Circor International Inc (CIR) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the CIRCOR International second quarter 2006 earnings conference call.

[OPERATOR INSTRUCTIONS]

I will now turn the call over to your host, Mr. Curhan McCann from the Company's Investor Relations firm, please go ahead, sir.

Thank you very much and good morning everyone and welcome to our second quarter earnings call.

Our objectives today are to review the Company's recent performance and provide an updated outlook on reminder of 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'll 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 Investor's 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 2005 Form 10K, which 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, and good morning everyone.

Overall we had a fairly good quarter. Our energy product's segment outperformed, particularly in North America, while our instrumentation and thermal fluid control segment continued to struggle as we worked to rebuild our operations and supply chain capability in that segment. Positive highlights are obviously the performance of our markets.

Basically all of our businesses are experiencing favorable demand. Especially the oil and gas-related capital spending programs that are going on. Our order backlogs are up 128% over a year-ago and they are at all time records. At quarter end we were sitting on $293 million of backlog which is equal to 58% of the last 12 months revenue.

It's not the market environment that keeps us up at night, it's our ability to produce and ship, which is dependent upon our internal processing capabilities and those of our suppliers. Bill Higgins will talk about both of these issues later in a few minutes.

Although our financial results for the quarter don't reflect that we have made what we consider to be significant progress during the past quarter in addressing our operating issues and in our transformation efforts. We continue to upgrade our management talent and during the second quarter we announced the addition of Chris Celtruda to lead our aerospace group of business. Chris most recently served as group Vice-President and director of the $600 million integrated supply chain for Honey Well Aerospace mechanical components.

A key part of our strategy is to ensure that we have the best talent possible to aggressively lead our transition to a lean culture of operational excellence, and over the past 12 months we've replaced all three group executives that lead the instrumentation and thermal fluid segment.

We have also upgraded key management at lower levels in our organization in both segments of the Company. This will continue to be an ongoing process as we identify needs.

We're putting together a much higher caliber leadership team in place and while it will take some time for these new group executives to make their own assessments, we continue to expect to see improvement in operating performance in the second half of this year. We certainly have the backlog to support our revenue forecast to have a great second half and a strong start to 2007.

As I said, it's a matter of our ability to produce and the capacity and capability of our suppliers to deliver as well. Basically, all of our key markets are healthy and the signs are good that we'll stay that way into next year.

Judging from our quotation activity and the project engineering work that we see being done, the oil and gas market demand is now taking us into 2008 for some projects, and with that, I will turn the call over to Ken Smith, our CFO and Bill Higgins, or COO to take you through the details of our second quarter results and our prospects for the second half.

Thank you, David, and I will start with Slide No. 3, we had double digit growth on revenue, the revenue growth for the quarter largely came from our three acquisitions.

Aero Indian Industrial, aerospace acquisition that we had in October 2005 and two in February of 2006. Sage Brush Pipeline Company and Hale Hamilton, and also revenue growth from our energy segments North American businesses. While profitability met our guidance it was nearly unchanged from last year.

We had operating margin expansion in our energy product segment that was offset by the margin decline in the instrumentation and thermal fluid product segment which Bill will explain later.

And we had a lower tax rate in 2006 that nearly offset higher interest expense on new borrowings for our two acquisitions in February 2006. Free cash flow was negative in the first half of 2006 due to higher levels of working capital to support the significant growth in orders and our record backlog at quarter end.

Turning to Slide No. 4 unveils the P&L further. Bill will discuss the segment operating income in a later slide so I will discuss the corporate expense, interest expense and taxes. First corporate expense rose this year largely due to the new accounting rule requiring stock options to be expensed which was at an increment $300,000 pre-tax in the quarter. Which is equivalent to $0.01 per share.

For interest expense it's higher this year as we borrowed $61 million in February 2006 for the two acquisitions of Sage Brush and Hale Hamilton which leverages up the 22% on a total debt to cap ratio at end of Q2 2006. And third, regarding income taxes we've reduced our effective tax rate this year to 32% thus far in the first half from 35% in the first half of 2005.

Now on Slide No. 5, in cash flow from operations and free cash flow the notable item is the cash used for working capital. Although our DSO remains very competitive at 62 days as of June end 2006, we have invested in inventory to support our rising and record level backlog and our inventory investment this year was also made to help offset longer supplier lead times in our migration to new lower cost suppliers. For the full-year 2006 we expect cash flow from operations of between $20 to $25 million, and free cash flow to approximate $10 million.

