Circor International Inc (CIR) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Circor International's Fourth Quarter 2007 Earnings call. Today's call will be recorded. At this time, all participants have been placed in a listen-only mode. The floor will be open to questions following the presentation. I will now turn the call over to your host, Mr. Curhan McCann from the company's Investor Relations firm. Please go ahead.

Thank you very much and good morning, everyone and welcome to Circor International's fourth quarter 2007 earnings call. Our objectives today are to review the company's recent performance and provide an outlook on 2008 with David Bloss, the Chairman and CEO of Circor; Bill Higgins, the company's Vice President and CEO-elect effective March 1, 2008; Alan Glass, VP General Counsel; Ken Smith, CFO; and Fred Burditt, Circor's newly appointed successor as Chief Financial Officer.

After their comments, we will then go to Q&A. Before we start, two administrative items. 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 risk factors, we advise you to read about them in the company's Form 10K, 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 CEO-elect, Bill Higgins.

Thank you, good morning, everyone. Before I begin with the highlights for the fourth quarter, I want to take a moment here to acknowledge Dave Bloss and Ken Smith, who are retiring this quarter, with Dave continuing as Chairman of the Board.

Their leadership and contributions during the past eight years, beginning with Dave's stewardship with the spinoff of Watts in 1999 have helped Circor increase its market value by 4.5 times through a combination of organic improvements and the number of acquisitions. So on behalf of the shareholders and all of the Circor family, I'd like to say thank you.

And now let's go to the highlights for the quarter. As you saw in our earnings press release, our fully diluted earnings per share for the fourth quarter was $0.60 and this included $0.06 for unusual transaction that we'll describe. If you net these items out, our adjusted EPS was $0.66, $0.07 above the high end of our previous guidance.

The company received orders totaling $170 million during the fourth quarter of 2007 increasing 1% over the fourth quarter of '06, an 8% decrease from the third quarter of 2007. For the full 12 months of 2007, orders totaled $772 million representing an increase of 9% over 2006, with year-end backlog remaining at near record level of $392 million, which is a 37% gain over 2006.

Our Instrumentation Thermal Fluid Control segment turned in sequential operating margin improvement this quarter of 11% before the special litigation charge taken. This is higher than we expected and due to a great shipment mix and profit improvement actions taken earlier in the year, such as outsourcing.

The Q4 margins, however, are above our currently sustainable run rate as it also included some beneficial year-end adjustments.

Incoming orders for this segment increased 26% in the quarter and ending backlog reached a record $137 million, which is a 21% increase from a year ago. So there's a lot of good news here.

As the earnings press release described, we did take a $0.10 charge in Q4 for litigation. The charge relates to one of the subsidiaries within our Instrumentation Thermal Fluid Control segment, Leslie Controls, that's incurring legal costs for asbestos claims that have been filed against over the past recent years, and Ken will provide more detail regarding this charge.

Our Energy Products segment continued to enjoy robust global oil and gas markets even though our North American business was softer in the quarter as expected due to the distribution inventory levels and a slowdown of activity in Western Canada. The profitability of this segment of our company is better than expected with 16.7% operating margin.

Now I'll turn the call over to Ken for further details on the quarter.

Thanks, Bill, and I'll be referring to our presentation slides starting with slide number 3, which shows the consolidated results for Circor. We had a very good quarter with a level of orders for a record quarterly revenue, near-record earnings, and our highest-ever backlog to start a new year.

For the quarter, the consolidated revenue increase was led by double-digit increase from our Instrumentation and Thermal Fluid Product segment benefiting from higher volume and price realization plus strong shipments by our Energy Products segments to large international oil and gas projects.

Regarding operating income, the fourth quarter of 2007 was driven by strong operating margins in both segments and operating income included a net charge of $1.6 million, or $0.06 per diluted share for three specific items.

First, the $0.10 per share charge to accrue estimated indemnity costs associated with open asbestos claims affecting the company's Leslie Controls subsidiary, a business that is reported in the Instrumentation Thermal Fluid Product segment, and I'll explain further when we get to slide number 4.

Second, a $0.01 per diluted share charge related to accelerated investing of equity awards for retiring executives, and, third, a $0.06 per share gain on sale of land at a former location in China previously used by our Energy Products segment.

Regarding diluted earnings per share, we had a very good quarter, even including the net $0.06 charge for the three specific items I just described. This quarter's EPS result excluding the three specific items was $0.07 over the top end of our guidance that we provided in our November 1, 2007 earnings call, principally due to the higher-than-expected operating margins from both segments.

