and duplication of inventory as we stepped up the foreign sourcing program. And again, Alan Carlsen will take you through with the details of that. Our debt remained below 13%, total capitalization after two small acquisitions and some additional pension funding we did. And most [inaudible] incoming orders were down 5% excluding acquisitions, actually increased sequentially 5% in the fourth quarter. And the backlogs ended up 11% higher than last year on a comparable basis. The order of backlog trends are heavily influenced by the results of the petrochemical segment where we have realized some rather robust international project awards which really out pays the weaknesses we saw in the North American field activity. The rest of our markets remain weak, but at least they appear to have stabilized.

From a profitability standpoint for the quarter, our instrumentation and thermal fluid control segment was coming off a stellar Q4 last year including project shipments attractive margins. This past quarter just the opposite occurred. No margin sales. In fact, just the opposite as we fought for what business is out there. But also lower production levels and absorption hit us. However, going forward we feel confident that we can return to the 14%, 15% operating margins in '03 for the full year as things become more normalized for us.

On the petrochemical front, our margins increased to the 10% mark this quarter. We're very happy to announce that. A level that we established as one of our goals for this segment. Even though we benefited from the shipment of some attractive margins this quarter, we're on the right track in our restructuring process here. The percentage results may slip back a little in the early going of '03 as our shipment mix returns to a little bit more normal margin levels, and we refocus our inventory reduction, which may cause some unfavorable absorption, but we see this year's profitable for this segment continuing to improve, and we continue to implement the next stages of [inaudible] cost reduction, including more and more outsourcing of components from offshore low-cost sources. And we expect to show year-over-year profit margin improvement again in '03 for this segment.

I have some closing remarks, but Ken Smith and Alan Carlsen will take you through details of the result. Let me turn the call to Ken.

Thanks, David.

To begin, slide No. 2 and slide No. 3 provided the reconciliation and segway from the U.S. gap results reported in the earnings release to the operating results Alan and I will be discussing on slides 4 through 9. They exclude the goodwill amortization that ended in '01 and it also excludes the nonrecurring special charges directly related to facility closings and consolidations some slides 4 through 9 are really on an apples to apples comparison.

I'll speak about slide No. 4. Regarding worldwide orders, we had a very strong quarter. In fact, our strongest quarter since the beginning of 2001. The GAAS came from the October 2002 acquisitions and also at that large international oil and gas projects. Sequentially, the large oil and gas projects if you would significant rise in orders and backlog. Aside from the large oil and gas projects in the two October acquisitions, our order rates from other end markets have generally continued to be lackluster, although military aerospace, marine and HVAC, steam markets have been steady, we continue to have softness in oil and gas MRO, general industrial, commercial aerospace, and power gin markets. We enter '03 with backlogs higher than the start of either the past two years. So compared to the beginning of '01 and '02, we start '03 with the highest backlog of those points in time because of the current strength of the international oil and gas project.

Regarding the revenues for the quarter, the diversity of the end markets helped less than the effect of the general industrial market softness along with a positive October. For the full year, revenues were net of several factors. On the plus side were FX rates, primarily the Euro that added 1%, acquisitions 3%, and the growth from large and oil gas projects, and the HVAC markets remained steady. These positives were more than offset than by the [inaudible] in commercial aerospace, power gin, OEM analytical and the short cycle business for oil and gas of North America. And general gas markets including chemical processing were also soft.

Regarding profitability, the operating results reflected a product mix change. Of course, selling less of higher margin product to the commercial aerospace the general industrial markets and the short cycle oil and gas producers. A second factor was the unabsorbed manufacturing costs that couldn't be fully avoided as orders declined. This is especially a factor in key high volume plants within our instrumentation and thermal fluid control segment which produce products of lower material content.

On free cash flow, the biggest factor compared to our 2001 was transition to more foreign source parts, particularly in the North American plants in both segments. And we also have more inventory in the Italian plant which services these international oil and gas projects, which has had a gang buster '02 and certainly as we mentioned a strong backlog going into '03, and they had inventory to service that backlog. And I'll add more color when I discuss slide 6.

Turn your knowledge slide No. 5, I'll note were two of the non-operating categories. Net interest expense was lower this year due to our principle payment of $15m in October 2002, and the benefit of additional income from higher invested cash balances in '02. The second category I'd like to point out is other income, which was favorable this year primarily from FX gains as the Euro strength.