Now to Slide No. 6, the balance sheet. Our balance sheet continues to be very health, the increased leverage in 2006 resulted from our borrowing of $61 million, as I said for the purchases of Hale Hamilton and Sage Brush in February this year.

And now Bill Higgins will talk about our segment performance.

Thanks, Ken.

Looking at Slide No. 7 our instrumentation thermal fluid segment results. Up first regarding orders as David mentioned our end markets continue to be positive. We look at the second half of the year--I'm sorry, we look at the first half of the year we're seeing double digit organic order growth in our simulated HVAC power generation and aerospace markets. And mid-single digit organic order growth in the chemical and general industrial markets. In addition, to the organic order growth we benefited from our acquisitions of Industrya and Hale Hamilton in February of this year.

Revenues have grown solidly in our instrumentation and thermal fluid businesses strongly aided by our acquisitions, as well as organic sales of simulated into commercial HVAC and power generation markets both domestically and in Europe. Regarding operating income and margin, we're not satisfied with this segment's result.

We're winning business and doing a solid--and building a solid order backlog, yet we need to do a better job of converting the orders by delivering to our customers on time and doing it efficiently so we achieve a higher rate of profitability that flows to the bottom line. As we had noted previously this segment has suffered from higher costs for stainless steel, supplier capacity constraints, lower productivity and suboptimal efficiency as we rebuild our operations and supply chain capabilities

As David indicated, the progress we've made hasn't--so far hasn't shown up on the bottom line, although we're building a more robust supply change both domestically and globally and our sourcing initiatives from low cost countries such as China and India are taking longer than we'd like yet will help us alleviate material cost pressures.

We continue to improve our factory planning and supplier management capability, both with stronger talent and more efficient procedures to more efficiently use our existing capacity and overcome the general tightness in capacity of our suppliers that is driving longer lead times for parts and hours spending for expedited costs.

Achieving double digit operating earnings in this segment has taken longer than we'd like, partly because we needed a stronger leadership team to lead the transformation and partly because we underestimated the effort and skills needed to drive large scale organizational and progress change in multiple facilities.

We are addressing both of these, as David mentioned we made significant upgrades in our management teams. Both at the leadership level and deeper throughout operations, and we continue to accelerate the deployment as a leading manufacturing (inaudible) to improve our operating processes and procedures to fundamentally improve how we run our operations

This is no small task, it will take time. We expect to see steady progress in most business units within this segment with solid progress in the second-half of 2006 in thermal fluids and aerospace. Our instrumentation products manufactured in Spartanburg, South Carolina will require more time and effort to achieve the levels of perform we expect. So year-to-date this segment reported an operating margin of 8.9%, our guidance for full year of 2006 is 9.5%, which means we're expecting this segment to sequentially improve its profitability.

Now to Slide No. 8, our energy products segment. I did note that 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. The total order increase as well as organic increase were substantial and hence the robustness of the global oil and gas markets. In short, this end market continues to be very strong.

Regarding revenues the biggest pluses were acquisitions and the over 20% increase in shipments by our North American businesses. We had a Q2 decrease compared to last year at our Italian business, which in the second quarter of 2005 had a huge revenue quarter, shifting in the second quarter of '05 nearly an amount that it shifts in two fiscal quarters. Year-to-date, our Italian energy business is above the same period of 2005.

As for profitability we had good operating margin expansion in this segment resulting from the benefit of higher volume driven by market demand, the positive benefit from the consolidation of the Mallard and Hydrosale product lines from Texas into Oklahoma last year and the benefit of our new China manufacturing plant, which serves as our key supply chain enabler to the North American market.

Let's now turn to Slide No. 9, on this slide we point out our assumptions for key end markets that we serve, and as we've noted most are expected to be positive for the second half of 2006.

Turning to slide 10, our expectations for revenue and margins in 2006 are noted here. For revenue growth we expect both segments to have double digit growth over 2005 compared to our revenue outlook described in our first-quarter earnings call, we've raised our expectations for revenue growth for the instrumentation thermal fluid segment, while we've lowered our expected energy segment growth to 35%. And although on our first quarter earnings call the energy segment outlook for 2006 revenue was incorrect 25% to 30% to clarify that it was incorrect because the range inadvertently included acquisition revenue.