And free cash flow was very good as working capital was reduced and profitability increased.

And I'll now turn to slide number 4, which lists the P&L in more detail. Bill will discuss the significant rise in this segment's operating income in later slides, so I'll add color on the other larger categories.

First, asbestos litigation costs -- as the asterisk at the bottom of slide 4 describes, our Leslie Controls subsidiary has been and continues to be named as a defendant in asbestos-related product liability actions. Leslie's costs for defense and resolution of these asbestos-related claims are accrued when probably and estimable, and given Leslie's brief history of claim settlements and verdicts, this typically has occurred at the time of settlements and verdicts, and defense costs are expenses incurred, and these historical amounts are quantified in the second row of numbers on slide 4.

And during the fourth quarter of 2007, Leslie recorded an additional liability of $9 million and an anticipated insurance recovery for $6.4 million for the estimated indemnity costs associated with resolution of all of its open current claims. The net amount of the liability of insurance receivable is $2.6 million, which was charged to the P&L and shows on the third row of slide 4.

Although Leslie believes this estimate is reasonable for settling all current claims, such estimate is also highly uncertain, especially because Leslie's claim history is relatively limited, very recent, and quite variable. As a result, the actual cost of resolving these pending claims could be substantially higher or lower than the current estimate.

In addition, while future claims are probable, Leslie's management cannot estimate the losses that may arise from such future claims, and we, therefore, have not accrued a liability for any such future claims.

Second on this same slide, special charges -- the Q4 2007 special charges were principally a $1.3 million gain from the sale of land at a former location in China used by our Energy Products segment as that segment moved its Chinese manufacturing plant to a much larger location.

The full year 2007 special charges also includes a $2.3 million charge for the cost of David's retirement agreement and its acceleration of vesting on previous equity awards, and the full-year total also includes a $1.4 million for costs of facility consolidation.

The 2006 special charges were principally a $400,000 nonrecurring expense for freezing our U.S. qualified pension plan effective July 1, 2006.

Corporate expenses have increased. The Q4 2007 increase over Q4 '06 stems largely from higher professional fees, the full-year increase over 2006 resulted from higher employer-related costs.

Regarding net interest expense, it was lower in 2007 for two reasons. First, we paid off fixed-rate debt completely in October 2006 and, secondly, we paid down a good portion of our revolving credit line during 2007.

In the other non-operating income category for the full year 2007, it does include a $1.6 million gain on the sale of an investment in a small European business previously reported in our Instrumentation and Thermal Fluid Controls Product segment, and that sale and gain was reported in the third quarter 2007, and that small affiliate had become an investment for Circor when we acquired DQS in 2003, although it had remained unrelated to our operations.

Regarding income tax expense, we had a 36% rate in Q4 2007 versus 28% in Q4 2006. The Q4 2006 rate had a benefit for an equivalent full-year tax credit for U.S. research when Congress reenacted it in Q4 2006, plus it contained an investment credit for our then-recently acquired French subsidiary. Our higher Q4 2007 rate reflects greater taxable income in higher tax jurisdictions plus the impact of revaluing our Italian subsidiary's net deferred tax assets as a result of recently enacted legislation, which reduced Italy's corporate tax rate effective January 2008. And in comparing tax rates for the full year 2007 and 2006, they were nearly identical at 31%.

Now to slide 5 on cash flow -- and you can see, we generated quite a bit more cash in 2007 from the marked increase in profitability and the reduced working capital. Even as revenues grew 13% and customer order backlog grew 37% to reach another record as of December 31, 2007.

Now to slide number 6, the balance sheet -- the balance sheet continues to be very healthy. We decreased debt in 2007 and ended the year in a net cash position, and our debt-to-cap remains in single digits.

And now I'll turn the call over to Bill Higgins, who will speak about our segments' performance.

Thank you, Ken, and now, looking at slide 7, our Instrumentation and Thermal Fluids segment results. As noted on the slide, the segment, again, had very good order and revenue growth compared to 2006 period.

Regarding orders, almost all the end markets served by this segment continue to be positive. Compared to 2006, our fourth quarter orders for this segment were led by aerospace, chemical processing, global industrial markets, and year-to-date all three groups in this product segment have been solid.

