Circor International Inc (CIR) 2008 Q1 法說會逐字稿

(OPERATOR INSTRUCTIONS) Good day, ladies and gentlemen. Welcome to the Circor International first quarter 2008 earnings conference call. Today's call will be recorded. At this time, all participants have been placed in listen-only mode. The floor will be open to questions following the presentation.

I will now turn the call over to your host, Curhan McCann, from the Company's investor relations firm. Please go ahead, sir.

Thank you very much and good afternoon, everyone. Welcome to Circor International's first quarter 2008 earnings call. Our objectives today are to review the Company's recent performance and provide an updated outlook on 2008 with Bill Higgins, the Company's President and CEO, and Fred Burditt, Circor's CFO. After their comments, we will then go to Q&A.

But 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 future expectations. These expectations are subject to known and unknown risks, uncertainties, and other factors. For a full discussion of the risk factors, we advise you to read about them in the Company's 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 to Circor's CEO, Bill Higgins.

Good afternoon, everyone. And you saw in our earnings press release last evening in our updated guidance on April 18, we had a great first quarter with fully diluted earnings per share of $0.76, which included $0.01 for special charges. Orders, backlog, revenues and margins were up, compared to the first quarter of 2007, as well as sequentially, compared to the fourth quarter of 2007. And while we'll discuss segments later, I would like to note that this performance is broad-based across Circor. The Company received orders totaling $237 million during the first quarter of 2008, which is up 27% over the first quarter of 2007, and 39% above the fourth quarter of '07.

Our backlog ended the first quarter at a record $452 million, 45% over the first quarter of 2007, and 15% above the fourth quarter of '07. Many of the global markets we serve, including energy, aerospace remain solid. We had new order activity in maritime. Revenues for the first quarter were $177 million, compared to $161 million in the first quarter of last year, and an increase of 10%, and I'll note with a strong tailwind from foreign exchange. So the top line performed well, and we have backlog to continue good performance going forward.

But really, the best story in the quarter was our margin expansion. Operating income was $19.5 million in the first quarter compared to $12 million a year ago, which is an increase of 62%. Operating margins were 11% in the first quarter, compared to 7.4% in the first quarter of last year, an increase of 360 basis points. And similar to our order and revenue story, operating margin expansion was broadbased across Circor with improved performance in both the energy and instrumentation thermal fluids segments. Now, I will turn the presentation over to Fred.

Thanks, Bill. I will be referring to our presentation slides, starting with slide three which shows the consolidated results for Circor. As Bill has outlined, we had a very good quarter with a solid level of orders, record quarterly revenue, near record earnings, and we finished the quarter with a new record backlog. For the quarter, the consolidated revenue increases 10%, including approximately 6% due to currency, primarily the Euro appreciation versus the U.S. dollar. The currency benefit impacted the energy segment by approximately 9%, and the instrumentation thermal fluid segment by approximately 4%. Regarding consolidated operating income, we grew 62% over same period last year, about 15% of which was due to currency.

The first quarter operating margins at 11% were the best performance since Circor's was formed in 1999. We will elaborate later when Bill discusses this segment. Regarding diluted earnings per share, the $0.76 for the quarter included special charges of $0.01, due to the impact of the retirement agreement for the prior CFO. The $0.45 in the first quarter of 2007 included special charges of $0.03, largely related to our instrumentation and thermal fluid products segment closing a U.S. facility. Free cash flow is even with prior year as the increase in net income of $5.4 million was consumed primarily by adding working capital to support the increase revenues and backlog.

Now, I'll turn to slide four which lists the P&L in more detail. Since we will discuss the segment operating income later, I will add color only on the other categories. First, asbestos related settlement defense costs. As the asterisk at the bottom of the slide 4 describes, our Leslie Controls subsidiary has been and continues to be named as the defendant in asbestos related product liability action. During of the first quarter, our total expense for asbestos related settlement and defense costs, net of insurance, was $1.1 million, slightly above the first quarter of 2007 of $1 million. Regarding special charges, I did review that in slide three.