Today we expect our energy segment to have very strong 2006 revenue growth organically and from its 2006 acquisition of Sage Brush. As we look at the end of 2006, we expect a very strong fourth quarter of shipments which underscores the importance of improving our operational performance.

Regarding operating margins and in particular our instrumentation thermal fluid product segments, it will likely take us three to six months to fix our supply chain issues, strengthen management and key operations and materials planning roles and complete the improvement actions I described

As I stated earlier this is no small task. The multitude of improvements underway will take time. We expect to see steady progress in most business units within this segment as we noted we have solid progress in the second half of 2006 in thermal fluids and aerospace and our whole product line instrumentation will require more time and effort to achieve the levels of performance we expect.

So looking into 2007 for the instrumentation thermal fluid product segment operating margins we expect to increase by 100 basis point every six months, every half year, which factors in the longer timeframe needed to improve our instrumentation product group. And although not on Slide No. 10 we provide EPS guidance in our earnings press release for the third quarter 2006 of $0.42 to $0.45 per diluted share excluding special charges.

The range of $0.42 to $0.45 is favorable to the third quarter of 2005 when we reported $0.29 per share, excluding special charges. We do expect a special charge in Q3 2006 of approximately $500,000. This amount represents a curtailment charge related to our qualified U.S. pension plan. We recently decided to freeze future benefits after July 1, 2006 and in tandem with this pension freeze we're enhancing our contributions to our 401k plan.

For cash flow, we expect cash flow from operations of $20 to $25 million, this reflects a continued use of working capital through most of the remainder of 2006. Particularly in receivables and to a lesser amount inventories to meet the growing shipments planned.

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

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

I'm sure the moderator is collecting questions for the callers.

[OPERATOR INSTRUCTIONS]

Our first question will come from Michael Schneider with Robert W. Baird.

Good morning, guys.

Good morning, Mike.

Maybe first we can address instrumentation. The margin forecast of 9.5 for the year, Bill, you mentioned, I believe 100 basis point improvement every six months is your expectation.

It looks like though even just the guidance implies a steeper ramp in the second half of the year. Can you give us some sense as to what expenses were in the first half that give you confidence they won't repeat in the second half and gives you at least some mechanical lift?

And then what indeed--what gives you confidence today that you are going to see that margin improvement in the coming six months?

There is a mixture of issues. We're improving on the supply chain, scheduling, planning whether it expedites costs and implementation costs that we don't expect to see in the second half of the year that we have seen in the first half of the year.

We're seeing some improvements in productivity as well we should gain and also some benefit as we outsource to lower cost suppliers. So that will give us a mechanical lift, to use your phrase.

The other thing that is happening is we're expecting to have a pretty strong fourth quarter that's related to the timing of some of our shipments. As we noted we have a very strong backlog and with the material planning and the work we have done, for instance, in our aerospace business, there is quite a significant size of orders that are scheduled to ship in the fourth quarter due to when we have the material coming in and assembly and production timing.

So it looks like margins then, while they may be depressed in Q3 and instrumentation would actually take a fairly--another fairly sizeable leap in the fourth quarter as a result of the stronger shipments?

I think we're expecting to see a sizeable increase in the fourth quarter, yes, but overall I'd use the guidelines that we're looking for 100 basis points every six months because some of that will be related to timing of shipments.

Okay, and then on the the revenue guidance for the segment, 25% including Hale Hamilton, can you give us a sense of how that breaks down between the acquisitions and organic?

That was approximately in low double digits from 12% to 13% organically. With the remaining gap getting up to 25% from the acquisitions.

Okay, and actually on those numbers, it looks like Hale Hamilton is actually running significantly ahead of at least the run rate you discussed at the time of the acquisition. Is that true and maybe give us an update on that business?

Both acquisitions speaking specifically here about Hale Hamilton and the instrumentation thermal fluid segment, but also it and the other acquisition in energy, Sage Brush, are both having good 2006s, after we purchased them, they both had surges in new orders for their end markets and both are doing--they're going to have better than a expected 2006 than we had anticipated at time of the purchase.

Okay.

Mike, we're very pleased with both of acquisitions. This is Dave. They have done extremely well, we've inherited some good management teams with them and their markets have improved. So all of that combined is showing the results that you indicate here above our expectations when we did the deals.