Turning to slide No. 6, as I mentioned earlier cash flow for the year was satisfactory concerning considering the inventory transition to more foreign source components and the fact we made, significant for us, cash contributions to our U.S. pension plan of nearly $6m. By year end to the pension plan funding point, we have a fully funded pension plan, at least to the ABO liability. Nonetheless, we had expected lower level of total inventory year end and, thus, inventory reduction remains a continued focus for us in '03. And by the end of this 2003 year, we are expecting working capital to decrease with sources from inventory and liabilities.

Turning to slide No. 7, total debt decreased from annual payment of $50m in October. Cash also came down the quarter nearly $30m. Largely due to the $50m debt payment and the $17m we paid out for the two acquisitions in October. And as you can see, our BS continues to be under leverage. For the foreseeable future, our goal for using the available cash is to invest in the right strategic acquisitions.

And now Alan will describe the performance of each site.

Thanks, Ken.

Starting with slide No. 8, let's first look at the instrumentation and thermal fluid control segment where general industrial slowdown has continued for us. Let me start with the information on the right-hand side regarding sequential order levels. When we exclude our two October acquisitions, orders were unchanged from Q3 of '02. The sequential quarter ending backlog, again excluding the '02 October acquisitions, decreased 13%. This backlog decrease was due to the Q4 scheduled shipments of the U.S. Navy steam related products and medical OEM products, which in both cases will had been in the backlog figures early in 2002. Reviewing this segment's revenues for all 2002, our steam and cryogenic-related products were very steady from year over year. This segment also benefited from acquisitions and foreign exchange rates. Unfortunately, all those positives were more than offset by the softness in the general industrial market, the decrease in power generation market, and the dramatic decline in the commercial aerospace since September 11th. Offering incoming margins declined, as our previous cost reduction actions were not enough to maintain the margins we achieved last year. We were impacted by several factors including the end markets that declined, as mentioned earlier, is where we sell our higher margin products. We also had unabsorbed manufacturing costs, particularly a sales volume decrease in our high-volume plants; and in addition, selective, competitively-bid products carried lower margins. Looking ahead, we certainly are not satisfied with 12% margins in this segment. We are continuing cost reduction actions and expect operating margins in this segment to be closer to the mid-teens for '03. When the general industrial markets improve, we also expect margin expansion based on our past and continuing cost reductions.

Now let's review our petrochemical segment, slide No. 9. We certainly wish we had these order growth rates every quarter. Let me explain what's happening. First, the short cycle MRR orders for the North American market have been soft throughout '02 and notably below '01 levels. In fact, the range of 15% to 20% below 2001 levels. However, secondly, the large, international oil and gas Capex spending by independents and major companies has been strong, and this strength has more than offset the North American softness, yielding sequential quarterly growth of 48% as you can see on the slide. Finally, these factors also cause total orders for the year to be 23% above 2001; and more importantly, backlogs increased 53% for the year. Revenue from this segment, however, decreased modestly this quarter and for the year. As for operating margin, petrochemical has achieved its initial target of 10%. Its managers have worked hard throughout '01 and '02, making progress on the restructuring of the KF business unit. They have stabilized and improved KF's manufacturing disciplines, have undertaken a major foreign sourcing program, and have grown our market share in the international project market, all of which have contributed to an improving level of profitability. However, inventory reduction in this segment was not achieved in the fourth quarter as planned. During the first half of 2003, we will be reducing inventories, creating under absorption. This will affect our profit somewhat, which is why we are expecting an 8% to 10% operating margin range for the full year of 2003 for this segment.

Let's now turn to slide No. 10. Here, I'd like to point out certain of our key end markets and other factors that we expect will influence the degree of our success in 2003. In the instrumentation and thermal fluid control segment, we expect that while markets served by our steam products will be steady, many of the industrial markets served by our instrumentation products will continue to be soft. Within the petrochemical segment, North American drilling activity has recently picked up slightly due to cold with weather, declining natural gas inventory, and higher crude prices. By for all 2003, we anticipate no significant rise from 2002 order levels from the North American market. Looking at the international project side of petrochemical, we expect international revenues to continue to be solid, as several orders in current backlog are scheduled for delivery in the first three quarters of '03. We also expect international orders to continue at a reasonably strong level, however, not at the pace we experienced in the fourth quarter, of course. This is also subject to how the international issues of Iraq and Venezuela play out.

