Circor International Inc (CIR) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the CIRCOR International fourth-quarter earnings conference call. Today's call will be recorded. (OPERATOR INSTRUCTIONS) I will now turn the call over to your host, Mr. [Curan McCann], from the Company's investor relations firm.

Good morning, everyone, and welcome to our fourth-quarter earnings call. Our objectives today are to review the Company's recent performance, and provide an outlook for 2006 with David Bloss, the Chairman and CEO of CIRCOR; Bill Higgins, the Company's Chief Operating Officer; and Ken Smith, its Chief Financial Officer. After their comments, we will then go to Q&A.

But before we start, two administrative notes. First, the slides 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 the CIRCOR's chairman, David Bloss.

Good morning, everyone. Let me begin by giving you the headlines of our 2005 year, which we felt was a fairly good one considering the changes that are going on internally, and resulted in our highest full-year results, with revenues of 450 million and net income of a little over $20 million.

For the year, earnings per share excluding special and unusual charges increased 29% on revenue growth of 18%. Earnings per share in the fourth quarter was up 10% compared to last year, excluding special unusual charges on Q4 revenue growth of 13%. Our incoming orders, excluding our 2005 acquisitions, showed continued strength within the instrumentation and Thermal Fluid Controls segment, where orders were up 2% for the quarter and for the full year up 6%.

Backlog for the entire company was 142 million at December 31st, 2005, which was within $1 million of being our highest ever. As we indicated in our press release, our orders in backlog for 2005 exclude some large project letters of intent on hand. These should be booked as orders in the first and second quarters of 2006, as the specifications are finalized. Taken altogether, this suggests a good start for 2006 for us.

Cash flow was also a good number for us. We generated $10 million of free cash flow in the fourth quarter, and about 28 million for the year, up 29% over last year, and equaling 1.4 times net income.

Obviously, our operating margin was under some pressure during the fourth quarter. And we will be drilling down into the details with you during this call. To start, let me remind you that in the second half of 2005, we went into full implementation mode for our transition to lean after training and start-up in the first half of the year. In Q4, we had expected to begin seeing some improvements in production capability in some of our key plants, and on completing some facility consolidation projects this past quarter. However, we now realize that these changes are more deep and more difficult, and take longer than we originally expected. Therefore, this plus some added costs and constraints on the supply of key components contributed to our lower-than-expected earnings. A portion of the supply problem also lies on our shoulders, not on our suppliers.

We're making significant changes in our manufacturing and business processes as we transition ourselves to operational excellence. We have just completed our first year of this process -- as I said really in the first six months, we're getting ready and training. And it will and is affecting all aspects of our operation, as well as how we communicate and schedule our production and that of our suppliers.

As we look back, we could have done a better job of planning and implementation. But these are fixable problems. The changes we're making in the way we operate are significant, and are designed to improve our competitiveness and financial performance over the long term.

In response to these current issues, we're strengthening our supplier management processes, expanding our sourcing from low-cost countries, and redirecting our lean initiatives to focus on these manufacturing constraints. We will also be initiating further facility consolidations and rationalizing the manufacturing of certain product lines along the way.

During this call, Bill Higgins will be providing more detail about our lean initiatives, and we'll give you for the first time some specifics on our objectives and expected timing of achievement. It's going to take us a couple more quarters to finish this phase of our operational changes. Then we expect the cost benefit line to be in our favor going forward.

On the acquisition front, we closed on two transactions which we announced earlier this month -- the Sagebrush Pipeline Equipment Company in Oklahoma, and the Hale Hamilton Group in the UK. These additions expand our end-market presence in the United States and Europe. Bill will talk about each one later.

With that, I'll turn it over to Ken and Bill.

I will start with slide number three. The P&L amounts are on a U.S. GAAP basis. We had double-digit growth on every key measure for the quarter and the year. Revenue growth in the quarter came from our Energy Products segment and our aerospace acquisitions -- Loud Engineering in January 2005, and Industria in early October 2005.

For the year, revenue growth came from our Energy Products segment, acquisitions, and the instrumentation businesses within our instrumentation and thermal fluid products cycle. Overall, profitability increased, benefiting from the factors listed on the slide. And our acquisitions have been accretive.

Turning to slide number four, which provides in more detail the P&L, Bill will discuss the segment performance in later slides. So I want to make note on this slide of slow-moving inventory, special charges, corporate expenses, and income taxes. First, the slow-moving inventory in Q4 2004 -- we did record a non-cash charge, primarily for related to slow-moving inventory that we had accumulated and subsequently disposed of in 2005.