Okay and then can you update us again in instrumentation the price volume mix and exactly how much of the revenue year-to-date you are probably up two points organically in instrumentation and thermal fluid, just how much of that is price?

I would say there is probably three or four points of pricing in there with the offset being some unit decreases.

But in the second-half it looks like --

That is the first half this year over first half of last year.

And in the second half do you expect units to actually turn positive?

Yes.

With more pricing as well?

I would say with more unit volume than pricing in the second half of this year.

Okay and then the only market that we didn't hear for the first time in a long time is just about the U.S. Navy and the Maritime market, any change there?

We are getting the benefit of engineering revenue, where they are actually paying us on an increasing level for designs and engineering work on new fleet designs. So it's helping offset where we had some decreases in product shipments.

Okay and final question, in the first quarter you mentioned that there was about $700,000 in one time expenses in instrumentation, severance, warranty expenses and you didn't expect those to recur. I guess two items related to that, margins were down sequentially. So what didn't recur and I guess, what should we consider unusual in this segment for expenses, looking into the second-half?

Well, I had a lower--as Bill has described and Dave described we've had increased number of recruitment for new managers that have come in for both segments, but certainly in this segment.

And again in the second quarter we have had recruitment and other related management upgrade costs that are in that. We do expect some to a lesser degree in a combined basis than what we had in the first quarter for mechanical at $600,000 correction that we had for inventory.

And I think that type of one time cost will be decreasing as we get sequentially into Q3 and Q4 and into next year, because our recruitment, although it's going to be at kind of the lower levels in the organizations should be more spread out and certainly less expensive than maybe we had here in the first half.

So on top of the $700,000 you talked about in the first quarter, where do you view that number as today in the second quarter?

It's probably $400,00 to $500,000.

Our next question will come from Ned Armstrong with FBR & Company.

Good morning.

My question involved the instrumentation segment. From what I'm hearing it sounds like your issues are much more on the supply side as opposed to the through put side, although I understand you have issues there as well. Is that a correct characterization and if, so could you tell me what proportion of your problems are on the supply chain side?

I would say it's a combination. I don't know that I would say it's more on the supply side. The supply side is definitely a challenge and in addition to sort of a normal supply activities where we're trying to develop--in the middle of developing offshore supply capability and a different network of external suppliers that certainly is a contributing factor.

But we also have internal through put issues where we're re-engineering the manufacturing processes, the planning processes and trying to build more flexible capacity in the factories that we have, so we're in a position where we can do our further product line rationalization and consolidation. I would actually on balance say it's probably a 50/50 effect.

Okay, and which issue do you think that you will be making the most progress on in the near term, meaning the next couple of quarters and then the intermediate term meaning the next four quarters?

I would say the establishment of the external supply chain will make the most progress on that. Soonest as we work through relaying out the factories and manufacturing cells.

Okay. Thank you.

Next question is from Charlie Brady with BMO Capital Markets.

Hi, thanks. Good morning, guys.

Good morning.

On your backlog, how much of that you expecting to realize next 12 months?

Well, for instrumentation, we have got backlog at the end of the quarter, Q2 2006 was $290 million. Of that instrumentation thermal fluid was $114 million, and I'd say substantially all of that would ship in the next 12 months.

The other portion, which would be for the energy product segment which was $180 million in backlog at the end of Q2 2006, there is approximately $20 million that would fall outside the next 12 months and would be beyond that period.

And putting out the energy product segment, given the strength in that business and really the strength in the underlying end markets where the products are going into, on the margin level, it seems as though maybe the potential high water mark for margins in that business may be a little bit better than what they might have been thought a year or 18 months ago. Was that a fair statement?

That is a fair statement. This is Dave, Charlie.

I think there are two factors that are influencing that and one is the ability for us to raise prices along with competition as the whole market, the supply of valves and ball valves in particular into that market is a little constrained because of supplier limitations as far as castings and forgings are concerned. So in those market conditions it's natural to assume that we'll have some more upside pricing opportunity and we'll just have to see how that goes with the many competitors that we have in that marketplace, as you know.

The second thing is an interesting phenomenon is occurring for us in our favor is with the supply constraints to the market, it's becoming more and more acceptable to approve foreign made products. And ours, as you know, we're one of the few, if only supplier of ball valves to the oil and gas industry in the North American markets here that has their own factory in China.

