Circor International Inc (CIR) 2005 Q3 法說會逐字稿

Thank you for standing by. Welcome to today’s CIRCOR International’s third quarter earnings results conference call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode. The floor will be open to questions following the presentation. At this time I would like to turn the conference over to Curhan McCann (ph) from the Company's Investor Relations firm. Mr. McCann, Please go ahead.

Thank you very much. Good morning everyone. Welcome to our third quarter earnings call. Our objectives today are to review the Company's recent performance and provide its updated outlook on the remainder of 2005 with David Bloss, the Chairman and CEO of CIRCOR; Ken Smith, the Company's Chief Financial Officer; and Bill Higgins, the Company's Executive Vice President and Chief Operating Officer. After their comments we'll then go to Q&A.

Before we start, two administrative notes. First, the slides that we will be referring to today are available on CIRCOR's website at www.CIRCOR.com under the link quarterly earnings from the investors page. Second, today's discussion contains forward-looking statements that identify our future expectations. These expectations are subject to known and unknown risks, uncertainties, and other factors. For a full discussion of these factors we advise you to read about them in the Company's 2004 Form 10-K which also can be viewed on the Company's website. Of course, actual results could differ materially from those anticipated or implied from today's remarks. Let me now turn the call over to CIRCOR's Chairman, David Bloss.

Thank you. Good morning, everyone. Let me begin by giving you the headlines of our quarter, which was mixed, but overall we thought was a fairly good one. EPS was at $0.27 a share versus $0.21 a share last year, up 29%. On a year-to-date basis, EPS at $0.97 versus 73 or a 33% improvement. Revenues were about 109 million, up 22% for the quarter and year-to-date up 20%. Our incoming orders and markets showed continuing strength almost across the board in basically all of our markets with total orders up 18% and backlogs at the end of the quarter up 30% versus last year. Without acquisitions, these numbers are still up nicely with incoming orders of base business up 13% and backlogs up 9%.

Our business units operating margin was up 40 basis points overall to 9.8%, but there are two different stories to be told here. We’ll get into that. It was led by our Energy sector, which was up 320 basis points, up to 10.4%, which included 8 basis points for special charges. These results were on stronger volume and better pricing in the marketplace. Obviously you noted that our Instrumentation and Thermal Fluid Control segment didn’t perform as well. Its operating margins fell about 1.5 points to 9.3% as a result of a number of factors, which Ken and Bill and I will get into on the details with you. A big portion came from three basic areas.

One is the raw material costs and availability. They continued to cut into our profits in spite of our price increases. We’ve implemented more and we’ll tell you about those.

Number two was cost of implementing our lean initiative. This segment has more factories and therefore more work is being done in these locations to change our operating systems.

And number three, we lost some absorption from the inventory reduction that occurred during the quarter. A majority came from this group of businesses. As you know, inventory reduction is a big part of our near-term strategy to reduce our inventories and improve our performance in that regard.

These costs will continue for awhile until we get the flow our factories realigned on the lean basis and our inventories down where they need to be. We’re making some significant structural changes in how we operate, basically overhauling our operations. We believe that this will make us a better supplier for customers, more efficient, and more profitable business going forward. We feel strongly that we are doing the right things.

From a market standpoint, our primary markets should continue to be in good shape as we enter 2006. On the acquisition front at the start of our fourth quarter in ’05 we closed one transaction, which we announced – Industria. We have paid $10 million for an aerospace business with 14 million in revenues. The price was about 7.2 times EBITDA. The deal provides us with an expansion of our existing solenoid product line for the US markets and it also gives us a better entrée into the European commercial and military aircraft platforms, and in particular airbus. We continue to look at a number of other acquisition opportunities, which are out there. Hopefully other announcements will be on the way soon.

Now let’s get into the details. For that I’ll turn over to Ken and Bill who will go through that with you. Ken.