Corporate expense has increased from prior year, driven primarily by two items. First, is an increase in variable compensation, including share based compensation. Second, is an increase due to the timing of audit related expenses, between 2008 and 2007. Regarding that interest expense, it was lower in the first quarter 2008, primarily because we continued to pay down a good portion of our revolving credit facility during '07 and '08, and into '08. Total debt was $25 million in March 2008, compared to $66.5 million in March of 2007. The other nonoperating expense increase for Q1 '08, compared to Q1 '07, is due primarily to $0.3 million from net foreign currency translation losses and $0.2 million to other credit.

Regarding income tax expense, the increase is due to the rise in the pre-tax income. The tax rate of 32% is the same as it was the first quarter of 2007. Now to slide five, cash flow. Cash flow from operations and free cash flow remains steady Q1 '08 to Q1 '07. With significant increase in income of $5.5 million was more than consumed by working capital increases to support our growth and to build up transition inventories as we relocate facilities, as we transition to low cost region sourcing from internal manufacturing. We also spent an additional $1.1 million of capital expenditures in multiple areas, including investments to support new products. Now, Bill will speak to our segment performance.

Thank you, Fred. I'll start with slide number six, our instrumentation of thermal fluid segment results. As we've noted on the slide, the segment had very good order and revenue growth, compared to the same period in 2007. Regarding orders, in addition to the favorable currency impact, high growth was driven by our strong aerospace and maritime markets. Aerospace continues to have strong business from the high OEM billed rates and strong military business, especially spares on helicopter landing gear. The maritime orders included a nice large U.S. Navy order and a rebound in our U.K. ministry defense orders. Total backlog ended the first quarter 36% higher than the first quarter of 2007, and 17% higher than how we ended the year in the fourth quarter of 2007.

Regarding operating margin, this segment's 11.3% margin was 410 basis points over the first quarter of 2007. If you remove the impact of special charges for all periods, margin improved 340 basis points. These improvements came from the aerospace and instrumentation areas, partially offset by a reduction of shipments and the subsequential loss of fixed leverage in the U.K. maritime business, as we entered the first quarter with a very low backlog in that business. Backlogs have rebounded in that business as of the end of Q1, 2008. The margins were driven by several factors, including price increases, favorable mix of sales, and some benefit from a low cost region sourcing project, particularly the actions that we executed last year.

Looking forward into the second quarter, we anticipate many of these gains continuing. However, we had some delay in our low cost region sourcing activities due to, as we've discussed before that, the high complexity, the many different parts or SKUs, the number of parts that we are outsourcing, and the critical quality requirements. We are also feeling pressure from continued devaluation of the U.S. dollar versus foreign currency, especially in China. That said, our planned consolidation activities and instrumentation in aerospace are continuing. We anticipate most of those moves happening in the second and the third quarters. We expect overall -- we expect a tremendous amount of improvement activities in this segment continuing, during Q2 and the remainder of the year. This does bring some inherent risk with it and may cause volatility, especially as we look at it quarter-to-quarter. But, we're confident we have the right processes, and teams and people in place, to continue improving operationally over the longer term.

Now, let me go to slide number 7, the energy product segment. The oil and gas markets served by this segment continue to be very healthy for both the large international project business, as well as the domestic fabricated and our distribution products business. In addition, currency has had a very positive impact on revenues for energy. The orders comparison for Q1 were up across all businesses, compared to Q1 of last year, and were also up 63% sequentially. Distribution products are our short-cycle MRO business here in North America. In fact, we were sitting in our Oklahoma headquarters here in Oklahoma City. Rebounded strongly in the first quarter, with backlogs ending in Q1 54% higher than Q4 of 2007, after slowing down in the second half of last year.

Inventories in the distribution system have been burned down sufficient or enough that supply and demand appear to be back in alignment and at healthy levels. Both our domestic fabricated business and the large international project business, also continue to build backlog sequentially during the first quarter of 2008. Regarding revenues, currency accounted for almost half of the revenue growth in the first quarter of 2008, versus the first quarter of 2007. The small organic component of 1% was driven by strong growth in our large international projects, but offset by weaker sales and distribution, and domestic fabrication, which both had low backlogs entering 2008. As I just mentioned a few minutes ago, the backlogs increased as we have gone through Q1 and entered Q2 in 2008. As for profitability, this segment turned in another solid quarterly operating margin and over 16%. Sequentially, we improved 90 basis points after removing special charges in Q4, 2007, which included a $1.2-million gain on the sale of land in China.