Second, the special charge expense in 2005 relates to the downsizing of the thermal fluid products business in France. And over on our Energy Products segment, we closed two U.S. plants of our Mallard Controls business, and moved that production from Texas to our KF business in Oklahoma. The 2004 special charges related to the sale of a Texas warehouse used by our Energy Products segment.

Third, regarding corporate expenses, the full-year 2005 increase of $3 million stems from higher staffing, including our new COO, who is leading the lean manufacturing initiative; variable comp expense, costs for due diligence on deals we ultimately passed on, and some consulting projects which included income tax planning.

And fourth, regarding income taxes, we did reduce our effective tax rate in the fourth quarter of 2005 to a full-year 2005 tax rate of 32.2%. That's a reduction from 35% that we started 2005 with, and down from the 34% annual rate we adjusted to in the third quarter 2005. In Q4 2005, we lowered the '05 rate to the 32.2 level based on Q4 events, including the increased benefit of tax credits.

Now to slide number five. In the cash flow from operations, and free cash flow, we had two notable items. First, we had a very good 2005, even after investing $7 million for two facilities, one in Rotterdam to consolidate three European businesses of our CIT division. And the second facility was constructed in China, and was completed in the fourth quarter of 2005, which is part of our Energy Products segment.

Second, we had some traction in inventory reduction. Inventories decreased $8 million in the fourth quarter, excluding our acquisition of Industria. And we achieved 3.2 turns at the end of Q4. That's the first time the Company has been over three turns.

Now to slide number six, the balance sheet. The balance sheet continues to be very healthy, with a debt to capitalization ratio of only 10% at year end. In 2004, we were in a net cash position. Now at the end of '05, we're in a net debt position. After paying out $51 million of acquisitions in 2005, that was for Loud and Industria, plus the minority shareholding that we bought out in our Chinese manufacturing business. Now in early 2006, our debt to cap ratio approximates 24%, because we did borrow approximately $60 million for the purchases of Hale Hamilton and Sagebrush earlier this month.

And now Bill Higgins, are Chief Operating Officer, will speak about our segment performance.

Thank you, Ken. And now slide 7, our instrumentation and thermal fluid segment results. Regarding orders, as David mentioned, our end-markets continue to be positive. The power generation, aerospace, chemical, and general industrial markets were solid, although we had more order strength domestically then we had in Europe this quarter compared to Q4 2004.

In addition to the organic growth -- oriented order growth in 2005, we have benefit from our aerospace acquisitions, Loud Engineering in January 2005 and Industria in October of 2005. Revenues have grown solidly in our instrumentation and thermal fluid businesses, strongly aided by our aerospace acquisitions in '05.

As for operating income and margin, we're disappointed in our fourth-quarter performance. While we made significant progress on inventory across the Company -- in fact, we reduced inventory over $11 million in the second half of the year, excluding the acquisition of Industria -- our lean manufacturing, operational, and supply chain improvements did not come fast enough for us to convert the higher demand at a satisfactory operating margin. We incurred additional cost to expedite material to meet customer deliveries because of supply chain limitations, both in our factories, where we are expanding capacity through our lean efforts, as well as limitations at our vendors.

We continue to raise prices at a rate the market will bear to catch up to the increase in raw material cost. And to improve our supply chain costs and responsiveness, we are expanding our supply chain internationally by taking advantage of our China operation and by expanding the supply of materials and components from other low-cost countries.

We're upgrading our supply of management talent and our planning processes. We focused significant Kaizen improvement activities on planning, scheduling and execution across the supply chain. Finally, we continue to rationalize product lines and facilities to lower our fixed costs.

Now onto slide eight, our Energy Products segment. The oil and gas end markets served by this segment continue to be very healthy for both large, international project business as well as domestic production and distribution. Although this slide shows order decreases, the oil and gas markets are strong. Our orders for the North American MRO market were up 6% in the quarter and up 19% for the full year 2005.

Orders for large, international projects continue to be lumpy, show a decrease in Q4 2005, although this is compared to a record quarter in Q4 2005 (sic - see press release). And furthermore, as David mentioned, we currently have over $50 million worth of letters of intent from Middle East customers as of year end 2005 that were not yet included in our reported orders for Energy Products segment. In short, this end market continues to be very strong.