Regarding operating margin, this segment's 8.3% this quarter is net of achieving a much better-than-expected 11.1% margin from operating activities, which was then reduced by the 280 basis points for the first-time accrual of estimated settlement costs for all of Leslie Controls' existing asbestos-related claims, as Ken mentioned.

The 11.1% margin is much better than we had expected. If you will recall, we had expected this segment to exit 2007 with a 9.5% to 10% operating margin. Initially, we were targeting 10% based on the lean manufacturing initiatives, the site consolidations, outsourcing and productivity improvement initiatives we've enacted beginning in late 2006 and throughout 2007. And after a setback in the third quarter, the fourth quarter has now gotten us back on our longer-term track to transforming this segment and driving toward higher levels of growth and profitability.

That said, due to the nature and the number of operational changes underway, it may continue to be a bumpy change process from quarter to quarter, as we continue on that longer-term trajectory of improvement.

In the fourth quarter, we did see a pickup in savings from our low-cost country outsourcing initiatives as lower-cost materials worked its way from Asia through our inventories as benefited the bottom line.

And as we mentioned before, we closed one plant in the U.S. in the first half of 2007, sourced its production from low-cost Asian suppliers, and we continue to expand this low-cost sourcing initiative -- or our initiatives -- expect to consolidate a second facility in 2008.

In general, we are seeing longer-term benefits from our lean manufacturing initiatives as well as some benefit from price increases on select projects.

On top of these operational improvements, this segment benefited from a mix of higher-margin shipments to instrumentation customers in Europe and to aerospace and defense customers in both the U.S. and Europe.

While we don't expect this mix to continue, our goal is consistent in this segment, and that's to achieve and to sustain double-digit operating margins in the segment and continue to improve from there.

Now we move on to slide number 8, our Energy Products segment. The oil and gas end markets served by this segment continue to be healthy for both large international project business as well as domestic fabricated and distribution products businesses. Orders comparison for Q4 is unfavorable, in part due to a higher order intake in the Q4 2006 and the order activity in North American distribution products trended down in the second half of 2007 as distributors normalize or rebalance their inventory levels, a condition we expect to ease in the first part of 2008.

And although not shown on the slide, Q4 2007 orders were 19% lower compared to the third quarter of 2007 due to orders of large projects and fabricated pipeline packages being lumpy.

Nevertheless, overall, the energy market for us continues to be very healthy, in particular, the activity on large international projects.

Our revenues on this slide are nearer the order growth, the quarter's decrease in revenues compared to a very strong Q4 2006, when shipments to both large international oil and gas projects and to North American distribution were strong. As I mentioned earlier, in the Q4 2007 shipments to our large international oil and gas projects were strong, but our North American MRO revenues through distribution were lower as distributors normalized and rebalanced their inventories.

Looking at the full year revenue growth was led by shipments to large international oil and gas projects and followed by strong shipments of fabricated pipeline packages.

So with the segment's second-highest level of backlog totaling $255 million heading into Q1 2008, we continue to expect a solid 2008. As for profitability, this segment turned in another solid quarterly operating margin at over 16%. This included 150 basis points for a gain on the sale of land in China, as Ken mentioned, was the former site of our manufacturing venture.

This segment's continued mid-teen margin performance is a result of several things, starting with the timing of shipments to large international projects. Additionally, the benefits from previous and ongoing activities that include improved factory and supply chain performance from our lean manufacturing improvements in North America and China operations, which has enabled us to bring on efficient capacity expansion, to continue productivity improvement and faster response times to our customers, plus we have benefited from the expansion of our production in China, our manufacturing plant there, which serves as a key supplier to our North American customers and provides us a lower cost of goods sold overall.

So let's now turn to slide 9. On this slide we point out our assumptions for our key end markets that we serve. Nearly all our businesses are expecting a positive 2008, and we've already described the expected strength of our oil and gas exposure. In our other segment, Instrumentation and Thermal Fluid Products, we're still anticipating solid order rates from aerospace, power generation globally, and other general industrial sectors with some softness in sales to the maritime market.

Now let's turn to slide number 10, which shows our expectations for revenue and margins in 2008. We expect revenue growth for both segments with record backlog for Energy Product segments to help drive double-digit growth.

Regarding operating margins and, in particular, our Instrumentation and Thermal Fluid Product segment, we expect to continue making progress, improving our supply chain, improving our operations and materials outsourcing to low-cost suppliers as well as continuing to rationalize product lines and facilities to lower our cost of operations.