During the first quarter, we shipped a very favorable product mix in our large international project business. This included a large valve special project order that enhanced segment margin 120 basis points. Let's now turn to slide number eight. On this slide, we point out our assumptions for our key end markets that we service. In our segments, we see almost universally solid foundations for 2008. Oil and gas prices are at record levels and consequently, rig counts are high.

Aerospace OEM orders remain high and the military demand, particularly for spare parts and repairs, hasn't diminished. Maritime related to the U.S. and U.K. Navies have recently picked up with new sub and aircraft carrier program orders. We are watching instrumentation closely, which is a global short-cycle business and it's impacted by many industries and capital spending around the world, but we haven't seen any dramatic changes there. In fact, at the end of Q1, ordered have picked up nicely.

Let's turn to slide number nine now. Our expectations for revenue and margins in 2008 are shown here. For revenue assumptions, we were raising our expectations for the instrumentation and thermal fluid control segment to a range of 5% to 10% -- sorry 5% to 7% for the full year. We had previously assumed 5% growth, which matched the Q1 results after removing currency effects. We have not changed our revenue outlook for the energy segment. Net of foreign exchange benefit, energy revenue grew only 1% in Q1. There was rebound we are seeing in the MRO short-cycle orders. We have a solid backlog to convert.

As for operating margins, here we've changed slightly from the last quarter, improving. Based on our progress in Q1, we've raised instrumentation and thermal fluid products segment operating margin to -- from 9.5 to 10%, to 9.5% to 11%. And energy is currently in the range of 15%, 16%. We were seeing material cost inflation in our energy distribution products business, particularly driven by commodity inflation as well as currency, and which we are offsetting with price increases. The assumptions on the other items we have on the page remain unchanged from our last call.

Overall, we anticipate having another strong performance in the second quarter with earnings per share, before special charges, at $0.74 to $0.83. This compares favorably to $0.60 we achieved in the second quarter of 2007. So when I summarize the outlook, we have good end market conditions. We have record backlogs. We are improving our performance to our customers and being rewarded with increasing orders. We've got stronger management teams in place, as I talked about before.

We are driving improvement in all of our businesses around the world on multiple fronts, to grow the top line and improve performance on the bottom line. In fact, as Fred noted earlier, we hit a new record for margin expansion. We are going to continue to deploy and drive lean manufacturing methodologies around the world at all our sites, and develop a culture that's an operational excellent culture for longer term benefit of our customers and shareholders. We will also continue to rationalize product lines and consolidate facilities to reduce our overhead fixed costs, as well as reenginner our supply chains, particularly globally, to take advantage of lower costs from foreign supply sources. With that, we would like to open up the lines for any question you might have.

(OPERATOR INSTRUCTIONS) We will go first to Charlie Brady with BMO Capital Market.

Thanks. Good afternoon, guys. Just had a couple of questions on the energy segment margins as we go into Q2 and the rest of the year. Given that we should probably have a pickup in that distribution business given the backlog build, could you talk about what that mix shift does to margins as compared to the large project business? Then also, should we expect then Q2 to see a sequential, but not year-over-year, but sequential decline in margin because you are not going to have that large valve project hitting in Q2 as you did in Q1?

Let me start with the first point around the mix shift. We do expect to see a mix shift because order backlog has filled in, although we have been steadily building project orders. So I don't know that it's that significant overall. The project order backlog has been filling in nicely. The large scale project orders that go out and sort of -- out into next year. But we have also some domestic fabricated project business that we are filling in for this year. It will be somewhat of a mixed shift as we go forward. We believe we can leverage volume on the short-cycle business as I talked about before, as we ramp up the volume there and leverage fixed costs. We are also very cautious of the increase in material costs coming out of China, and our supply chain that comes out of China. We are watching those cost increases as well. Your Q2 question was, would we see a decline because of the very nice project we shipped in Q1. We will probably see a little bit of a margin decline as we go into Q2, relative to that.