So our Chinese made products are our products with our API stamp on them and our quality of certifications and so forth. So we think we have an advantage in getting our Chinese made valves accepted sooner in the process than other buy resell competitors, who are just buying and reselling somebody else's product.

And in today's constricted supply environment, it's becoming more acceptable to our end use customers and as you know, we make more money with that mix of product. So as that trend continues forward, the margin potential for this business increases as well. So I'm glad you asked the question.

Thanks. Could we just talk about the whole business of Spartanburg, which you indicated is going to take a little longer time to try to get that where you want it to be. Can you give a little more specifics on sort of what has to happen there versus the other parts of the instrumentation business?

Sure. There's a number of things there and I can think of them in different categories. One, we have been improving our capability from a management standpoint there and building out a stronger team.

Along the way, developing outsourcing, both local network, as well as offshore and looking through the product lines to really decide what makes sense for us to have a partner to make and what makes sense for to us make. So there is a supply chain piece of it as we develop that.

There are also is a portion of it, a little bit longer term that we're look at from a standpoint of consolidation of the facilities. We have multiple facilities in that group, with the main facility there in Spartanburg.

So we're going to look at what makes sense for to us do in the future as we develop other capabilities around outsourcing and internal flexibility in our manufacturing processes. There is an element that is near-term tactical and there's an element on it that's a little bit longer term strategic that takes us into 2007.

Great, thanks very much, guys.

Thank you, Charlie.

Next question comes from Mark Grzymski with Needham & Company.

Good morning, guys and congratulations on a good quarter.

Thanks.

Just turning to the instrumentation and thermal fluid division, wondering if this is a fair statement, it seems that incrementally the first quarter of this fiscal year was probably the weakest with some good improvements in this second quarter. Is that fair and if so, are we going to--the kind of improvement that you are expecting in the second half, is that sort of baked aggressively into guidance, or are you still being somewhat modest?

I think you are right in your observations, even though it hasn't shown up in the bottom line of our operating profit performance we feel our second quarter we made some progress in improving that business. And it's a mix effect as well. You've got three different product lines in there that we're talking about, aerospace, thermal fluids or steam and then the instrumentation, the Hoke product line business that we've referred to, and we have seen some good progress in the thermal fluid controls business and the profitability and incoming orders and their internal processes.

Aerospace, Chris Celtruda is getting his arms around everything right now, but even despite him just coming on board, we did see some improvement in the performance of that business as far as on-time deliveries and past two backlogs and things of that nature that the customer sees, even though we don't see it in the financials.

And then moving forward, we're showing that same mix improvement baked into the numbers. If you take a look at our year-to-date actual, our third quarter prognosis here and then using our total annual projections that we show on slide 10, you back into a pretty healthy fourth quarter and as we said, that's two things happening.

We expect to see profitability improvement flow into our P&Ls in that segment of the Company and a better mix in that fourth quarter, where things like loud landing gear shipments, a big lump of revenue in that fourth quarter, and those carry-up a much nicer margin as compared to the average of that total segment.

Okay, so while mix has definitely improved in your favor, it does seem like the first quarter was the bottom from an operational standpoint when you factor in the initiative that you are taking?

Well, it filtered into the second quarter and I think between the first and second quarter you are seeing the bottom of performance. And we're obviously expecting and we have more than wish and hopes, we have got actual specific action plans and supply chain changes and improvements that are scheduled, approved already and we have parts coming in right now that will further enhance our profitability and our performance to our customers.

Okay. Thanks and just touching on the balance sheet, Ken, wondering first off if you could elaborate a little bit more on the inventory issue. I think you did mention--I'm wondering what is the make-up there? Is that a lot of finish--just work in progress? And secondly, what is your goals for paying down debt through the reminder of year?

The rise in inventories are predominantly in raw and semi-finished components.

Okay.

And I would say a little bit in whip. Because we do not assemble into finished goods and orders, we essentially have subcomponents of raw materials and then wait and conform that to orders once received. So that is the bulk of the make-up of the inventory increase.

On the dent debt repayment in the second half we do have our final mortgage burning $15 million payment due on our senior note and that comes up in the middle of October, which we're going to pay off and at this point given our cash use, still predicted here in the third quarter, I will probably be borrowing off a revolver to make that senior debt payment of the notes.