Our full-year expected margins for this segment is 9.5% or 9.5% to 10%, as I have stated before. We are making progress. It's no small task, it takes time, and it's not a linear process, as we've seen, quarter-to-quarter. We have much stronger management teams in place, and we expect to see continued progress in this segment.

We anticipate operating margins for our Energy Products segment to approximate 15% this year, as we anticipate keener pricing for new orders in North America in 2008.

Regarding corporate expenses, we expect an equivalent amount in 2008 as incurred in 2007, and we anticipate income tax rate of 32% for the full year. This is a slight increase from the 31% in 2007 primarily due to the expiration of U.S. research and development tax credit as of December 31, 2007.

And not shown on the slide, we've provided EPS guidance in our earnings press release for the first quarter of 2008 of $0.54 to $0.58 per diluted share. This includes an expected $0.02 for special charges related to facility consolidation.

The range of $0.54 to $0.58 is favorable to the first quarter of 2007 when we reported $0.45 per share, which included a $0.03 special charge related to facility closures.

And the primary differences through the first quarter compared to Q1 2007 are expected to be higher operating margins for our Instrumentation and Thermal Fluid Product segment, partially offset by higher corporate expenses for variable compensation and professional fees.

Our EPS estimate for Q1 2008 is lower than the fourth quarter of 2007, primarily due to lower revenue and two factors, the first being our Instrumentation and Thermal Fluid Product segment has benefited in Q4 2007 from a mix of high-margin shipments and performance-related price adjustments on certain projects and, second, our Energy Product segments benefited in Q4 2007 from the gain on the sale of land in China and from other favorable year-end adjustments that do not repeat in the first quarter of 2008.

So to summarize, summarize our outlook, we have good end markets, healthy backlogs, we have a great balance sheet. We're improving our performance to our customers and being rewarded with increasing orders. With stronger management teams in place, we are driving improvement on multiple fronts to grow the top line and improve performance on the bottom line, as we expand margin. We are deploying lean manufacturing methodologies globally at all sites. [It is all] the culture of operational excellence and for the long-term benefit of our customers and shareholders, and we'll continue to rationalize product lines and consolidate facilities to reduce fixed costs as we reengineer our supply chains, particularly globally, to take advantage of lower-cost foreign supply.

So, in summary, this gets us to the full-year guidance we've shown on slide number 10 and, with that, we'd like to open up the lines for any questions you might have.

Thank you. (Operator Instructions) Charlie Brady, BMO Capital Markets.

I wonder if you could just quantify for us the instrumentation margins -- how much of a benefit that strong margin came from the adjustments and from a product mix during the fourth quarter?

Approximately 50 basis points, Charlie.

Combined for both of those items?

Yes, and then we also have -- also contributing to this sequential change, we have, traditionally, the fourth quarter is very strong for that segment, and also we have a little bit lower revenues here in the first quarter seasonally, and that's probably another 250 basis points impact.

Was there a (inaudible) in the fourth quarter from Q1 or Q2 that affected that at all?

There's a little bit of that, Charlie, particularly in the aerospace and defense-related product lines where we ship when we're ready and to the customer cycle. So, yes, there is a higher level of shipments, and they tend to be a higher profitable mix of shipments that go on the fourth quarter that don't necessarily recur in the first quarter.

Okay, and then on slide 9 in your market assumptions, it looks as though the maritime, U.S. Navy, has finally shifted over into the positive column, which I haven't seen for a while. Can you just give a little more color on what's happening there?

The maritime, in general, is a mixed picture, and it's a mix picture when we look at it from both an order and a revenue standpoint. The long-term cycle of the Navy businesses continues to be -- particularly where our product is in the cycle, has been on a long-term down cycle.

What we're seeing on a positive front is a pickup in orders as the Navy is reconstructing some new ships, and we've won new business. So we're going to see, as we get into 2008, we're going to see the U.S. Navy business pick up in orders, but a lot of those orders will go into out years.

We have just won a program in the UK Navy as well, in the astute program, and some of those orders will ship in 2008. So it's still a mixed picture. We're not out of the woods yet, but it looks like we've kind of hit the bottom of a long decline in the cycle, and we should see it start to pick up -- probably more in 2009 than it is in 2008.

Amit Daryanani, RBC Capital Markets.