Assuming that we don't have that order, obviously in the second quarter. As we said, it impacted the quarter by 120 basis points. Assuming that no replacement for that, will have some depressing effect on the quarter. Your other question on mix, too, we -- if you look at the mix of businesses, the project business tends to have all the issue with mix of sales or orders, tends to have better margins overall than the other part of our segments. I think to both of those, it will have a little bit of a depressing impact, all things being equal.

Talk about pricing and the instrumentation business. For a long time, you guys were hitting a ceiling against the major competitor in instrumentation market who wasn't raising prices. What is allowing you now to get pricing through from a competitive standpoint? Others are now raising their prices also?

We have -- we seen a little bit of price movement this year that's really kicking in we believe, based on our best estimates in the second quarter. So we have raised prices ourselves. We are testing that. I wouldn't call it a dramatic change, but there is a little bit of movement there.

Then the bulk of the margin expansion instrumentation then would not be from price?

Just round numbers, about a quarter of that expansion was due to price.

Thanks very much.

The next question from Kevin Massey from BB&T Capital Markets.

Good afternoon.

Good afternoon, Kevin.

To follow up on that price question and ask it a little bit in a different way if I could. What other impediments are there to you taking more price? Is there some long-term contracts on your non-MRO business that maybe -- even if you have the ability to price higher, you may have to wait until those contracts come due?

There are long-term contract prices in particular businesses. The aerospace is a good example. The OEM businesses are typically contracted over a long-term. To change prices takes a significant negotiation. The project businesses that run across energy, and some of our smaller project businesses in the other segment, are pricing out into 10, 12, 14-month timeframes, and those prices are negotiated at the time of bid. They are typically a bid competition. We test the pricing on the project businesses as well. If we overprice on those, we end up losing the bid. We were testing on both sides of it. And then, the short-cycle business, we've raised prices as we mentioned, in both energy on distribution products, as well as instrumentation. There we test it and watch the volume, and the price elasticity, in reaction to the market.

Okay. And question on the commodity cost side, if I could. Whether it be steel, aluminum, brass, any of the metals that you are buying, can you talk a little bit more about what you are seeing there? It sounds like you are getting a little bit of price. Are you actually able to expand margins based on that price? Or only attempt to recover your higher costs?

I think to the large extent, we are just being able to recover our higher cost. We talked just before it's hard to get price. There is a long tail on some of our projects, so our ability to get price over and above most of our material inflation is not significant.

As we've talked about in the past, particularly in instrumentation, is the restructuring a lien and consolidation of the facility that we've been driving to expand margin.

Okay. Then one other quick one, if I could. Could you comment on seasonality as it relates to margins? If I look at the last couple of years, it looks like the first quarter tends to be the lowest margin quarter. I know there's some mix things that you mentioned, that may kind of skew things a bit as we go forward. In general, would you expect that to still be the case as you look out to the rest of the year?

Let me try that from a slightly different angle, Kevin. It's an astute question. In many of our businesses historically, the first quarter was the low quarter for us. A lot of that had to do with how we ran our operations. A big push at the end of the year, shipping the government or military work. As we become more of an operationally excellent company, as we become more what I call linear, and ship daily and weekly on a more predictable and dependable basis, as we have improved across the Company, we should see less and less of that.

So we had a very good Q1, and better than our previous first quarter. I wouldn't necessarily say that's a low point. The other thing I heard and when I was for instance out here with the distribution products representatives covering the market, that 2008 looks a little different than prior years, in that, it started off with low orders because of the channels were over stocked last year. Then, looks like it's picking up as we get into 2008. In prior years, that would have probably been the opposite. We would have started out with a high order rate, high backlog of orders into the year, and then sort of burn that down through the year. There is another fix going on. It's not necessarily seasonality that you see over the long-term.

Okay. Thank you.

We will go next to Mike Schneider with Robert W. Baird.