As for operating income and margin, the increases were a result of volume and pricing improvements compared to 2004, plus the fact of a large charge in Q4 2004, primarily for slow-moving inventory. Nonetheless, we're not satisfied with the margins in this segment either, given the 2005 revenue increases achieved. Here we also had some higher charges for raw materials that were -- we've not yet offset with price increases, but we expect to in the first half of 2006. We continue to raise prices in this segment as well.

Additionally, our consolidation of the Mallard and Hydroseal product lines from Texas into our Oklahoma facility drove higher supplier costs than planned. We were able to close the two plants in Texas. Yet through this consolidation, our inability to meet growing demand resulted in lower efficiencies and increased backlog at the end of the year. We expect to have this resolved in the first half of the year.

Let's now turn to slide nine, and let me talk about our lean efforts. In the beginning of 2005, we launched a significant initiative to implement lean manufacturing and Six Sigma across CIRCOR, beginning with our major sites in North America. This is the beginning of a long-term effort to transform our culture to one of operational excellence. In 2005, we got off to a good start. We completed over 100 cross-functional Kaizen events, and we're beginning to fundamentally rebuild our manufacturing and business processes.

This slide is intended to provide an estimate of the cost/benefit of our lean implementation over a four-year period. We're making significant investments to train our employees and to rebuild our processes and business units into high-performing operations. This is a major change, and it's underway. We expect the benefits will begin to offset the investment costs in late 2006, with more immediate benefit coming from inventory reduction. Additionally, we expect to achieve higher levels of customer satisfaction, quality, and to enable continuing product line and site consolidation with the factory floor space that we make available.

Let's now turn to slide 10. On this slide, we point out our assumptions for key end markets that we serve and factors 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 first half of 2006.

Let's now turn to slide number 11. Besides the end markets being positive, we also have the benefit of increased exposure to the maritime and energy markets from our February 2006 acquisitions. We acquired the Hale Hamilton Group in the United Kingdom and Sagebrush Pipeline Equipment Company in Oklahoma. We expect Hale Hamilton to contribute $0.05 to $0.06 net of borrowing costs and amortization expense from the purchase price allocation, and Sagebrush nominally accretive in 2006, as we have some initial integration costs.

And now onto slide 12 -- many of our expectations for revenue and margins in 2006 are cited here. Regarding the first quarter 2006, we're providing EPS guidance of $0.30 to $0.32 per diluted share, excluding special charges. The range of $0.30 to $0.32 is comparable to the first quarter of 2005, when we reported $0.33 per share excluding special charges.

Our operating margins and earnings for both segments will likely take six to nine months to fix our supply chain issues, strengthen management and key operations, and material planning roles and complete the improvement actions I described.

Regarding corporate expenses, our 2006 estimate includes incremental equity-based compensation compared to 2005. We will implement the new accounting rule requiring the expensing of stock options -- that means a pretax expense of 1.3 million, or $0.05 per diluted share for the full year of 2006. We also have an incremental pretax cost of 900,000, or $0.04 per share, for restricted share units for the full year 2006. These equity-based increases will be partially offset by decreases in other 2006 corporate spending for consulting, other variable compensation, and audit fees.

In income taxes, we expect a full-year rate of 32%.

So to summarize our outlook, we have good end-market conditions and healthy backlogs. We're driving all the right things, implementing customer price increases where and when we can. We're implementing lean manufacturing methodologies for the long-term benefit of our customers and CIRCOR, increasing lower cost foreign sourcing of supply, upgrading our management talent, and consolidating facilities to reduce fixed costs.

With that, we would like to open up the lines for any questions that you might have.

(OPERATOR INSTRUCTIONS). Charlie Brady, Harris Nesbitt.

Can you break out for us -- when you talk about the raw material cost increases and the supply disruptions -- slow-moving inventory, things like that, and your productivity losses from lean, can you break out sort of the impact of how it fell across those three broad areas? On a margin -- [hurting] the margins in the quarter?

I would say the supply chain/productivity was probably the greater proportion of our margin degradation in both segments for the quarter, followed by the cost gap on raw materials as a second leading reason for that impact.

And at what point -- and maybe you covered this -- at what point do your price increases you implemented already and are going to implement, cover your raw material cost increases?

I think in the energy segment, we expect to have covered that gap at the start of 2006. In the instrumentation rotation and thermal fluids segment, it's going to take us longer, probably another six months. We're closing the gap, but we haven't closed it completely.