Thanks David. I’ll start with slide no. 3. This slide is on a US GAAP basis. We had a very nice double-digit growth in both earnings and revenues for the quarter and the nine months compared to the same period last year. As David noted, our Energy segment again led the revenue and earnings growth with significant shipment volume to large international projects notably in the Middle East. Our acquisitions of Mallard Controls in late April 2004 and of Loud Engineering in January 2005 also contributed to our results. Nearly all our other business units turned in higher revenues as many their end markets continued to be healthy, including the general industrial markets.

Overall profitability significantly increased benefiting from the factors listed on the slide. And the two acquisitions of Loud and Mallard have been accretive. On free cash flow, it’s been reasonably good thus far in 2005 despite the working capital demands of fulfilling higher customer order levels and in the CapEx numbers spending 6 million for two new facilities. We’ll discuss cash flow more when we get to slide 5.

Now turning to slide no. 4, which details the P&L, since Bill will dissect the segment performance in later slides, I want to make note on this slide of special charge, corporate expenses, and income taxes.

First, the special charge category is used by us to classify the incremental costs for closing and moving facilities. The 2005 costs relate to the downsizing of our SART (ph) business in France and a closing and moving two smaller US plants. The two US plants are our Mallard Controls business that we purchased in April 2004. We are in the midst of moving that production from Texas to our caf (ph) business in Oklahoma and will completed in Q4 2005. The 2004 special charges relate to the sale of a Texas warehouse used by our Energy Products segment.

Regarding corporate expenses, the Q3 change of $1 million above the same period a year ago, included 300,000 for Sarbanes-Oxley Section 404 and audit fees; 300,000 for variable compensation; and another 300,000 for targeted consulting projects including income tax planning. The year-to-date corporate expense increase of $3 million came from a $1.3 million increase in Sarbanes 404 and audit fees; 1 million for variable and stock-based compensation; plus the consulting projects that we are using to improve the Company.

In income taxes we did reduce our effective tax rate by one percentage point to 34% for the year-to-date 2005 period. We expect that we will have more domestic tax credits this year and therefore reduce the rate. When Bill speaks about our full year 2005 results later, he will mention the expected improvement in our 2006 effective tax rate. It would come – it is expected to come from our tax planning projects that we are now investing in.

Before we leave slide four, I want to revisit SOX 404 and audit costs. We completed our compliance of SOX 404 for the year 2004 in mid April of this year with a lot of unexpected effort going into it after we reported our 2004 results. But our total spend for SOX 404 and audit services was $5 million for 2004, with 800,000 of that 5 million figure being expensed in the 2005 P&L. We expect our 2005 P&L for SOX 404 and audit services to include that 800,000 for last year’s compliance and our costs for 2005, which we estimate to be about $3 million. The point I am making is that even though slide four and this year will include a big increase for SOX 404 audit fees year-over-year, we are making substantial progress in reducing these costs – in fact a 40% reduction on the 5 million for last year down to 3 million for 2005.

Now I am ready to move to slide no. 5. In the cash flow from operations and free cash flow there are two notable items. First, we generated cash from accounts receivable and inventories this quarter. That generated $9 million. And the Instrumentation division is leading the inventory reduction, in part aided by the lean manufacturing methodologies it has implemented on an accelerated basis. Secondly, in CapEx we’ve used $6 million for two facilities. One is in Rotterdam where we intend to consolidate three European businesses within our CIT division during the next three to eight months. The second facility is being constructed in China, which we expect to be completed in the fourth quarter of 2005 and into which we will relocate our current Chinese plant. This new Chinese plant is larger than our current facility and will enable us to expand its capability beyond the oil and gas products it now builds.

Although not on slide five, we have invested a lot of cash this year in growing CIRCOR. Besides the 11 million in CapEx we have spent another $41 million for two acquisitions. That is Loud Engineering and the 40% interest in our Chinese joint venture that we did not own.

Now to slide no. 6, the balance sheet. Our balance sheet continues to be very healthy with a debt-to-cap ratio of only 13%. In 2004 we were in a net cash position. Now at the end of Q3 2005, we are in a net debt position after paying out $41 million for the acquisitions I just listed. Regarding the fourth quarter of 2005, we’ve already spent another 25 million of that cash. Earlier this month we spent 10 million for the acquisition of Industria and we paid down another $15 million of our high-coupon senior notes.