In concluding with slide No. 11, translating our 2003 market assumptions into our business assumptions for 2003, we factored in the following points. Overall, most of our end markets are soft. Our product lines that normally have seasonal strength in the fourth quarter will trend down a bit in the first quarter of 2003. In Capex, we have been spending at maintenance levels. In 2003, we have some new products and cost savings capital spending along with some planned IT investments. But Capex total for '03 will still be below our depreciation.

With that I'll now turn the call back to David.

Thanks, Alan.

As we indicated in the press release and the comments today, we're not looking for much, if any, improvements in our markets for 2003. In fact, with all the uncertainty that exists today, our ability to see beyond just a few months is pretty difficult. In our view, the first quarter of '03, is that we should come in at about $.20 to $.24 per share. I know this is a wide range, but it really depends our the sort-cycle business activity and how much inventory we're able to focus on and reduce through our factories and the inherent unabsorption that carries through that. So that's the reason for the wide range.

We've added a couple features to our disclosures here this quarter. I want to point out to you we're now disclosing our orders and backlog by segment, which is new for us. And that was in the press release. And also giving you a little more flavor of our business drivers and our '03 business assumptions on the slide level.

So with that, we'll open the lines up for any questions you may have.

Thank you. Today's question-and-answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit 1 on your touch-tone telephone. Once again, it is star 1 if you would like to ask a question. And we'll pause a moment to assemble our roster.

We'll take our first question from Michael Schneider with Robert W. Baird.

Good morning, guys.

Morning, Mike.

What I'd like to run through, I guess, is what's most surprising to people is the margins on the instrumentation side.

Yep.

I guess I am curious. The number is significantly lower than I could have even envisioned in a bad mix scenario. Let me run through what I think is going on, and then the disconnect. If you look at the MRO business, I presume Hoke(ph) is being hit hardest; and steam presumably had a strong quarter, then some military shipments as well which are presumably good margin. I guess I am still struggling with, even though you have the weakness at Hoke on the MRO side and the petrochem side, how a stronger seasonal mix of steam and then higher military orders wouldn't have, I guess, saved the quarter. Is there something else going on?

Well, part of that -- let me take you through some of the things that we've looked at because we've done quite a bit of analysis of that as well. And it's due to probably some mixed events occurring. As you know, there's some fairly high-margin pieces of that instrumentation business, if you dissect it by-product line.

Yes.

And, unfortunately, those were the ones that were rather soft this quarter. And in the plants that carry a high amount of absorption for each product we produce, as you get in smaller-size products, you have no overhead, obviously, per unit. And those were the units that the inventory did decrease during the quarter. So we had some unabsorption there. So that hit us a little bit as well.

And what market is that specifically that was unusually weak for you?

Well, certainly, quarter-over-quarter, the commercial aerospace. We had a lot of pre-September 11th orders and backlog at that point in time that did schedule and ship in the fourth quarter of to '01. Not only that, a high margin business, but it also had projects and attractive pricing that was not repeated here in the fourth quarter of '02. So not only was the volume down for that market, but also the pricing [inaudible] a tad. Power generation for the whole company is down year over year, but certainly quarter over quarter. We probably lost, I don't know, $5m to $6m worth of revenue just from the power generation customers that we serviced in '01 versus '02. Another key piece from a margin impact standpoint. Here in North America, pricing wise, we had a decrease in some of our consignment sales, which is generally [inaudible] and sold off at standard pricing. So it would be three examples to that point.

Maybe you could shed some light on the steam business. Was it seasonally strong this year?

I was surprised to see the numbers myself that it was not seasonally that strong. And even into January, we saw, you know, rather soft incoming order rates in the steam business, with the weather conditions in the Northeast where all of the steam heating is, you'd expect that to be real strong, but its not. And the feedback I'm getting on that as I talk to various people, is I think they're withholding maintenance spending. I think it deals with two things: The coldness of the weather -- if you get too cold, people will not shut down their systems for maintenance. They'll allow the valves to leak somewhat until the demand on their heating system declines a little bit. Secondly, obviously, the occupancy rates in some of the commercial buildings in the major cities have gone down with the economic conditions prevailing, and the maintenance spending by the maintenance crews for these buildings have been tightened as well. So that's what I'm hearing back, Mike, about the seem business. And we're hoping that, once the weather does settle down a little bit for us, we'll see a little bit more business. But we may not see that return this year.