Okay. Great. Thank you.

And just lastly, wondering in the global kind of climate that we're in right now, and what is going on in the Middle East, is there any--is this having any effect on you as far as you can tell?

Not that we can tell, no.

Okay. Fantastic. Thanks, guys. Thanks for taking my questions.

You are welcome.

Your next question comes from Jim Foung with Gabelli and Company.

Hi, good morning, gentlemen.

Good morning.

It seem like by the time you hit the fourth quarter a lot of the operational issues in instrumentation would have been kind of resolved, because you talk about doing 100 basis point of improvement every six months in 2007.

Is this fair to use the fourth- quarter results a baseline to look at your earnings potential going forward?

Well, you have to factor in the mix effect that we talked about earlier, Jim, the fourth quarter contains some favorable mix of revenues and heavy shipments of those favorable margin products.

So I don't think you can take that as a baseline going forward. You are going to have to factor in some of that mix effect. We'll probably be able to give you a better view of that at the end of next quarter, when we see the progress being made, and we can then start looking forward into '07.

Okay. But that mix doesn't create that much of a distortion, does it? Even just adjusting for that mix that that fourth quarter should still represent pretty good indication of what you can do in the instrumentation, as well as the energy business?

Instrumentation, again, I would say that that mix could have 1 point to 1.5 point improvement in margins for us

And the potential of profit improvement of the base business, as Bill said, we're going to march along with an estimate of improving that base, but say it's 9.5% of 1 point per six months moving forward and then the favorable mix on top of that, would--whenever we get it, and as we get it, will bolster the results of that segment.

So it's a pretty muddy--still a muddy picture, but as we get further along through this second half, we'll be able to clear it up.

Okay, and then in terms of the energy, is there any reason why you can't continue to grow the margins in the energy products with the tightness in supply and the ability to raise prices?

Well, we're hoping we can. My view of this segment as I said in other calls has changed dramatically over the last couple of years because of our market position and because of the profitability potential that we now see in this business.

So yeah, the answer to your question is yes, we're hoping that there is more potential.

What do you think is the top you can do in this kind of business? I mean, you are already hitting about like 12% margin in this segment right now. You think that this is a 15% or higher type of margin business?

It's hard to tell, it just depends on what everyone does. As you know it's a very fragmented market. There's a lot of competitors in different classes of product that we provide to the oil field sector, and it depends on everybody else.

We we are one of the top two or three in the world as far as the full package is concerned. But our pricing power is still limited because of the number of competitors that you have in different classes of product. So it just depends on that trend, and the trend towards acceptance of our Chinese made product which gives us a higher margin and profitability. So it's dependent upon those two factors.

Okay and how big is that Chinese business? That is obviously that growth, that margin expands because of that, right?

It's growing quite nicely, but we don't share publicly the size of that business, because it's really a supplier to the North American market.

Okay, and just lastly, I think earlier you gave kind of the break down between organic and acquisition and instrumentation and could you do the same thing for energy for the second half of '06 in your guidance? I guess for that--

The whole year, I will stick with the whole year, we said 35% combined.

Right.

And it looks like we'll be just touching about 20% organically in the balance from our acquisition.

Thank you.

We have a follow-up question from Charlie Brady with BMO Capital Markets.

Hi, thanks just a follow-up on Jim's question on the margins and I understand the mix issue in fourth quarter maybe bumps it up in instrumentation above a near-term normalized run rate, but still, looking at what you are saying about the 100 bips improvement year on year every six months, in '07 we should be pretty much into a double digit operating margin in instrumentation, is that fair?

Yes.

Okay, and then just something unrelated, with the acquisition of Industrya and getting onto the Airbus platform, anything good or bad regarding the A-380 and the changes that have been going on there? Does it help you or hurt you at all?

At this point, it hasn't hurt us or helped us. It's a little early to tell, but where we are in the value stream, we're doing okay.

Thank you. Thank you.

And we have no further questions.

I would now like to turn the call back over to our speakers for additional closing remarks.

Thank you all for listening in on our quarterly conference call. We look forward to hearing from you again or being in front of you again next quarter we're going to go back to work and do all the good things that we put on the table here today. So thank you very much for attending.

And this concludes today's teleconference and we thank you for your participation and have a wonderful day.