Just a quick question in your debt-to-cap on 5%, right, and I'm just wondering the amount of cash we expect to generate, going forward. Could you (inaudible) what you intend to do with the cash [bead] that -- share buybacks or potential acquisitions?

Well, the historic and current outlook is that we would like to redeploy our capital on acquisition, that remaining our number-one priority and target to redeploy that. So that continues to remain our current thinking.

All right, and I think you spoke once in positive adjustment that impacted your margins, that one (inaudible). Could you talk about what they were exactly?

Well, in the case on both segments, they had the benefit as we get to the fourth quarter and are finishing up and concluding our audit for the year; we are truing up estimates that we've accrued during the year for various bonus plans and other warranty, for example. And so those are true-ups. In the case of Instrumentation and Thermal -- actually, both segments had the benefit of some particular pricing callbacks that we had for performance-related achievement, particularly in the instrumentation segment.

Could you guys quantify that for each on the segments?

I said it was 50 basis points for instrumentation, and it's approximately 150 basis points for the energy segment.

And I may have misunderstood this, but I thought you said 50 basis points for mix and positive adjustments initially, is that wrong or is it 50 basis points just for this one-time adjustment?

I'm sorry, I misspoke. That 50 basis points is just the adjustments. So the other --

Finally, we see the industry trends have been sub-(inaudible) for a while. Could you talk about what plans you may have for 2008 to potentially expand that number?

Well, we've got, as you may recall, over the last year, year-plus, year-18 months, we've on-boarded it to the management ranks of both segments, and virtually every business unit, a higher standard and capable folks who have come from lean manufacturing backgrounds, people who have successfully built global supply chains, a high proportion of them have got black belts and green belts in six sigma, and they are bringing a different level of thinking as to how we manage our inventories, how we tie demand, end-user demand, to the intake of inventory and the timing of how it's manufactured so we can ship to customers and reduce all the elements of our investment of inventory along those pieces of the fulfillment chain.

So we've had certain business units have gotten pretty linear, as Bill could expand on and color, who have, with these -- well, there are some of our similar business units -- we've got us a handful now that have production and inventory flow that's pretty linear to the customer. And we've seen some traction in certain business units for increasing inventory turns, and we're looking for, certainly, more of expectation that we'll have faster turns in '08 as some of the initiatives by these new leaders take hold.

Let me add a little color to that. Inventory is a big focus for us. It is an area that we haven't made the level of progress we have expected nor do we believe we should be making at this point. It is part of our compensation and bonus programs, we're targeting people with significant inventory improvements and businesses across all of Circor.

The improvements you would see if you look at our lean manufacturing initiatives start first with our improvements in our service to our customers, and that's very visible in the metrics that we measure.

The second level of improvements you would see are in the factories themselves -- the visual layout of the space we've freed up, and that's enabled us to consolidate some of our plants as we've freed up that space. So the benefit we've seen is more on the margin expansion line than it is on the inventory line, just yet.

We have incurred higher inventories for two other reasons. One is with the basic growth in the business, particularly in the project businesses where we carry inventory for a longer cycle, but also as we've moved our supply chains global, we've added a little inventory in the buffers to cover it.

So working process inventories on the factory floor has improved, but the net overall inventory turns, you're not basically looking flat. Some businesses have improved and other businesses are still below where they should be. So we'll have a great focus on it in 2008, and it's the last area, really, when you think about lean manufacturing to show the benefit, and it's the most difficult, particularly in a business as ours, with all the different products and business units that we have. But it's at the top of our priority list.

Ned Armstrong, FBR Capital Markets.

With respect to some of the margin improvements that you seek in your Instrumentation and Thermal Fluid Controls businesses, you mentioned several sources; notably, sourcing lean efforts. How do you see each of those contributing? Are they even contributors, or have you got most of the sourcing and now it's lean? Can you talk about that a little bit?

Sourcing, we still have a ways to go. We've seen some contribution there, but, really, we're very early in building a global supply chain in the Instrumentation and Thermal Fluid business. We've got more experience there on the energy side of the house. So we've got a lot more work to do there.

The benefits are mixed. We are seeing benefits from selected areas where we've been able to increase prices on projects -- that's helped us historically. We've been testing the market. We have achieved significant levels of productivity in some of our businesses and continue to drive that.

So it's really from multiple activities, which makes it hard sometimes to predict it month-to-month and quarter-to-quarter how it's all going to come together, really, in multiple locations.

And they're all contributing on a relatively equal basis, would you say?

Oh, it's different in each business.