Well, is this a case, though, that if the cold snap continues as cold as it is, that this maintenance just doesn't occur this season and we'll have to wait till next year?

Yeah, that may happen.

Okay.

And that's one of the reasons we've got this sizable gap in our expectations for the first quarter. That's a quick turnaround business for us. We've got the inventory, if the orders come in, we can ship it quickly. It just depends on what orders come in.

And the military orders that went out in the quarter, would you characterize them as an adverse impact or positive impact on the margin?

For our military orders particularly in petrochemical certainly from a volume standpoint we're positive. They weren’t as sizable as in the fourth quarter a year ago. They were sequentially important to that segment.

And is it also a case that we've got, obviously, half of August of our Navy at sea right now, that there were projects in the fourth quarter that didn't go?

They still have port -- they still have ships in dock that they do rotate.

There are four carriers in dock right now at the present time for retro fits, 14 carriers are in the fleet. We had done some specialty work earlier last year in getting some of the ships back into the fleet, in service, and that was a lot of the Navy business which we did ship last quarter.

Okay.

The other things besides the end market conversation, we did have some other favorability a year ago in the fourth quarter of '01 down in the operating expense area. Just to give you one example, when we were truing up our BS for that quarter, one of the benefits we had a year ago was in the receivables area where we decreased our reserve. We had a collection difficulty on some accounts early in ’01 that we satisfactorily -- in reserve at that time. We satisfactorily resolved that during the year and collected and no longer need that increment and so that certainly benefited.

How much was that, Ken.

It was a few hundred thousand dollars. But it was probably the largest of a lot of little things during that quarter that were beneficial. But appropriate to that quarter. And I kind of look back at that fourth quarter, that was the best operating margin we had in the segment I think since we've spun out for a lot of the reasons that I’ve described on this call. The normalized average, I guess if we look back over eight to twelve quarters, are on the 16% to 17% level for this operating segment. And, so, there was some, you know, projects, end markets, and things like they just mentioned the SG&A that really knocked the socks off of Q4 '01.

The Para Plate and Timeco(ph) acquisitions, were they negative impacts. Does that explain some of the weakness.

No, they were positive for the quarter, but they certainly -- I think it would be fair to say, not at the same profit contribution levels of some of the other steam group or some --

Well was the ramp-up expenses or transitional or moving expenses [inaudible] that hit this quarter unusually.

No.

And pricing. You mentioned pricing as a renewed issue in this segment. What product lines is that hitting most?

I'm sorry, Mike. Could you repeat the question?

Just pricing in general: What product lines or markets products have you seen are most aggressive in the instrumentation segment?

I'd say chemical continues to be tough still. Over in general instrumentation, there are not a lot of purchase orders getting released, so we're trying to get our fair share, but prudently, to maintain top line and still deliver earnings on that. So those are couple of markets that come to mind.

Some of this business, Mike -- this is Dave -- does deal in the project side of the area, and especially in the oil and gas. We do have instrumentation analyzers and panels that go into platforms, and so forth, and that's obviously been a tough business from a margin standpoint and continues to be. The steam businesses, it's a matter of volume rather than pricing on the margins there, Mike. The pricing in that business holds pretty steady for us. It's always been a good, steady provider for us in pricing. In fact, you know, we try to get, you know, 1% to 2% realized price increases every year on that segment.

Okay. And the final question, and I'll get back in line: Alan, on the margins in that segment, what gives you the confidence that you can get back to 14% and 15%? Maybe you can lay on some specific actions that will drive you back to the number from the 12% you're at right now.

Some of the important things is the international sourcing is going to be helping out quite a bit. We have a very active program there not only for completed finished valves, but also componentry coming from sources overseas, not just China but the countries in Europe and also India, that's very active for us. And general consolidation of activities in our facilities and some outsourcing at some of our services.

Okay. Thanks a lot.

Thanks, Mike.

We'll take our next question from Keith Hughes with SunTrust Robinson-Humphrey.

Thank you. Switching to petrochemical, you talked about pushing some inventory at the beginning of '03. In this backlog business, is this far in the future when you're going to deliver that? I'm a little confused on that.

Yeah, Keith -- this is Dave -- the big increase we've had in inventory and backlogs is the projects business over in Italy at PDS [inaudible]. I think we recorded the $22m for the quarter of incoming orders, so if you plug that into the numbers we provided, you can see that the rest of the business, the short-cycle, MRO-type business and the business is in North America has been rather soft. So a lot of that backlog is projected to ship out gradually over the year. I think our factory over there is now booked up through probably about October, booking into November, now, and December. We're even now quoting '04 projects for delivery. So that's going to come out throughout the year.