Now Bill Higgins will speak to our segment performance.

Thanks Ken. I’ll start with slide 7, our Instrumentation and Thermal Fluids segment results. Regarding the orders, as Ken mentioned, the end markets are generally strong, Power generation, aerospace, chemical, and general industrial markets are leading our orders improvement this quarter and this year. The strength has been somewhat offset by continued weakness in our US Navy business and softness in steam-related commercial HVAC market. In general, though the majority of our businesses have achieved solid organic growth both quarter-over-quarter and for the first nine months of the year. In addition to the organic growth, we’ve benefited from our acquisition of Loud Engineering in January of ’05. As you might recall, Loud manufactures components, sub-assemblies, and provides after-market repair and overhaul service primarily for the military helicopter market, which has also been a strong market for us.

Revenues have grown solidly in our Instrumentation and Thermal Fluids businesses for the reasons I just mentioned. As noted on the slide, the revenue growth has come from the Loud acquisition and organic growth. Nonetheless, we did have some orders not ship in Q3 2005 due to vendor supply issues. We estimate $2 to $3 million in sales value was postponed into the fourth quarter of 2005 due to tighter supplies and poor vendor quality on selected key components. Operating income and margin declined for the third quarter while year-to-date improvement has been good. For the third quarter there were several factors that have combined to have a net decrease on the third quarter earnings as compared to last year. These following factors also pushed us into the lower end of our guidance range for Q3 2005.

The first is the lean manufacturing initiatives where we’ve been accelerating in this segment. In the third quarter, we’ve estimated a 75-basis points effect from the unabsorbed manufacturing costs associated with those initiatives. Concurrent with the lean initiatives has been a $3 million inventory reduction, which has pushed margin down by an estimated 240 basis points. And higher raw material steel costs have contributed to a 175-basis point decrease to margin versus last year’s Q3. Partially offsetting these decreases were the favorable items listed on slide seven, including the price increases instituted in the second half of 2004.

On the topic of pricing to customers, this segment has raised prices in 2005, although its pricing power is different when we look at each of the major product lines. For example, in aerospace it is limited due to the program pricing is contractually determine. It’s better in Thermal Fluids steam-related products where we have a more prominent market position; and somewhat limited in our industrial Instrumentation product lines, where it is a highly competitive market and our share is relatively low. Yet this segment’s Instrumentation Group, which has been most aggravated by raw material cost increases, has raised prices again effective in the fourth quarter of 2005. Once we get the backlog out the door, we should see some improvement in margins. I expect that late in the fourth quarter of 2005.

Now onto slide 8, our Energy Products segment. The oil and gas market served by this segment continued to be very healthy for both large international project business as well as domestic production and distribution. This segment is really achieving some nice financial performance as the results have shown on the slide. Order increases reflect continuing growth in international projects, including the Middle East as well as growth here in North America. The dramatic increase in revenues was the net result of several factors as noted on the slide, the largest of which was a sharp rise in volume of shipments made by our Italian business unit that has been successful serving the Middle East projects. Let me point out that in Q3 2004, our Italian business unit had very low shipments over a low order intake early in 2004. Nevertheless, our Italian business is continuing to excel in serving its Middle East and European customers.

As for operating income and margin, increase was predominately due to the contribution margin from the higher volume of shipments. The other factor of pricing, that was on slide eight, also contributed to that rise in operating margin. As mentioned earlier, we are now over half way through the consolidation of two small US plants into our large Oklahoma facility. Both were acquired when we purchased the Texas-based Mallard Controls Company last year. This consolidation is expected to be completed in the fourth quarter.