Okay. And then my last question, I'll get back in the queue -- the tax rate, 32%. Is that linear throughout '06, or does the first half have anything that would drive it down, the second half being higher?

I'm expecting that to be linear.

Mark Grzymski, Needham & Company.

What is the capacity utilization of the energy and the instrumentation businesses running at about now?

Energy business -- you need to break it down between North American operations and our Italian operations, because they really are two different product types and markets served. In our Pibiviesse operation, the project activity has been very strong, and is continuing to gain some momentum for us. So in fact, Bill and I are going to going over there in the next couple weeks to take a look at ways in which we can increase capacity, because they are bumping up to it right now.

In the North American operations of energy, they have the Chinese plant which was recently completed. We're into that plant now -- fully operational, and we've expanded our capacity there. And with all the lean activity that's gone on in Oklahoma City and in China as we revamp that plant and moved it, we're probably -- got some room to go there. We're probably at 80, 85% capacity, I would say, in rough terms.

Turning to the other businesses we have, we feel that we've got adequate capacity to meet the demands that are there. It's a matter of process improvements that need to be finished up to be able to satisfy that customer demand. So there, we're within 75 to 85% capacity as well.

Great. Secondly, on the -- I think you mentioned it earlier, and hopefully I heard you correctly. But you said that some of the supplier constraints had to do with CIRCOR having some issues. Could you elaborate on that?

I sure could. We're not proud of it. None of us are proud of it. But when we went through our process changes, we started accelerating the implementation of some of the changes that were taking place. And the large quantities of purchase orders for individual components were reduced to meet the just-in-time and lower batch processing that was being done.

Our vendors couldn't respond to that as quickly as we thought they could. And as the markets began to kick in for us in the second half in some of our businesses, we had to increase -- go back to them and start increasing the quantities. And at that point in time, our previous decreases in their requirements on batch sizes were filled up by other customers. So we had to get in line. So that was a self-imposed issue that we're now smoothing out.

Okay. Would any of this had to have done with large -- the lumpiness of the orders and the inability to kind of time it, or is it just as you described?

Probably both. One of the businesses we have is in the HVAC steam business, and Spence, as -- being an HVAC business, it's a little bit more seasonal in the heating season. And we went back to our vendors at the time that the orders start taking off -- that business, those of you who have been listening in for the last few years have listened to us indicate that that segment of our business was kind of soft, with the vacancy rates of these -- and lower maintenance spending by some of these commercial building owners. But that changed in this last quarter, and picked up pretty nicely for us. But we went scurrying back to our vendors, and they weren't prepared for it. So there's a mixture of reasons.

Jim Foung, Gabelli & Company.

I guess just on this last issue, how much is that -- took away from your margin? It seems like that can disappear fairly quickly now, right?

No, in fact, I think many of these issues that we're facing can be repaired, it's just a matter of time. And we think probably in the next few months, we will be able to get behind some of the supplier issues. We still have to settle our processes down, and -- both in the office and business processes, we call it, and on the shop floor. And that's going to take a few more months. And then to finish up some of these consolidations of plants and product lines that we've been focusing on.

So we think this -- that's why I said earlier -- the next couple of quarters we'll be getting ourselves through these issues, and the second half, we're expecting to see some pretty good improvements.

So I guess in the next couple quarters we should see kind of margin improvements and then kind of see some really quantitative improvement in the second half?

We will be able to give you a better picture when we release our first-quarter results, and then we will take a closer look at the second quarter. But I think Ken and Bill provided sort of an overview broad brush of the full year, and how we're looking at it. And I think you can put that in your model and come up with a range that we're trying to target toward.

I think just getting back to some early issues, what's the percentage gap between cost increases and your ability to raise prices? Ken was saying you narrowed the gap in energy, and in instrumentation, still kind of six months behind. What's that difference in gap -- about 3 percentage points -- 3% in between selling price and cost increases?

Let me answer it a different way. Let me first start with energy. As you know, about half of that business is project business, and we quote using current costs. So there's virtually -- we pass that on immediately in our quote.

The distribution business in North America lags with our competition and the distribution phasing of notifying them of price increases and so forth. And those prices have been strengthening pretty much in line with raw material cost increases. There are a couple of product lines -- are a little bit behind, but all in all we're generally there. We increased one product line at the end of the year. Another price increase on one particular product line in the North American markets. So that gets us in fairly decent shape.