Is there a risk -- if international events play out well, if the war premium in crude prices is removed is there a possibility in that scenario that this business could get pushed out even farther into '04?

No. I asked that specific question myself and looked at the order book, and these are long-term projects. They've been on the table for a long time. These end users have spent a lot of money on all phases of it, already, developing it for the phase of now accepting our valves. They are so far into it so it's really a commitment.

In terms of business that they're thinking about and talking about right now, is that scenario out? Does that weigh heavy on their minds add you have discussions with them.

Could you repeat that question?

Sure. The scenario laid out before as you talk to people on orders that are not necessarily in the backlog now but could potentially come in the backlog this year, is that scenario on their mind at this point? Or are they just ignoring the inflated price of crude and just, you know, running as they normally would.

These are long-term projects; and, therefore, our experience has been that, once they release these projects for, quote, and then send out acknowledgments for the order, then they're committed to that side of it. On the stuff that's on the drawing board, we've seen in the past that some projects come off the drawing board. So it does vary. On potential orders that we are quoting on today that been released, there is a risk that that could be postponed or cancelled depending on world events.

Okay.

The projects I've seen that we're quoting today that we don't have in our backlog really don't depend on current event. These are long-term development projects for the various readings of the oil and gas world.

Okay. Thank you.

You're welcome.

We'll take our next question from Richard Lane with Broadview Advisors.

Good morning.

Hi, Richard.

A couple of questions here. The oil and gas side, we did see a pretty meaningful pickup in Patterson just recent here on the land rig side. And can is Canada generally on land rigs have seen a pretty nice pickup, too. On your short-cycle oil and gas, are you seeing any pickup in activity there?

Yes, we are. And just to quote some numbers to you, we track consigned stock sales. These are real quick delivery, short lead time stuff, out of our consigned stock locations. And we target around $60,000 to $80,000 a day in that kind of activity, and it's gone as high as $110,000 to $115,000 in the early months of this year.

So we haven't seen a pick up in that. I don't know how long it's going to be. The Canadian business in western Canada has improved, not dramatically, but it makes us feel better than we did that year end.

And, David, is that -- so is the short-term business more tide to land rigs or would it, you know, be equally weighted to the Gulf of Mexico?

There's influence, I think, probably more on land rigs than the Gulf. When you get into the Gulf area, that's more project oriented, and those orders come in lumps. But our short-cycle business is more on the land type.

Okay. I'd think that would -- you know, certainly all the discussion at B.J. Services and Precision and Patterson has been pretty favorable recently. So the other thing I was going to ask you is that --so, with the Milan unit, are the orders coming in there really more to do with the transmission lines?

There's a variety of projects going on, and it's a multitude of systems and processes. There's L & G products, fuel development going on in the Middle Eastern countries. There's some projects going on in Norway. It's just a variety of applications and systems work that they're doing. And most of which are more long-term developmental projects of their fields.

There seems to be a lot of activity in the Soviet Union, too, lots of stuff headed towards, you know, Japan and China. Is there a real pick-up in activity, generally speaking?

Well, there seems to be. But historically, we haven't done a lot of business in that region because of political, economic, and basic things like making sure you get paid in currency. So that will not influence us very much at all. And that's not what's influencing us today.

Okay. And then, on the sourcing of components program, you had stated in the past a goal getting as much as, perhaps, 40% imported content. Are you still thinking in those terms? I'm wondering where, roughly, you are now.

Yeah, we're definitely headed in that direction. We see -- we're looking at several things A. lot of things -- the change in our market acceptance of foreign source products are is increasing virtually every day. We are definitely headed toward the 40% target. It's a general target. We think it may increase in the future with the acceptance in America today. We are well on our way to that. We have -- this past year, we've brought on a new position of Director of International Sourcing Development who reports, you know, directly into myself. He focuses 100% of his time on international sourcing. So we have a very strong activity base there, and we kind of leapfrogged that off our joint venture we already have in China in the petrochemical business for utilizing not only for petrochemical, but leapfrogged that for other businesses units at the present time.

Have you rethought your strategy at all, I mean, vis-à-vis bringing in imported components assembling here as opposed to the next step of producing the completed product in China.