Now let’s turn to slide 9. On this slide we point out our assumptions for key end markets that we serve and factors that we expect will influence the degree of our near-term success. Most of the end markets we serve are expected to be positive for the remainder of 2005. We did have some softness for new projects in the steam-related commercial HVAC markets and continue to experience softness in the maritime US Navy market as the US Defense Department has directed spending to the Iraq War.

Now on slide 10, besides the end markets being healthy, we also have the benefit of increased exposure to the aerospace market. As Dave mentioned, on October 3, we spent approximately 10 million in cash for the acquisition of Industria outside of Paris, France. With this purchase we extend our reach into the European aerospace and military markets for flight-qualified hardware and we expand our global product offering with solenoid valves and other related components. This acquisition gives us a nice footprint in the European aerospace market and it enables to leverage our sales and engineering teams through cross-selling and joint new product development. With annual revenues of approximately $14 million, Industria will operate as part of our aerospace product groups and is expected to contribute $0.02 to $0.03 to diluted earnings per share in 2006.

Now onto slide 11. Translating the market assumptions from slide nine into our business assumptions for the year 2005 on slide 11, we expect a reasonable fourth quarter in 2005. It should result in the full year results depicted on slide eleven. Regarding the fourth quarter 2005, we are providing EPS guidance of $0.34 to $0.37 per diluted share excluding special charges. We are estimating Q4 2005 special charges of approximately $700,000 to $800,000, which will come from the completion of our Mallard closing and the move into Oklahoma as well as provide Instrumentation Group’s European consolidation. The range of $0.34 to $0.37 does compare favorably to the fourth quarter of 2004, when we reported $0.01 per share, or $0.30 per share if we exclude the large inventory charge we recorded during that quarter. That $0.34 to $0.37 range, which excludes special charges, is lower than our previous expectations of ninety days ago for the fourth quarter. So you ask, what has changed?

First, our operating margins, as we mentioned, in our earnings in our Instrumentation and Thermal Fluids segment. Although we expect this segment’s operating margin to sequentially rise by 200 basis points, almost 12%, excluding about 500,000 of special charges in Q4 2005, its margins are not snapping back as fast as we’d like due to several factors. Let me share some of them. First, the continuing higher material costs from suppliers; lean manufacturing events that yield short-term pressure on margins. As I said, this segment has been fairly aggressive with Kaiser & Evan (ph) so far this year. Also, unabsorbed manufacturing spending due to expected inventory reduction of another $3 million in this segment during the fourth quarter of 2005. We are fighting through some vendor supply issues that have cropped up. Certain parts and components have been constrained. We find ourselves planning farther out into the calendar and also working – spanning longer distances as we use more and more offshore, particularly Asian, suppliers. We’ve increased prices in this segment in 2005 and its industrial and instrumentation products will have another increase effective in the fourth quarter of ’05.

So we are driving all the right things for this segment. We are implementing customer price increase where and when we can. We’re implementing lean manufacturing methodologies for the long-term benefit of our customers and CIRCOR; emphasizing lower-cost foreign sourcing of supply; upgrading our management talent; consolidating facilities to reduce fixed costs; and striving to improve cash flow through faster turns of inventory.

We believe we will see the results of these actions, although not overnight. We have many products serving many customers and lots of internal processes to fundamentally change. It is going to take us a little time. So we ask ourselves when the benefits will be greater than the costs of lean manufacturing changes. We know they will come. We expect to see that at the end – or by the end of 2006. In the short and medium term, we will likely see improvements in the cash flow statement before we will in the P&L. But we remain convinced that lean is the right strategy and we are intent on pushing ahead to achieve the longer term benefit that we’ve seen other great manufacturing companies realize.

The second major change for the Q4 2005 forecast from ninety days ago, as Ken mentioned, are corporate expenses. We expect our corporate expenses for the 12 months of 2005 to be higher by $1 million to a now total of 14.4 million for 2005. That 1 million increase consists of variable compensation plus new consulting projects we’ve invested in to help CIRCOR improve on a number of fronts. The consulting projects include tax planning, for which we expect to reduce the 2006 effective tax rate by 1 to 2 points; plus evaluating our retirement plans to significantly reduce the expense volatility of our US pension plan; and developing an information technology strategy to help reduce our infrastructure costs and gain added capabilities to communicate with suppliers and customers.