Now I'll turn the page on the instrumentation and thermal fluids. The issue there is on instrumentation piece. As you know, there's aerospace in there. That's mostly aluminum and light metals that haven't been impacted so much. The profitability issues in aerospace have been one of productivity and changes on the shop floor that we've been implementing.

On the steam businesses, we've been able to keep up pretty much with inflation and pass those on. So it's really on the instrumentation business. And I have said before that we have a couple large competitors out there, and we're not the market leader by a long shot. And we have increased prices there as much as we can and still maintain our customer base and competitiveness. That's where it is.

Now, if you take that piece of the business as a percentage of that total segment, which is only thing we publicly report financials on, you're probably talking about 1 to 2 basis points in profitability because of that.

So you should be able to narrow that gap then by the second --

We're working hard to, and we just can't wait on our competition to raise prices. We're going to be really aggressively pursuing some foreign sourcing of some of the components of that business more than we ever have in the past. Bill is working on capabilities, both in India and China, to accelerate our low-cost sourcing of some components we currently manufacture in Spartanburg and elsewhere.

And then just last on this chart on page nine, this lean implementation cost/benefit projection -- how much of that can we take to the bottom line? Are you going to have to give some of this to your customers to your customers, or you can capture most of this to your bottom line here -- in terms of your annual net cost/benefit?

We should be able to keep that. We're working hard to make sure that we don't have to give it away. We think those are good numbers to look at for opportunity for profit improvement for the Company.

Mike Schneider, Robert W. Baird.

Maybe first, we can focus on just organic growth within instrumentation and thermal fluid. It looks like organic growth was probably down about 1% if you scrub acquisitions and currency for the quarter. Can you give us a sense of how that looks between the two subdivisions, though, of instrumentation and thermal fluid?

Give us a minute to flip some pages, Mike.

And I ask because -- to your point, Dave, that the HVAC business has come back, but aerospace has as well, I'm trying to determine why this business would be down.

We should have enjoyed better volume from our aerospace business -- if we could have produced the stuff and got through the productivity issues on our shop floor. So I think we have lost some opportunities there. And we're focused on gaining those back.

The other piece of that probably would be the Navy business is still -- we're seeing it improve a little bit, but it still isn't at the pace that we've enjoyed in the past. The order rates are picking up, so you should see the revenues help us in '06. But for '05, there's still a drag -- on a revenue basis, not an order basis.

And that's order rates for both marine and aerospace?

Yes.

In fact, while you're looking at the numbers of just the marine business specifically, this is -- this challenge has been going on for many quarters now. Do you have any additional insights as to what may have changed about Navy order patterns, the fleet deployment, your position technologically, or anything that would explain -- and maybe even contrast that with Curtiss-Wright's results, which seem to be more much stronger in the marine space -- at least as my understanding is -- do you have any additional thoughts? And I guess, what might be going on with your specific place in this marine market?

Well, the headlines are that we're seeing some improvement in the order patterns. There's a lot of engineering and design going on for the new programs further out. And we have a number of tasking projects that we've been awarded. And that's a very good sign. They don't give engineering tasking projects out to people that they aren't going to do business with.

So our position with the Navy programs continues to be very strong. Our specific applications may be different than Curtiss-Wright. I've never done an analysis of it, and I've never heard of us competing directly with them on any of the applications that we have, although we are all on the same ships. So I would have to get back to you and take a look and where they are and where we are to build that bridge you're looking for in that regard.

I'm just wondering if there's been some change in -- I don't know, parts, competition or some new replicators that have come in that would explain why the existing platforms remain weak, despite probably over two years of declining spending.

It's not a new entrance into the competitive environment. We're just seeing very soft, continually soft markets out there. And a lot of the maintenance work is starting to show up for us. And that's what you'll see in '06.

And then just specifically within this segment, instrumentation and thermal fluid, what are the moving parts right now in terms of facilities? What's done and what's to come in '06?

Well, we're still -- I cited the new facility that we have in the Netherlands, Rotterdam -- we are probably halfway through that consolidation, We're (technical difficulty) European locations into that -- the backbone of that new facility.

And we may have a couple, probably will have in the latter half of '06 in this segment, small facilities that we're analyzing now. So we're halfway through one, over in Europe, and we've got a couple others in our sights for the latter half of this year.

Those are consolidations as well?

Yes.