A major portion of support completed product from China, but there's also a portion of our business that is very specification orientated where we have to have and do have the opportunity to add specialized actuation to the project, configure flanges, end fittings, et cetera, using foreign sourced internals in our products to help give us a better price competitive position. So there's an entire venue if you will, of different activities going on as far as foreign sourcing goes.

Strategically, we want to limit some of the projects that we do foreign source in their entirety. Because of technology issues, we want to protect our technology, we want to protect our distribution channel, obviously. So on those products, we will continue only to import components, so we don't give away our technologies and capabilities for the whole completed valve. We also, currently have, -- I don't know if you're aware of it or not -- a 60% joint venture in China producing ball valves up to 24-inch diameter that's been very successful operating since 1995. So we are manufacturing there and we're looking for ways to expand that as well.

Great. Thanks, guys.

You're welcome.

We'll take our next question from James Phung(ph) from Cavelli & Company.

Could you try to help us how understand how you expect to achieve the 14% to 15% margin in the instrumentation business when 12% in the fourth quarter. It seems like the fourth quarter was a pretty clean quarter, I'm understand ago year one was pretty tough because of some good business. But if that's your run rate in the fourth quarter, you know, could you kind of quantify what kind of cost savings you expect to get?

Well, I think, Jim, as Ken and Alan alluded to earlier, that's really not our run rate for the -- what you see in the fourth quarter, we don't believe is our run rate. There's some anomalies in there that affected us in the fourth quarter that we don't think will continue going forward. Some in the SG&A side, some in the other cost of goods sold or manufacturing variance side because of volume reductions that we've instituted there. But you also have to understand the mix effect of a relatively bad quarter of incoming orders in particular business units. I indicated earlier that there's a wide margin, a variety of margins within this segment of ours, and those were that were affected most in the fourth quarter were those in which provided us upwards of 20% operating margins, and those businesses are expected to return to more normalized shipment levels going forward, somewhat lower than we saw a year ago when we were hitting, overall, a 19% operating profit. But as Ken indicated, that 19% was bolstered by a couple of, I guess, non-sales related activity. Allowance for doubtful accounts and so forth adjustments.

So just returning back to your question, I don't think the fourth quarter is the run rate. We're looking to more normalized mix of sales especially in the higher margin segments. They provide us a comfort that we can get to the percentages that we've indicated here.

Were those businesses the higher-margin business that was soft in the quarter?

Well, you get into higher-engineered and higher-pressure of miniature valves of circle sealed controls, the aerospace stuff and instrumentation application. The Aerodyne business in New York, you know, carries above 25% operating profits for us. And that goes into a diverse set of end use markets including aerospace, medical analyzers. It's a very complex engineered product line there, and they get a very high margin. So that gives you a flavor for the two particular businesses.

Okay. But it seems like those markets in aerospace continue to be weak, to it's hard to see kind of an uplift in those businesses if you would look into '03.

Well, the remarks earlier about increasing our lower cost of alternative suppliers, some of which are going to be offshore. And some of the staffing adjustments that we took midway through '02 that will have a full year '03 effect, and other measures.

Okay. And I guess just shifting gears on the petrochemical side --

Yes.

Are you're pretty confident a conflict in the Middle East won't push some of these orders back a bit to '04?

Well, you know, no one ever knows. You know, it depends on the extent of the conflict and whereall ends up. It could -- there's always a risk of that. But, you know, we've looked at those projects, and as far as their long-term nature is concerned, if they are pushed back, I think the likelihood of them being ultimately cancelled is rather small.

Okay.

Also in the last conflict we had over there, we saw an Up tick afterwards with the Kuwait oil fields needing valves to replace everything they blew up or destroyed as they left. So project business on one hand, day-to-day business for quick supply for the trees on the oil fields could also be an up tick for CIRCOR.

So construction could be very positive for you guys.

Right, sure could. We're not counting on that either.

Thank you.

You're welcome.

Once again, it is star 1 for questions, and we'll go back to Michael Schneider with Robert W. Baird.

Just a couple of follow-ups. Building on Rick's questions, you guys aren't more positive on the Canadian drilling season, you had your largest distributor, National Oil Well come out and say that they expect distribution to be up 6% to 9%. They were, I think it's fair to say they were very positive on the Canadian drilling season in the first quarter, I guess are you just being cautious, or do you see something different?

