Circor International Inc (CIR) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to Circor's First Quarter 2009 Conference Call. Today's call is being recorded. There will be an opportunity for questions and comments after the prepared remarks. (Operator Instructions) At this time, for opening remarks and introductions, I would like to turn the call over to Alexia Taxiarchos. Please go ahead.

Thank you, and good morning, everyone. Welcome to Circor International's First Quarter 2009 Conference Call. On the call today is Bill Higgins, the Company's Chairman and CEO, and Fred Burditt, the Company's CFO. The slides we'll be referring to today are available on Circor's website at Circor.com under the link, "Quarterly Earnings," on the Investors page.

Today's discussion contains forward-looking statements that identify future expectations. These expectations are subject known and unknown risks, uncertainties and other factors. For a full discussion of these factors, the Company advises you to review Circor's 2008 Form 10-K and other SEC filings. All of the Company's filings are available on its website at Circor.com. Actual results could differ materially from those anticipated or implied by today's remarks.

Any forward-looking statements only represent the Company's views as of today, April 30, 2009. While Circor may choose to update these forward-looking statements at a later date, the Company specifically disclaims any duty to do so. And now I'll turn the call over to Bill Higgins, CEO for Circor.

Thank you, Alexia, and good morning, everyone. During today's call, I'll start by providing highlights for the quarter. Fred will begin our slide presentation and offer additional details on the numbers. I will then discuss our segment performance and our view of our markets, and then we'll go to questions.

So let me begin with a few comments on our performance, which we continue to execute well in Q1, especially given conditions in many of our end markets. We hit the top of our revenue guidance at $176 million revenues, and we came in at the middle of our range for EPS reporting $0.61 per diluted share.

Adjusted operating margin for the first quarter improved 80 basis points to 12.5% on a 0.5% decrease in sales compared with the first quarter a year ago. This performance reflects our commitment to operational excellence, having great leadership talent in place and continuously improving our business processes with lean and global sourcing.

Our orders for the quarter reflected the global economic downturn. We received orders totaling $121.9 million during the first quarter of 2009, down 49% from $237 million in Q1 of '08. Our backlog at the end of the first quarter was $298.1 million, down 34% compared to the first quarter of 2008, and down 13% sequentially from the fourth quarter of 2008.

The backlog includes $12.4 million from our March acquisition of Bodet Aero in our aerospace businesses.

With that, I'll turn the presentation over to Fred.

Thanks, Bill, and good morning, everyone. I will be referring to our presentation slides starting with slide number 3, "Financial Results," which shows consolidated results for Circor.

As Bill discussed, we reported a good quarter in terms of sales and adjusted operating income. Consolidated revenues for the first quarter were essentially flat with the first quarter of 2008 at $176 million. Organic year-over-year growth was 6%. Revenues were eroded by a negative 8% currency impact partially offset by a 1% contribution from acquisitions.

Organically, by segment, Instrumentation and Thermal Fluid Controls grew 2%, and Energy grew 10% in the first quarter versus the first quarter of 2008.

In our discussions today, we will be referring to adjusted operating income and adjusted operating margins. These metrics exclude pretax charges associated with asbestos affecting the Company's Leslie Controls subsidiary. These metrics also exclude special charges, which, for the first quarter included a pretax gain of $1.1 million related to the proceeds from a previously discussed, disclosed, land use rights sale in China.

There is a reconciliation of our adjusted non-GAAP operating income and net income to comparable GAAP measures available in our financial tables within our financial press release and available on our website.

Consolidated adjusted operating income grew 5.7% from the first quarter of 2008 to $21.9 million. This is a considerable achievement, given that total sales were down by 0.5%. On a sequential basis, adjusted operating income was down 16%.

The Instrumentation and Thermal Fluids segment came in within a recent high -- 12.9% adjusted operating margin, up from 12.5% in Q1 last year, and from 11.2% in sequential fourth quarter. The improvement was a result of improved mix, productivity, and a decrease in material costs.

Energy had a solid improvement in adjusted operating income at 18.1% compared with 16.2% last year but was down from 20.1% in the sequential fourth quarter. The year-over-year improvement was due to the growth in international projects and fabricated systems in North America. The sequential decrease was the result of unfavorable product mix and lower short-cycle volume.

Adjusted earnings per share was $0.57 for the quarter, down from $0.77 reported last year and $1.12 in the fourth quarter. Please note that the adjusted earnings per share excludes the after-tax impact of special charges but includes asbestos charges.

We recorded an unusually high asbestos charge of $8.3 million in the quarter, which I will review in a few minutes.

Now let's turn to slide 4 and discuss additional details with P&L. We will discuss the segment operating income later, and I will also discuss asbestos charges on the next slide.