Okay. And then before I leave the segment, do you happened to have those organic growth numbers by subdivision?

Yes, I do. We had very modest improvement in the [PSC] piece, but that was net of some very -- some softness in the European power gen market in the fourth quarter '05. So it's weighted down by that quarter softness.

The instrumentation was up, but modestly compared to very strong Q4 '04, when we had some significant sampling projects that we shipped out and fulfilled, particularly in Asia. And aerospace was modestly up.

So there were two dampeners on the organic change, and that was power gen in Europe this year, Q4, and a year ago, very strong sampling project business in Asia. That was a bit of a bluebird, at least as strong as it was over a year.

And aerospace was up about a couple points, almost three points organically.

Charlie Brady.

Can you speak specifically to stainless-steel pricing increases, that's obviously in the instrumentation side a big input. Where is that sort of cost escalation? Has that flattened out, or do you see higher costs on that as well in '06?

The stainless steel surcharges that began back in -- I would say around January or February of '04, peaked in '05 in the second quarter, beginning of the second quarter. So we saw them stabilize, and they're coming down, and we expect them to be down as we enter into March here from a level about a dollar 20-something, $1.21 or $1.22 last year to around $1.09 or $1.10 currently. So we're seeing stainless surcharge pricing come down.

Okay. And then If we look at the operating margin, first half '06 versus second half '06, given that we still got a couple more quarters until some of the benefit of the lean kind of swings back in your favor -- if we're looking at our models, is it sensible for us to really give the second half a much higher weighting on operating margin to get to your full-year guidance for the segments?

Well, I wouldn't put a lot of emphasis on much higher as you phrased. I think we're looking for gradual improvement sequentially through the 2006 year. Whereas the back -- we could be -- 100 basis points better, say, in instrumentation thermal fluid than we start out '06 -- hopefully, better than that, just because we'd like to overachieve for once as far as our guidance.

But I wouldn't say we're looking for 300 -- we're not looking for 3 or 400 basis points improvement in the fourth quarter compared to the first quarter. Because as Bill described, there's a lot of fundamental changing of our everyday processes. We load the shops, and plan capacity, and integrate with our supplier base. But it's going to take some time, and will hopefully contribute gradual improvements as we go throughout this new year.

And then just on acquisitions, you closed two in February, and you're still going through this plant consolidation. What's your appetite for acquisitions through the rest of '06? Are we taking a breather, or are there still things sort of in the pipeline for you guys?

We have things in the pipeline. We're going to be a little more selective, I think, moving forward to make sure that the deals we do go after are ones that can add significant fold-in opportunities for us and fill in some of the capacity that we will be building in some of our plants.

So yes, my job is to continue to identify opportunities and grow this business. But as prudence would tell you, that when the Company is faced with internal changes and a lot of changes going on for the good of the business long term, we've got to make sure we balance that with our capabilities and not overtax ourselves. So we will be looking at quality additions to aggressively pursue, and the ones that takes longer and require a lot of work -- we will try to put those off for a while.

[Richard Glass], Morgan Stanley.

Can you maybe tell me why your sales guidance for next year look so conservative, given the fact that you already have these orders in hand? Do you see something that belies some conservatism looking out further into the year on your part? (multiple speakers) first question.

Particularly on the backlog rise in instrumentation and thermal fluid, the predominant portion of that backlog rise is from the acquisitions that we've had, so and I guess secondarily, the order rates that we've had in the most recent quarter, Q4 2005, were a little more modest than the order growth we had earlier into '05. So I think -- both of those pieces have influenced our rate projections and order growth here for next year.

Does that mean we're expecting some sort of fall off in the energy spending? (multiple speakers) look like there's a whole lot of growth, given what's going on in spending projects by and large and the general environment there.

Particularly when Dave talked about the letters of intent, he described in our earnings press release, a lot of those were in the final throes of trying to finalize the drawings, settle on letters of credit and other details until it finally gets converted to purchase order. But when it does, a good portion of that is going to be late 2006 and even into 2007 deliveries.

So yes, we still are looking for a healthy '06. But the robustness of that energy market, particularly the long leadtime items on those international projects, mean we're going to have deliveries really tailed into the end of '06 and affecting '07.

Okay, but given that kind of business, it should be pretty good margin business as well.

Yes, we're close to running full guns over there. So we're trying to get as much pricing we can, given other competitors who can do some of this difficult stuff, and still win the business. So we're hoping for a healthy year, in both order rates, sales and margins that come with it.