Mike, the incoming order rates in our Canadian operations are positive. And we fully incorporated it into the projections that we have. You know, we're on the conservative side. We want to make sure that, you know, that we leave room for ultimate disappointments in other market areas as well. We have some pluses going on, and we're hopeful that they prevail at the end of the day in the mix of businesses that we have. But we have seen improvements. We're getting our share of that market, Mike.

Also, to add a little supplement to that remark, the size of our Western Canada distribution and sales penetration is proportionally to our entire petrochemical segment, relatively smaller than say the KF impact or [inaudible]. So we could see a 6 %or 7% rise in Western Canada but not have a big impact on the total segment.

Fair point. And then just the backlog, now that you've built in petrochem, how would you describe the margins built into that backlog say versus the book of business you had in 2002.

They have continued to improve. I think in earlier reports, we are indicated in earlier conference calls, we indicated at one point in time in the downturn of this business, we were quoting at a markup to about 1.25. And that was in the doldrums of product activity a couple of years ago. Today those markups are above 1.45, 1.5. So we've seen really good improvements and strengthening in our market position, the way our customers are viewing the quality of our products, and they're accepting our price deferential. As compared to last year at this time, I'd say, you know, we're probably up, you know, in markup percentage terms another 8% to 9%, 8 to 9 points.

And your comments about capacity utilization over at TVSE, if you're booking out to October now and even into '04, presumably you're running full out in that facility or those facilities. There -- are there cases right now in which you're actually losing business because you don't have the capacity over there and people are looking for deliveries sooner than that?

Yeah, good question. The answer is no. We've been very fortunate -- and we do a lot of subcontracting over there. We do the engineering, assemble, and test. And we do some machining of some critical components and some of the larger-size components in our PBSC operation. Are we out of capacity in those months? Not really. We could add some more in the months between March through October. You have long lead times. This is not stuff that, you know, you book and ship within four weeks. It has an average gestation period of probably 12 weeks. So you're always out three months just because of normal lead times of getting the components and the forgings, and so forth, done, and the metal that's required. So that takes you out -- we're in February. That takes you out to May, so you're talking about June, July, August, September, time periods. We have some room in there yet if we do have to squeeze some things in. When we do that, obviously, we quote at even higher markups, because it's going to take some expediting to get that stuff squeezed into our plan. And I guess that's a long-winded answer, but we've not lost -- some business, yes, but not significant amounts of business due to constraints on capacity.

On okay. And then just some specific questions. The working capital transition you mentioned in the slides, I presume that relates to -- as you mentioned, the buildup of backlog in petrochem, but the globing sourcing programs, you just got duplicate inventory as you transitioned these programs.

That's right.

And the pension assumptions for '03, did you make changes? And where does the actual under funded -- or over funded status lie at year end?

Yes, we did make changes to the assumptions. We reduced our planned rate of return on asset performance down to 8.75%. On the discount used to establish liability we also reduced that down to 6.75%.

On part B, the answer was the funding. As we exited '02, we had approximately a little over $11m in plant assets and the AB liability for the plant was at $11m, so it's fully funded at that level.

Perfect. And Dave, could you give us some insight on the acquisition program? And there's actually some decent-sized properties being shopped out there, at least meaningful for CIRCOR. Would you buy something that is at least rumored to be available on the petrochem side, or do you stick to the instrumentation side going forward?

I don't know what you're talking about, Mike.

I'm sure you don't.

We're pretty firm on our strategy of building the higher-engineered side of our business. And we continue to be focused on finding and acquiring product lines in the fluid control industry that commands higher profitability, and not as subject to foreign competition. And, so, we're very caution and careful and patient, an that's what we're going to continue to be.

And would you characterize anything meaningful as likely in the first half, just to give us some sense.

I really don't want to get into predicting the acquisition activity other then to tell you that I'm always busy in that area, I'm always searching those things out. I've got other eyes and ears out this helping me do that. And our strategy, clearly, is to grow our business through that acquisition process. And there’s always 4 or 5 on the table that we're looking at, and that's been consistent since probably the last five or six years.

Okay. Thanks again, guys.

You're welcome.

And congratulations on a nice year.

Thank you.

Gentlemen, there appear to be no further questions at this time.

Thank you very much.

Thank you, everyone, for joining us today, and we'll see you next quarter. Thank you.

This does conclude today's conference. Thank you for your participation. You may now disconnect.