We’re making other investments in CIRCOR as well. Our 2005 CapEx will include $9 million for two new facilities. The one in Europe that we just completed this spring to co-locate the consolidating of smaller facilities; a new plant in China to replace the current smaller facility. And $6 million of an expected 9 million total for these two buildings was spent in the first nine months of 2005.

We announced in December 2004 an agreement to buy out the 40% minority owner in our Chinese joint venture. That purchase was completed this past quarter. We used nearly $7 million resulting in CIRCOR 100% ownership of our Chinese operation. This becomes an even more significant asset for us as we expand our sales penetration into China and the Pacific Rim area as well as increasing our foreign sourcing of component inventory and component materials.

Lastly, we’ve made two strategic acquisitions this year to further expand our exposure to the aerospace market.

So to summarize our outlook, we have solid end markets in general and healthy backlogs. We continue to focus on the implementation of lean manufacturing to drive operational profits improvement and to build a culture of operational excellence in order to achieve the longer term benefits that we believe will be sustainable fundamental improvements in the business.

With that, we’d like to open up the lines for any questions you may have.

Very good. (Operator Instructions) Ned Armstrong with Friedman Billings Ramsey.

Good morning. Could you talk a little bit more about the supply disruptions that you alluded to? What exactly was it that happened? Elaborate more on the corrective action that you are taking.

The supply challenges have been on a couple of different fronts. There is not one major one. We have seen some shortage of supply with casting suppliers. We have gone out – and the corrective action has been to bring online additional casting suppliers to give us more flexibility and speed. We’ve also seen the lead times required, for example, for forging the aerospace out very, very long. We are into planning for a year from now with long, long lead times. So we’ve had to put in a more robust planning approach with both suppliers, which is helping us as we get into the fourth quarter and the first quarter of next year. Those would be the two major examples I’d cite.

My second question involves any effects that you felt from hurricane Katrina at all.

We haven’t seen any impacts of Katrina. Our operations are in the Tampa area for our steam business. That is the only facility we have in the Gulf Coast region. Our distributors fared well during the process. We have provided some assistance wherever we could to get them up and going. Therefore, no I can’t cite any issues. In fact, there may be some opportunities as rebuilding takes place in some of these places. It would be limited to us because we have a limited exposure to the refining business in our industrial valve melt (ph) ector.

Good. Thank you.

Mike Schneider with Robert Baird.

Good morning. I am trying to get a sense of how much mix is playing into the Instrumentation margin decline. Can you give us some specifics on how far off year-over-year the Navy business is and also the steam business is?

From a revenue standpoint, the US Navy business is probably off $2 to $3 million. We started to see some weakening in the – probably midway through the second quarter of ’04. That has somewhat continued into this year as the Department of Defense redirects spending over to the Middle East.

As you know, that is a pretty high-margin business for us.

That is why I asked. So 2 to 3 million, is that just this quarter, Ken?

It would be a year-to-date figure.

Year-to-date. And then on a percentage basis, means what?

For just the quarter?

For year-to-date. The 2 to 3 million – that is what percent off?

The segment had for the quarter had about $60 worth of revenue, so about upwards of a million of that 60 million.

And the steam businesses?

The commercial HVAC project business is probably down year-to-date maybe 1 to 1.5 million. Again, a very profitable business.

And on a percentage basis, Ken?

It’s another 1.5 million of about 60, so we’ve got a combined 2 to 3 million year-to-date. I would say that is a year-to-date miss on what that segment has performed thus far year-to-date this year.

So the margin declines, given those numbers, (inaudible) single-digit declines – doesn’t look like its nearly as much mix working against you in that segment now as it had been – as we exited ’04 and started ’05?

That is why we cited – Bill cited these. We have some other factors more on the cost side that are aggravating us.

It is not that steam business as much as it used to be. That’s a correct statement.