Okay. And then the mix -- is that more a result of just how the order patterns happen to be, or is that more the result of your trimming different product lines and emphasizing certain products?

It's a result of customer order patterns, particularly in the defense and aerospace areas, the military areas.

Okay, and then with respect to the debt levels, you have them at pretty low levels. Is that level -- is that now sustainable or did you just happen to be able to pay off a good chunk of debt towards the end of the year?

It was pretty steady through the year, and although we did have some stronger cash flow here in the fourth quarter, it allowed us to pay that down.

But you anticipate being able to keep the debt at approximately these levels, or do you think it might pop up a little bit again?

Well, I know we've got -- we'll pay some taxes and some bonus money here in the first quarter, actual cash outflows, and we typically pay our global insurance premiums in the first quarter, so we'll have some outflows that we don't have reflected in the other three quarters of the year. But throughout 2008, cash flow would remain strong and expect to be at this level. Hopefully, we'll get extra bump, as Bill described, for all the inventory reasons that should bring that down and accelerate the turns. So as to then the acquisitions, I think we'll still remain under-levered here.

(Operator Instructions) Michael Schneider, Robert W. Baird.

Maybe we can start on the Instrumentation Thermal segment. Just a follow-up on the low-cost country sourcing initiatives -- we talked last quarter about the savings had yet to really flow through the inventory, and now we saw it this quarter -- are you able to determine how much yet flows through in the first half from the initiatives you've already got placed -- in the inventory you've already got in place -- or have we seen most of that flow through during Q4?

Mike, no, we haven't seen most of it in Q4. It's really just started, and it's going to be a long-term improvement as we go forward, because as we outsource the second facility, or consolidate the second facility, there is a significant share of outsourcing that goes on with that, and to do that, we have to look at it product-by-product, product line-by-product line. So getting out of the second facility that we're going to close in 2008, in the Instrumentation group, the benefits of that will even trail into the second half of 2008 into 2009 as we get through all that, as we experienced in 2007.

Okay. And then the -- so we look at the segment margins in the second half with some of the benefits you've talked about, were 9.2% blended third quarter, fourth quarter, you just (inaudible) for that. Then the guidance for next year is just 9.5% to 10%. I'm trying to determine what changes or are you just being conservative given that the next should be blended about the same across the year, should get some of the same year-end true ups or something close, more lower-cost country sourcing, just -- and especially in comparison to what we had been talking a year ago about 50 basis points of improvement every six months. You're not even assuming that, really, for the year. Could you give us some perspective as to what actually hampers the margins in '08?

Well, one, we want to sustain them quarter-to-quarter, we don't want to go through what we went through in the third quarter and the fourth quarter and there's still a number of areas we're working on.

We're watching costs of material as well as considering how we can accelerate some investment for infrastructure in low-cost countries, which would involve a combination of capital and expense to expand our capability, particularly in Asia for the segment.

So most of the work we've done in sourcing in Asia had been on the energy side, historically, and we've piggy-backed off that, but we're looking at increasing our capability on the Instrumentation and Thermal Fluid side.

So we're looking at the year, we want to drive into that plus-10% range, but we know we have a few quarters here to still work through with consolidating a major plant and outsourcing and all that activity. So we want to improve it and sustain it and then go from there.

And does the margin forecast include any unusual items or what are your expectations for unusual items in '08?

Well, we have -- as we described in the earnings press release, we have a couple of cents here in the first quarter related to two facility consolidations that we're working on. And there could be some trailing cost of that related to both of those facilities in the second quarter. So in the aggregate, that's -- those two are our primary ones particularly here in the first half in order to -- there's not other elements baked into this guidance that we've put on the slide.

So the 2Q expenses, Ken, are in this forecast on slide 10?

These -- what's on slide 10 excludes special charges. So we've got a couple of cents here in the first quarter that we put in our press release. It's included in that EPS range that we provided, and we're filing $0.02 to $0.03 anticipated in the third -- and that's during the second quarter of '08.

Okay, and then in terms of pricing, Bill, you mentioned additional costs of materials and instrumentation for the year. Can you update us on pricing across the major product lines, what you've gone out with, and what the reception of that has been given that the market seems to at least become a little more sensitive?

We have continued to test the pricing fronts in all of the business units. We have had some success, for example, in the aerospace units where we've looked at -- which have consisted of a lot more long-term contracts while we've been able to successfully renegotiate those based on general inflation costs and material increasing over the last few years.