Can you talk about your assumptions on your acquisitions? Given the amount of money we're paying here for Hale Hamilton and the EBITDA multiple, the accretion looks, at best, okay. It seems like we're taking a lot of risk there for not a whole lot of accretion. So I wonder what the assumptions there -- whether you have any cross selling built in, or whether that's potentially upside to the numbers? And then on Sagebrush, I'm wondering how much of the revenues you're assuming you keep to get to that number?

Let me start down the list of your questions, Rich. Factored into our earnings expectations from both of these deals are two cost features. One is we have a cost of borrowing that we've in fact incurred. As I said earlier, we borrowed approximately $60 million from our revolver to fund these initial acquisitions.

And second, in our purchase price allocation, we think we're going to have some other intangibles that will have some value that we've acquired that have definitive lives. Three or four years ago, when you acquire those types of things, they fall into goodwill, it's not been amortized.

But we think some of these customer relationships, other intangibles will have some definitive lives. Under the accounting rules, you have to amortize that cost to the P&L unlike goodwill. So both of these deals and arriving at the EPS that you see on that slide have been reduced for the cost of borrowing and this amortization cost.

Part two of your question -- the slide that noted the acquisitions and what we paid for them on the multiples and the dates, which I believe was on slide 11, at the bottom of which we've identified synergies that we think we're going to be able to achieve, although what we've loaded into our expectations is a fairly modest out-of-the-gate expectation, because we don't start cross-marketing on day two of ownership. So we're expecting once we get to '07 and '08, the EPS contribution from both of these deals will be greater than what we've earmarked here for the first year at the bottom of slide 12.

And I believe your third question was earmarked to Sagebrush about being able to hold onto the sales level that historically has been there and Sagebrush has sold to its customers. We are hopeful that we can -- that we will. And we think we bring some good distribution partner muscle, and as well as sales and marketing support from our KF organization, which will be responsible for that, to be able to sustain those levels of sales and hopefully improve our cost -- lower our cost of sales as we can introduce possibly some of our own KF product into what they put on our [fabrications again].

You're saying you assume 25 million of sales next year, or some growth off that?

A little bit of growth, but also we only will own it for 11 months this year in 2006, not a full 12 months. And that figure that you see for sales on slide 11 is a full 12-month sale (inaudible).

All right. It just seems like it should be more accretive, given that, though.

As I said, we have the cost of borrowing and this amortization expense, which is non-cash. It's -- (multiple speakers)

Yes, even so. All right, thanks.

(OPERATOR INSTRUCTIONS). Mike Schneider, Robert W. Baird.

Thank you. Just focusing on the energy segment, I guess the same question as instrumentation. If you could break down maybe for the quarter what organic growth looked like for the North American operations, and then specifically Pibiviesse?

(multiple speakers) For the quarter for energy, they were weighted down by a negative 4 percentage points on foreign currency (multiple speakers), but the balance was all organic.

And any difference in growth, though? You mentioned MRO in North America was strong, up 6%. But the group looked like it was up 10. Does that mean Pibiviesse was up in the midteens?

Yes, it does.

Okay. And then given the order, at least the order drought in the fourth quarter that sounds like it was already recovered in the first quarter, is this going to be a repeat of 2004, or six months later, which would be the second quarter we see some real weak results out of Pibiviesse, but they make it up in the second half, and we should model accordingly?

No, the backlog at Pibiviesse is much stronger now then it was in the historic wave that you referred to, Mike. So we should see some pretty steady shipments coming out of Pibiviesse in '06.

So there's no specific down, I guess, gap in that production schedule in the second quarter or third quarter (multiple speakers)

I haven't seen any. I've looked at it. And we're still trying to fill in some gaps for '06. But because some of these -- as Ken alluded to, these letters of intent, some of them fall into '06 deliveries. But the majority of the fall into '07. So we still have some. But the quotation activity is strong enough where I feel pretty confident that we'll be able to fill that out.

And do you have any idea of what units were actually up at Pibiviesse? I'm trying to get a sense of if you guys are at capacity, is the -- for example, the 15% growth we saw in the fourth quarter, is that all pricing?

I'd say a fair portion of that was unit volume. A fair portion of that was unit volume, the majority of which --

Okay. And going into '06 now, given your capacity constraints, is that feasible, or is '06 going to be predominantly price versus volume?