The lean initiatives. You said it is factor number one hitting you by 75 basis points. That is hitting you through consulting fees, or inventory reductions and under-absorption, or both?

That’s a both because we are paying incremental fees to a consulting firm that we expect to use for about 18 months while they train us on how to sustain that effort.

You mentioned that margins in the fourth quarter are expected to rise 200 basis points sequentially in this segment, although it sounds like the four initiatives are all – I am sorry – the three headwinds all continue in the fourth quarter. So why do margins bounce back so dramatically?

We think we’ll get an improvement from the pricing that has been put forth in some of these businesses that were enacted at the end of the second quarter beginning of the third. They will be in full effect for the fourth quarter. Plus the price increase that Bill mentioned will help us in the third month of the quarter coming on. We are going to clear the supplier issues that aggravated us in the third quarter. We don’t think those are going to be a continuing headwind, to use your term.

Taking a step back and looking at, in particular, the Instrumentation segment, is it your sense that a lot of this – even though you have cited these three factors, materials, inventory reductions, and lean – is it a case where you view these almost as intentional moves on your part to improve the long-term business? Or are we confusing that with what appears to be some form of fundamental deterioration in the market, be it offshore competition, stiffer pricing – whatever it is? This has been going on now through a very strong recovery that exceeds 24 months. Yet margins are going down to multi-year lows. I am trying to get a sense if, indeed, we aren’t confusing some of the efforts you’ve been taking internally with something on a broader scale.

A good question. I can tell you that from our perspective as we look at each one of these businesses, there are a lot of product lines in this segment. We don’t see any significant fundamental change in the business models out there and the opportunities that we see in profitability. You have I have talked before publicly about what the expectations and margins are in this business. We think they are still where they have always been – up into the 14%, 15% arena. We’ve been doing a lot of things in these businesses to improve them for the long-term, become more competitive. For instance, we don’t have large market share in that Instrumentation business. I think we own 7% or 8%, a growing market share, but still relatively small compared to the two big competitors we have out there. We have to – obviously in that position, we have to wait for them to react to pricing changes, which has been slower than I would have liked to see people react in these times and market opportunities. But there is where we are.

The other lean initiatives are designed to make us a better competitor in all of our areas. We feel strongly that that is the right thing to do long term. The short answer is no. We don’t see any fundamental changes significantly in any of our individual product lines.

So the budget for the lean initiatives is just the entire sic sigma rollout. When you look at dollars spent out of pocket, is the budget higher or lower in 2006 versus 2005?

The budget for external is probably (multiple speakers) lower because I thought we were going to use PBM for about an 8-month contract.

The activity rate will be at a fairly consistent pace, which is a pretty high pace. We will do more of that with the in-house resources that we’re developing as we go. In this particular segment, we’ve got over 100 (indiscernible) at CIRCOR now from a cold start in January. This particular segment has probably gotten over 80% in five facilities. There is a lot of activity going on right now in those five plants. We’ll continue that into 2006.

Today then with those [kaisen] (?) and the sic sigma rollout, is it concentrated in Instrumentation or Thermal Fluids?

Both.

When you look at the number of facilities that we’re applying this toward, obviously the Energy segment has fewer facilities. As we are relocating to our new facility in China, we have leaned down the processes. As we move into the new facility, they will be in a leaner environment. Then you have Oklahoma City.

He was asking about Thermal Fluids, though with Energy.

Now compare that to the Instrumentation business where we have, I think, five facilities we’re leaning out, and you see a distinction between the two. A lot of facilities mean a lot more lean activities and consulting fees. Also combine that with where the inventory is being reduced the most. That is why you are seeing the disparity in two businesses’ profitability as a result of lean.

In fact, if you look at the year-to-date margin for the segment overall, Instrumentation and Thermal Fluids, you are probably running – I don’t know – off the top of my head, probably 11.5% or 12%.

Yes.

What – is Thermal Fluids still above the corporate average – or segment average by a meaningful amount?

I believe it is.