Good afternoon, guys. Bill, maybe just sticking with KF for a second. On that question or comment about the seasonality that is different this year, how much of what we saw this quarter and -- in the orders at least on the MRO side, is due to restocking at the distributors? We heard comments out of the distributors that they are incrementally much more positive. I presume it's just because of the new discoveries in gas and oil prices. Do you sense that this quarter was unusually boosted because of that channel fill?

I guess before I try to quantitative -- my action is that there is a significant increase due to restocking. There is also been real strong international activity that we've seen growing. That's somewhat of a reaction to the coming off of the negative effect in 2007, where the overpurchases were and overstocked distribution. I do think some of it is a pickup that we saw, particularly at the end of Q1and as we entered -- and through the month of April. March and April are real strong order months. We published the March data, but we were seeing good conditions in the market.

I'm sorry, there was a number you mentioned in your opening remarks or segment details. I'm sorry. The KF was up 54% or the MRO was up 54%. Was that backlog orders year-over-year or sequential? If you could repeat that?

Make sure I get that right. Yes. Ending backlog, first quarter or 54% higher than they were over the fourth quarter of 2007.

That is just for the MRO portion of the business?

That would be -- that's the total energy?

That's the total energy?

Hold on a second. We're just checking the numbers to make sure we have the accurate numbers for you here.

That's the total segment.

Is that the total segment, not just in North America.

Okay.

North America did rebound, but total backlog ended 54%.

That's driven in -- by strength of both sides of the business, engineered projects --

And that's international projects and MRO.

Got it. And then, in instrumentation, the two facility closures or moves that are underway. Can you give us a sense of where you are in that process? Have you actually started equipment in process in the move? And then, what's different this time, because there has been disruptive moves in the past. What are you doing new or different this time around to try to minimize that risk?

The instrumentation move is still underway. Our goal has been to have everything moved out of the facility by the middle of this year. We're generally on track with that. It might have moved a month or two, but let's say by Q2, Q3, we will have moved the majority of production out of the second facility we have in South Carolina. What's different this year is we've really taken a harder project management, six sigma lean approach to the move process. That doesn't mean there isn't risk. There is always a risk when we pick up machinery and move it, it the machine has been for a long time, getting it started may be a risk. But we have stronger teams doing it and a much more rigorous review process in what we call repositioning competency that we have been developing.

There is a significant amount of material that we outsourcing along the way. We were outsourcing ahead of the moves. So we outsource material, we qualify -- the outside vendor might be in Asia. We get the new material in before we do anything to shut down the machine. One of the reasons you see a little uptick in inventory, because we build inventories before we make those moves.

Okay. And then, the margin guidance for instrumentation, you bumped it up on the high end to 11%. With the pricing that is in place already, and then will roll through for the balance of the year, you are doing over 11% margins now for six months. Have you just built in -- and given that you are above the high end of the range. Have you built in a cushion just for the facility moves or do you expect a mix shift? Just give us some sense as to why you wouldn't finish higher than that.

We got a little bit of a tailwind in the first quarter on stainless surcharges not being quite as high as we thought or quite as high as they were last year. We seen them come back up a little bit. We also had some cost in our budgets and in our forecast for the move, that due to the complexity of taking some of the next level of components offshore, has delayed the move and has delayed some of that cost. And there is -- we also have in our budgets, a plan to expand our global sourcing in the investment in that in Asia in the second half of the year.

Okay. Then, Bill, just on the guidance practices, if you will. This is twice now in six months where the guidance on the forward quarter proved to be disappointing, and there was elements built into it, and then low and behold when the quarter actually is released, and in this case you actually positively pre-announced. The numbers prove to be significantly higher. What is it within a quarter, and maybe use this quarter as an example, that there is such huge variability and inability to pinpoint where you are going to be in the quarter? Is is simply a couple shipments that make the difference?

In this case, it's two-fold. The project businesses as I said before are -- they're very hard to predict and they're very large orders. So these are very -- these valves that we shipped in this project in the first quarter -- they're million-dollar valves. They're very hard to predict exactly when they will get -- not only through the whole process of certification, but then the shipping process, and the schedule-to-project process. There is a timing issue that is difficult, as well as the cost, because a large part of these orders are all custom-made. They're all made for the first time. And trying to really analyze and forecast what our costs are going to end up being has been tricky. That's the lumpiness of the project business.