The capacity issue is one of getting -- probably assembly and testing capability, which isn't that difficult. But the thing you have to look at it is finding the buildings to put it in. And we're obviously trying to stay away from adding a lot of fixed cost, because this business doesn't appear to be as cyclical as historically it's been. But I hate to even say that, because as soon as you do, it starts a cycle. But all the indications are that this growth in activity maybe long-lived for the oil and gas fields.

So we're trying to find ways to find facilities to expand our assembly and test capability. Machining-wise, our subcontract base is fairly strong and deep. So we think we can keep up from a machining standpoint.

Have you revived that plant next door near Pibiviesse?

Yes. That's fully utilized.

There was a plant you were in the midst of constructing or leasing, and you canceled that plant. Is that plant coming back on (multiple speakers)

No, that plant was leased to somebody else, because they had another person in line. That was a year and half or so ago, wasn't it?

Yes.

No, we didn't foresee -- that was a huge facility. And that would've been a big step for us. And that would been banking on a large amounts of increased orders, not only for traditional ball valves for the [OPECs], but also the caged ball valve technology that's improving quite nicely -- but you would have to have triple the size of that business in order to begin to filll the size of that facility. So we're going to be looking at something a little bit smaller, I think.

And what does the mix look like now of the sophistication of these Pibiviesse projects? Because if we go back two years ago, even three years ago, you were saying it's the richest mix you could probably enjoy, with specialty alloys and stuff. And then the mix seemed to deteriorate. We saw it in the margins. What's the update?

I'd say it's probably status quo of the most recent margins that you have experienced, there is a mixture of low-pressure, high-volume type of orders. But we have to take some of those to stay in the game and be able to supply those same end-use customers with the high-end stuff. I'm trying to avoid that as much as possible, but it's a delicate balance that you have to try to maintain.

And then, just specific on slide 9 again, Jim was asking about the lean implementation slide. If you look at this slide in '05, your kind of P&L statement you have included here shows a net cost of 2.4 million in '05. Would that include your estimate of what the disruptions have been and the unproductivity has been of implementing this stuff, or is that a soft cost that isn't in there?

Probably not included all the soft costs. We try to estimate some of the costs within each facility. But there's probably peripheral costs that were not included here.

So then looking forward in '06, the slight positive number of $400,000 -- what does that assume for disruptions? Because it sounds like you have kind of reset the bar given your experience in '05. I'm just curious as to what you guys are modeling for disruptions on the forthcoming initiatives?

I think we learned a lot during the year that we've included in our budgeting process. I think we're in pretty good shape. We learned where those disruptions were, and we have countermeasured them. So I think this is a pretty good estimate. This is built into our budget plan for the year.

And then Ken, just focusing on the modeling, the first quarter guidance, 30 to 32 -- frankly, I've been consistently just way too high on modeling the instrumentation and thermal fluid division margins. Can you give us a sense of where you start the margins for each of the segments in your Q1 guidance? And I think that will probably put us all on the right track to start the year.

In the first quarter, arriving at our range assumes somewhere around the mid-tens for instrumentation and thermal fluid. And energy, somewhere around -- these are margins including our new acquisitions. And in energy, I'm assuming somewhere just shy of 10.

Glad I asked. I believe that is all. Thanks again.

It appears that there are no further questions at this time. Mr. Bloss, I'd like to turn the conference back over to you for any additional or closing remarks.

Let me summarize a couple of things here. Those of you who have been following CIRCOR since its inception should have observed a consistent drive by us to improve. During our initial years, we reorganized ourselves into focused business teams. We generated significant cash flow and paid off debt, consolidated and closed a number of facilities, and added a number of businesses through acquisitions.

But we felt we could and should be doing much more. Even though we made substantial improvements, we see more opportunity to further reduce inventories at [fewer] number of clients and better customer service. That means leadtimes and on-time deliveries. And we needed to start building more core competencies that would allow us to grow at an accelerated pace.

We're confident that [by] creating a culture of operational excellence, we will do just that. And we will improve the performance of our existing operations and create the core competency that we can extend and apply to larger acquisitions.

This takes time. It takes investment. It takes a lot of effort and changes to the way we operate.

But we believe in it. And we also believe that we will begin seeing the benefit during the latter part of 2006.

Again, thank you for being on the fourth-quarter earnings call. We look forward to updating you on May 2nd on our Q1 2006 results. Thank you.

That concludes today's conference call. Thank you for your participation. You may now disconnect.