We don’t have those numbers sitting in front of me. It has been. We haven’t – nobody around the table here is noting any significant change in that, so I would say, yes.

The margin degradation, then, has really been equal across both sub-components of this segment?

Yes.

Switching gears to corporate expense, you are running at a 14.4 load for the year. That is up over $3 million now. When you look at ’06 again, is there – you mentioned the consulting firm fees will probably begin to roll off a bit. Is there any meaningful relief in that number to the extent that can get back to this $10 million run-rate?

Besides the consulting fees rolling off, we are going to roll off on the SOX 404 and audit fees. Not only will we roll off because of the 800,000 in the 2005 P&L that related to our completing 2004, but on that $3 million figure I cited for the 2005 compliance, I hope to beat that in 2006. And then, I would also be remiss if I didn’t add a third element. We, like all other public companies, will be starting to expense stock options beginning in January of 2006, which is another topic. That will probably be accounted for in the corporate portion of our P&L. Setting that aside, though, I am expecting a reduction from those two pieces as we get into ’06 for corporate spending versus ’05.

Ken, what is your latest forecast for options?

For the 2006 period?

Yes.

It could be $2 million. But we are still sizing that up. We do not – we may have awards in the first quarter of ’06, which have not been finalized.

So that would not include – the $2 million run-rate would not include the ’06 awards?

Correct. I need to adjust – it has some. But it doesn’t have the full – it doesn’t have a complete number in it because it has not been decided.

Okay. Thank you.

(Operator Instructions) Charlie Brady with Harris Nesbitt.

Thanks. Good morning. On the delay of the key components part, I know you mentioned are you going to get some of those shipments in 4Q. Are you finally recovering all the delay in 4Q? Or does it go beyond fourth quarter?

I think we will recover a good piece, but I think some of it will slide into Q1.

We are still crossing our fingers, obviously, to get the components we need to finish those off. At this point in time, it doesn’t look like we’ll recover all that.

Can you quantify what the price increases that have been put in place have been and where you are on a recapture rate – a percentage of how much you are recapturing right now and where. Do you get to a 100% recapture rate in 1Q ’06?

Some of that – before I quantify the price increases – some of that recapture success will be partially determined on what our competitors do and don’t do over the short-term. Certainly if they were to move – can catch up to us or get ahead of us, that would give us another opportunity to rethink our pricing strategy.

In this Instrumentation segment that we have been talking about, virtually every business unit has put in at least one price increase this year, which has been in the 3% to 4.5% range. It didn’t all become effective on shipments that went out the door January 1. These were announced in late in –mid second quarter and the beginning of the third quarter. We gave our distributors – as most of that product goes through distribution – we gave our distributors essentially 60 days to put that in place for new orders that they place on us. So there is a lag time when that flows to actual shipments that we make to them. That is the magnitude of the individual price increase that was made essentially across this business unit thus far this year.

Separately, the industrial instrumentation product line that we have and is manufactured domestically has enacted a second one that Bill talked about in his remarks, that is effective in the fourth quarter. By the time that cycles through from a notification and orders that are placed with us and our backlog of previously priced orders, it’s flushed out on the ship.(?) That will only benefit us probably as we get into the latter few weeks of December ’05.

Full stop.

So then, let’s assume that once the lag time catches up and these price increases are in place and the pricing is adjusted, will you then be fully recovering the increase in costs? Or will they still have a negative headwind on that?

I think we may be close. But I am not sure we would be fully closed out. It is still dependent on what suppliers do to us in November and December and the purchase orders we place in January. We feel a little constrained in closing the gap or exceeding it because we are not the market leader in some of our key markets where we’ve got some large sales penetration for this segment. So we’re cautious on how we move versus some other bigger competitors.

Looking at your backlog figures, if I look in the release you just put out, the third quarter ’04 numbers are different than what you put out in the third quarter of ’04 in your release by about $15.5 million short. What was pulled out of there?

Can you give me some numbers? Because that is----

Yes. In the release you put out for the September ’04 quarter for – I think it is petrochemicals, the number was 41.755.