We've tested the water, for instance, in the whole product line. I don't know that we're making headway on price increases there yet, however, as we do any special project work, we're continuing to test the waters on price, and we've probably got a little bit more on special projects than we have on basic products.

Stainless steel costs, which we've talked about in the past, on the cost side, surcharges tend to be easing a little bit. We're watching that to see what kind of an impact that will have. That's on the Instrumentation side of the house.

On the Energy side of the house, we're watching the costs as well, and the -- we're watching, for instance, with our supply chain out of China, the appreciation of the renminbi. We expect some increased costs due to the appreciation -- the currency change.

Okay, and then, sticking with Instrumentation, the revenue forecast of 5% growth in '08 is down, call it, 2 to 3 points organically from 2007 -- which business, in particular, might you expect to slow the most '07 to '08?

Instrumentation Thermal Fluid revenue growth?

Yes. The total growth rate on slide 10 is estimated at 5% for the year, and with currency it did about 9% organically in 2007. So it looks like the growth is flowing, at least in some of the businesses, I'm just curious what businesses you are anticipating slower growth in '08?

Well, TFC, in particular, had a very strong 2007. They had, in particular, the fourth quarter was one of the benefits that particular segment enjoyed in the fourth quarter '07. But they also had a really strong 2007, particularly for end markets that typically are 1% to 2%, 3%, market growth. And so we don't think TFC will be as robust in '08 as it had experienced in 2007. And the other two are projecting -- we think we're going to be -- the aerospace and instrumentation will be comparable, a little stronger than what we had for '07.

Okay, and I apologize, switching to Energy -- Bill, you mentioned the margin should be roughly flat year-to-year at 15% because of keener pricing in the U.S. I'm curious about that comment, and maybe overlay some perspective on what the mix does if distribution -- if the distribution depletion of inventory is over and that business actually accelerates in the mix. Is that good or bad for margins? And then, again, some color just on your keener pricing comment.

Yes, the keener pricing comment is with regard to capacity and supply catching up with demand over the last year or so, and then when we experienced the wet summer last year, the inventories basically getting full. And then working through, we expect, as I mentioned in my comments, the rebalancing, the normalized inventory to be in line with rate count, so to speak, in customers. In the first part of 2008, and we're watching that right now, it looks positive. We'll work through that.

We don't anticipate that when it catches back up that we're going to have the kind of pricing power we had for the last several years, where we were able to raise prices into the face of significant increases in demand where the capacity wasn't able to respond as quickly as we were able to.

So we're watching that, and we just don't expect to have the pricing capability we've had and, in fact, there could be some pricing pressure as it becomes more competitive.

The -- what was the other side of that?

Just the mix change, if distribution, indeed, does come back or normalized, what that does to the margin mix?

It's somewhat a function of the project mix itself, because within the project mix there is a mix of higher value-added valves, more specialty valves, higher service, special material valves that command the higher margin. So even within the project mix, that mix can shift around quarter-to-quarter, which contributes to the lumpiness of it.

And the benefit we've had in the MRO business in North America, as we've really leaned out the supply chain and added China is we can leverage the volume fixed overhead for the contribution is strong there as the volume increases.

So it will change, over time. It's not a straight answer, I guess. It will change, over time, due to the mix comparison within projects, but the contribution is strong on the MRO side with volume.

Okay, and, finally, just Dave and Ken, congratulations. You guys have done a remarkable job. Watching this company unfold since 1998 has been a pleasure, and enjoy your time off.

Richard Glass, Morgan Stanley.

Hey, guys, nice quarter. So Dave gets a retirement package, I suppose Ken's going to want one of those, too. In all seriousness, just echoing what Mike said, you guys have done a great job for shareholders and the company. So congratulations, and we're sorry to lose you. But we have got a great management team to pick it up, too, and on that note, to sum up Mike's questions, it's good to hear your guidance in conservative, but moving to your assumptions on cash from operations for 2008 that you gave on page 10 here, what is the assumption inherent in that -- in the working capital change?

Working capital is probably a positive $20 million or so, in that number?

A source of $20 million, you're saying?

Yes, source. If it's a question of whether it's a source or a yield, that answer is it's a source.

Okay, so you are assuming you get some inventories --

Oh, yeah, that's a big piece of that. It will be a reduction from inventory in increased terms.