The thing that's different this time, in the first quarter for us is that, all of the businesses across Circor, except for one and the one that is the lower performing one, we knew about. But all of the others performed at least at or above where we expected it be, and a couple of them much better. It's the opposite of the perfect storm. We have the size of our company, the diversity of the business units that we have around the world, and the amount of change that is underway right now with lien and six sigma, and the plant moves, and the product line rationalizations, and the upgrades, and the leadership team, there is just a lot of moving pieces. Typically, we have some businesses that do a little bit better and some that do worse. Then they sort of negate each other when we do our forecast. And that didn't happen this time.

Everybody performed to the upside. I would love to be able to sit here and say, that's the way it's going to be going forward. I think what's more accurate to say is, there is so much change going on in these businesses, it's really going to be hard to pin down quarter-to-quarter. We will do our best, but longer term they are going to improve. That's our goal with these businesses. I'm not trying to cop out on the question. I would have loved to be able to forecast the higher performance that we delivered. For all of the businesses to have performed well is not something I would have forecast.

I think just to add to that a little bit. The other major factor across our business is -- has been mix in this quarter, as Bill said. Those mixes all shifted in the right direction, all at the same time. Whether it was product mix within individual businesses or whether it was just mix between our businesses, they tended to mix up as we talked about with the big project businesses in the energy segment. Even within our thermal fluid and instrumentation segment, we had examples where we had favorable product and business mix in the quarter.

Okay. I didn't mean for that to sound like a complaint, because you deserve high congratulations on a great quarter. Thank you.

Thanks.

We will take the next question from Ned Armstrong with FBR Company.

Thank you. Good afternoon. In the presentation, you cited the maritime industry as being strong. Can you spend a couple minutes talking about the drivers behind that, as well as the duration that you anticipate for strength in that business?

That's a very special case. It's really a case, where the maritime, particularly the Navy business that we have, has been on a decline. The U.S. Navy business that we've had has been on a decline for a fairly long time. What we were talking about now is orders. There is a lot of engineering work and investment by our team, and have won programs on the aircraft carriers and then, behind that there are some other Navy ships. There is not a lot, but there's some other Navy ships around that for us will turn the corner. We are starting to build a backlog for the longer term in the Navy, that we have only seen a declining backlog for a number of years, at least four or five years that I can think of. That's on the U.S. side.

On the U.K. side, the Navy spend -- as well on the U.K. side has been stifled in the last couple years, with all of the shift of Department of Ministry of Defense funding for the war in Afghanistan and Iraq. away from Navy spend. We also saw decline in our U.K. Navy order rate in the last year. And that picked that back up with the astute program and a couple of other programs the Navy in the United Kingdom is going forward with. These are orders that are going into our backlog, as positive trend, but a lot of the orders don't get delivered and converted into revenue in 2009 and 2010.

Okay. Thank you.

We will take the next question with Ron Fisher with U.S. Steel.

Good afternoon.

Good afternoon, Ron.

Earnings likely to be up this year. Your forecast for cash flow is flat. I have to think then, that working capital is going to continue to be a use of cash. I'm wondering with all of the good things that you are doing leaning out and improving your operations, why working capital wouldn't be an addition to cash rather than a use?

I think we will have positive cash flow by the end of the year. A lot of our inventory improvements which are going to come from this activity, is going to happen toward the very tail end of the year. Plus, the receivable piece -- timing of receivables -- how much we will have to invest on receivables for the added backlog and -- Let me add an operational flare to that, because we spend a lot of time working on that inside. The benefits from lien that you would see in our factories, and those that have visited them, will first show up on the factory -- visually see a better flow of material. The customers will feel with better on-time delivery, performance, responsiveness, the show in quality, will start to see work-in-process inventory improvement.

But because of the mix of product that we have in Circor, the number of different product lines and types of products, particularly specialized customized products, the inventory piece is going to take a little longer. The projects we have underway to redesign and reengineering our production, our supply chain processes, will drive improvement and work-in-process inventory, but we'll probably add inventory a little bit as we outsource more and more, as we get through that period. The inventory improvement is going to be the last one to show up on the bottom line. We will work through that, and we have fully loaded plans to work it and we were working it aggressively. The management teams all have targets, significant targets, particularly in the second half of this year to improve inventory turns. There is a lot of work to do. We were in inning one or two on that front, in that game.