Yes, I agree with that number.

Yes, I’ll come back. I think I had that wrong. I apologize.

If I look at your [strong suit] for the Energy products for the fourth quarter, it equates to a revenue increase of about 2% to get to your full year 20% revenue increase. And you’ve got much higher increases in your order figures for that. Is there a reason why it is a low function for revenue increases in Energy fourth quarter?

Yes. That is just the timing of project shipments versus project orders. Those are lumpy items.

In the Italian unit, that is largely fulfilled – that Middle East order stream. Those projects are big. The valves would probably crush your livingroom, weighing about 40 tons. It takes us six to eight months to build it and ship it. So the big order intake in the third quarter of ’05 is largely probably going to be shipping in late Q1 or the second quarter of 2006.

The ship as a completed set. It reaches the project when – as a total package. So there is lumpiness in both sides. Just to give a little more color, the ball inside that ball valve it’s 48 inches. The ball, and then formed, takes one month just to cool down. That is just one element of this six-to-eight month fulfillment cycle once we get an order.

Back to my prior question when I was talking about the order number year-on-year change, I am looking at the backlog numbers. There seems to be a difference year-over-year in the backlog numbers.

What numbers are you citing now? Give me specific numbers so I can answer you. We had backlog a year ago in the Energy segment of about $59.8 million. Do you recognize that number?

I do. But in your release today – I am looking at (indiscernible), it looks like it is 75 spot 923 (?). I am looking at the----

That is a----

(multiple speakers) Sorry about that. My printout must be (inaudible).

I think the right quarter was the end of September ’04 (multiple speakers)

That was the year-over-year number. You are right. I apologize.

I want to clarify for the other listeners that you were also looking at a number for December ’04. That’s why we’re different – two different time periods.

Got you. Thanks.

Andrea Wirth, (ph) with Robert W. Baird.

Good morning. Just a quick question on margins in the Energy business. Obviously you had a great level, 11.3% excluding charges. Give us an idea of where you think margins go from here. Is this a peak run-rate? Or can you go higher from here? Playing into that, what does pricing look like in the backlog right now? Where are your capacity constraints? Are you running into any yet at Pibiviesse?

That is a lot of questions, Andrea. Let me see if I can capture them. We are hoping we can get more. It depends on other players on the industry, which have been behaving quite well. Maybe there is some more upside opportunity. But if we see movement in pricing some more by our competitors, we certainly will lock-step right behind them. We have been ahead in a couple of cases in the past. They are catching up to us right now.

On the capacity issues, we’re in good shape. The project business at Pibiviesse continues to be very strong. These are long range projects. We can sequence them nicely. We have a lot of subcontracting capability in machining. We do a lot of – all the assembly tasks in our facility, but a lot of the machining is done by subcontractors and we have to manage that carefully. We think we can meet the demand for the types of projects and the types of valves we want to build. We could outstrip our capacity if we went after lower-margin items and pieces of the projects, but we have not gone there. We want to manage our capacity to those higher-margin opportunities. That is what we are going to continue to do.

If we move onto China, we are expanding that capacity to help support with components and finished goods in the North American market. Yes, overall we’re in decent shape.

Talk a little bit about the sentiment that you are seeing the market. Any signs of slowdown with [salaver] (?) yet? What are you hearing from your customers?

No, we don’t see slowdowns. We see maybe a leveling off at a very high level. We’re still waiting for Canada to kick in. We understand that they are expecting a very strong winter as it freezes up there and they get the rigs out in the fields. But no, we haven’t seen major changes in any. We have a lot of project activity going on, a lot of distribution through our distributors. They are feeling good about what they are seeing out there. That is about all I can tell you.

Great. Thanks.

With that, there are no further questions. I’d like to turn the conference back to David Bloss for any closing remarks.

Thanks everybody. We’ll look forward to seeing you in February to report on our fourth quarter and take a look at our first quarter expectations as well. We’ll see you then. Thanks.