Okay, and then on the CapEx, can you talk about where the $17 million is going? It's a pretty good-sized increase off of the 10 and 12 of the last -- 12 and 10 in the last couple of years.

We have some key projects that we've won that we need some particular machine tools for. Bill mentioned earlier to the U.S. Navy becoming an end market, or at least an end customer that swung over to the positive column. For those programs, both the astute and an ongoing one here for the U.S. carrier, [GORAM] we need some machine tools that will be delivered here in 2008 that will make those butterfly valves for those programs. And so it's probably, of that $17 million, there's probably $3 million to $3.5 million of new machine tools particularly geared to new products or new programs that we want that would be different than the rate that we just had for '07.

Okay, so it's pretty directly revenue-generating in a pretty good payback period?

Yes.

Amit Daryanani, RBC Capital Markets.

I just had a really quick question -- what sort of commodity prices are built into your margin expectations for 2008?

Commodity pricing -- you mean commodity costs or what we're expecting a barrel of oil to be?

No, commodity cost like stainless steel and brass, for example, to you guys?

Well, in the Instrumentation we are most affected by particularly stainless steel surcharges over in our Instrumentation and Thermal Fluid segment and, particularly, the Instrumentation division within it, and it's -- what we've baked in here to our plan and the outlooks that we've got on page 10, essentially no significant uptake from the surcharges that we've been bearing -- the costs we've been bearing -- through the fourth quarter of '07. So we've not baked in any appreciable rise.

I think we've assumed that stainless, which is the one that really affects us, we're looking at relatively flat, going forward here, based on where we ended the year.

Obviously, the price moves up. We have not leveraged in past on the price increases on the instrumentation side?

Not historically, we have not, and that has been one of the major issues for the Hoke part of the Instrumentation group, which is why we're doing the outsourcing -- the facility closures, the China, Asia, low-cost supply development.

All right, and then just the low-cost material procurement supply development -- what percent of your building material is procured from low-cost regions today and how high can that number get to, over time?

Well, it's a different answer between the segments. I would say Energy, our Energy segment, particularly the products that are distributed and sold through the North American markets -- it's probably in the range of 50% to 60%. It's procured, built, assembled, machined, in low-cost countries.

If you contrast our other segment of Instrumentation and Thermal Fluid, that answer would be a lower percentage, probably in the 20% to 25% range. And as Bill has given a lot of description to on this call, it's our biggest opportunity to drive margins up not only for the company but particularly that segment.

When you shifted the program from North America, Western Europe to low-cost regions, is it reasonable to think they get about 15% of cost savings out of it, or is that number different to you guys?

Fifteen?

Yeah, 15, 20%?

I would say at least. We wouldn't do it for less than that.

And is there any reason why the Instrumentation segment could not get somewhere close to where the Energy segment is right now, over time, in terms of 50% to 60% of the products procured, assembled in Asia?

I think, certainly, that it could have the same -- to the same proportion of its cost of goods sold procured from those locations, it could have the same cost advantage. But one of the gates as we have talked about previous calls and Bill mentioned just earlier, we do have some other investments that we're trying to make that may dampen some of those -- instead of having all those savings drop to our bottom line. But it certainly could put us in a position that is advantageous as we got for the Energy segment, but some of those products, particularly Instrumentation and Thermal Fluid are more highly engineered whereas that's not necessarily the case with some of the bread-and-butter products we sell out of distribution products for our Energy segment. So I'm not so sure we could move such a -- as great a proportion offshore as maybe the Energy segment of ours has already been able to accomplish.

It appears there are no further questions at this time. I would like to turn the conference back over to Mr. Higgins for any additional or closing remarks.

Thank you, everybody, we appreciate your time and your interest in Circor. We are looking forward to our next call on May 1st, and before we wrap up here, I'd like to turn the call over to Dave Bloss for a few concluding remarks. David?

Thanks, Bill. Since this is my last earnings conference call as CEO of Circor, I'd like to take this opportunity to say thank you to all of you who have invested or provided analytical coverage to the company over the past eight-plus years.

Circor has come a long way since its spinoff and formation in 1999, and we've taken great care to develop and attract an extremely strong management team headed by Bill Higgins, that should take us to an even higher level of performance.

I sincerely appreciate the opportunity that I have been given to lead Circor through its first chapter of what I believe will be a great success story. Thank you again for your support and professionalism to all of you.

And this concludes today's conference. Thank you for your participation, you may disconnect at this time.