Thank you.

We will take the next question from James Fallon with Giavelli.

Good morning. Good afternoon, actually. Could you talk about acquisitions and possible divestments, Bill? I know your last couple months, you been looking at your businesses and just wondering what do you come up with so far, in terms of what you consider core and what you want to grow?

Jim, we continue to search for acquisition's. We are continuing to meet with companies and evaluate. As we've mentioned before in 2007, we struggle with a high price premiums. We walked away from a couple of decent deals late in the process, because prices just got too hefty for us. We couldn't see a return on our investment. We were still working that front as we go, as we have. Possible divestitures, we divested a couple of smaller product lines over the last two years with the newer leadership teams in place. A couple in Europe. A couple of product lines in the United States. Very, very small ones. We will continue to look at that and develop as we fill in our management teams and our executive teams, we will continue to look at the strategy overall. We don't have anything to report or announce on either the acquisition or the divestiture front. Just want everybody to know, we are still working through those and we -- analysis going.

Could you talk about the areas you are looking at for potential acquisitions and if you are interested in putting on another (inaudible) in the company?

We have communicated. We are more ready than we would have been a year or two ago to make a larger acquisition. An acquisition that is in say a 100 to $200-million range, is something we would not have considered two or three years ago when I joined Circor. We couldn't have handled it or integrated it very well. We have the management and operational teams now that we will consider a larger deal, as they fit within our core competencies.

Shifting gears a bit. Last two quarters, your margins were outstanding in both segments. Have you looked at your long-term outlook for margins in both segments? Have you bumped it up in terms of what the potential margins could be over the next three to five years?

Well, we have. I think we're going to have to go back and look at it again. We've -- as we talked about before, we typically looked at energy, and believe that 15% range was one we could sustain, and keep working productivity to offset material costs. As well as the entrance of a lot of other players into a very healthy market and being competitive there. The harder question for us has been on the instrumentation in thermal fluid side, how far we could go with improving the margins. And we've said in the past, we have a path. We have a path that we see in the 11% to 13% range on operating margins for that segment. We will keep evaluating that as we go forward, but over the next -- I think your number was three or four years, that's been our thinking.

Right. Okay. You are right there involved pretty much -- Great job. Keep doing it.

Thank you.

Thank you.

We will take our final question from Richard Glass with Morgan Stanley.

Hey, guys, nice quarter.

Thank you, Richard.

Way to set the bar high for yourself going forward, Bill.

Yes. I know.

Can you just help us understand on the SG&A line, how much -- is flat as a percent of sales. I'm wondering how much you are running through, in terms of extra costs or redundant costs, given some the moves and programs you have in place, and how that should progress from there in terms of getting more leverage out of that?

Not -- if I take acquisitions off the table for a minute, I expect to make longer term incremental improvements in SG&A. I'm afraid you want to add specifics to that. We saw a little bit of improvement over through the last six months in SG&A. The product businesses, and there is a lot of engineering and sales costs, we have to add up front when you grow that business. That's a little tougher. Then the product businesses, as we consolidate facilities, as we create a more lean production process, I fully expect we can get more out of our SG&A dollars.

We've really not spent a tremendous amount of money in these moves. We are spending $0.5 million to $1-million range in these areas. It's not a dramatic impact.

All right. Thanks, guys.

That does conclude the question-and-answer session. I would like to turn the conference back to Mr. Higgins for any additional or closing remarks.

I would just like to thank everybody for your support, your interest in Circor. We had a great quarter. We're working real hard across all of our businesses to do the best job we can for our shareholders. It's not going to be a linear process. The improvements that we're making across the businesses are going to be in a stepwise fashion. We're going to keep at it for long-term haul, and we look forward to our next earnings conference call on July 31, 2008. Thank you, everybody.

Thank you. That does conclude today's conference. We thank you for your participation and you may disconnect at this time.