As I mentioned previously, our special charges for the quarter included a $1.1 million gain related to the proceeds from the previously disclosed land use rights sale in China. Corporate expenses increased slightly by $0.7 million due primarily to higher pension-related expenses and professional fees partially offset by lower equity compensation expenses.

Net interest expense was lower in the first quarter of 2009 by approximately $0.1 million, primarily because we paid down a good portion of our revolving credit facilities in 2008. Total debt climbed $10.4 million to $23.4 million on March 31, 2008, compared with the year-end 2008. This was primarily as a result of our March acquisition as well as additional borrowings for working capital and items.

Other income was $0.2 million, up $0.6 million from last year primarily due to FX re-measurements.

Our effective tax rate for the quarter came in at 30%, a result of lower level of US-based income. This compares to the full year 2008 tax rate, 44.9%. However, excluding the large goodwill and intangible impairment charge we recorded in the fourth quarter 2008, the 2008 effective tax rate would have been 30.3%.

Turning to slide 5 -- I'll go into more detail about the $8.3 million of asbestos charges recorded in Q1 2009. As a background, our subsidiary, Leslie Controls, continues to be named as a defendant in asbestos product liability actions. Currently, Leslie, along with many other defendants, is a party to 1,103 active claims.

We believe that any asbestos was incorporated entirely within the Leslie valves in a way that would not be harmful during normal operation or during normal inspection repair procedures. However, Leslie has been a party to most of these cases because of asbestos produced and applied by other parties was used to insulate the valves externally, primarily on Naval vessels. Leslie and its insurors' strategy has been to vigorously defend against these cases.

While we strongly believe that exposure to Leslie's products has not caused asbestos-related illnesses, and we have a strong defense, this is certainly an emotional issue and, as such, juries or courts have and could continue to reach a different conclusion in particular cases.

Leslie has resolved and continues to resolve asbestos claims, where possible, for strategic reasons, including avoidance of defense costs and the risk of excessive verdicts. We do believe that asbestos-related liabilities are legally limited to the net assets of Leslie Controls.

As we have stated in the past, asbestos charges have high variation, especially quarter-to-quarter. For example, in Q4 of 2008, most areas, including the number of new claims and the average cost per claim were relatively low compared with the prior few quarters. Unfortunately, in the first quarter of 2009, several factors caused comparatively higher asbestos charges totaling $8.3 million.

The increase from $1.1 million a year ago, or $7.2 million, was due to several factors. First, we made an unfavorable insurance adjustment of $2.1 million related to an insurance coverage dispute that arose during the quarter of one of Leslie's primary layer insurers. We believe that we have the stronger position dispute, but to be conservative, have reserved for it.

Second, we had higher indemnity charges of $3.3 million, as both the number of new claims increased and the cost of settlements in the quarter were higher than the first quarter of 2008. The remaining increase was due to higher legal costs with the increased cases year-over-year. In addition, we have less insurance recoveries versus last year, as on a P&L basis, we have exhausted our coverage for indemnity as reported last year, and we have lower coverage on legal defense.

For further details, I encourage you to read our full disclosure in our 10-K and 10-Q reports.

Turning to cash flow on slide 6 -- during the first quarter of 2009, the Company used $7.9 million of free cash flow. This is primarily due to lower accounts payable and accrued expenses and was partially offset by reduction of accounts receivable and inventory. We define free cash flow as net cash from operating activities plus capital expenditures and dividends paid.

And, finally, capital expenditures decreased slightly year-over-year to $2.6 million from $2.9 million in Q1'08. Capital spending is primarily focused on new product development and lean initiatives.

Now Bill will speak to the segment performance and markets.

Thanks, Fred. Please turn to slide 7, and I'll review our Instrumentation and Thermal Fluid Controls segment results. Orders were down 31.6% from the first quarter of 2008 and down 19.7% from the fourth quarter sequentially due to weaknesses in many of our markets including HVAC, general industrial and process markets in semiconductors.

Also, year-over-year comparisons are distorted somewhat by a large multi-year Navy order that was booked in 2008.

Revenues compared to the first quarter of 2008 grew 1.7% organically, and 2.7% due to acquisitions but were offset by a currency impact of a negative 6.8%. Sequential revenues were down 8.6% from the fourth quarter. Strength in Aerospace and Power Generation was offset by weakness in other flow technologies end markets.

The segment's backlog ended the first quarter at $170.9 million, or a 7.1% increase from last year and a 0.6% increase from Q4. This reflects strong backlog growth in Aerospace offset by a decline in flow technologies backlog. As Fred has got the segment's adjusted operating margin with 12.9% compared with 12.5% in the first quarter of 2008, and 11.2% in Q4 of '08. As a reminder, adjusted operating margin removes the impact of asbestos and special charges.

This strong margin performance is especially noteworthy given the 2.4% decline in revenues. Our ability to execute provides us with good reason for optimism that we'll be able to accelerate our earnings growth in this segment when our markets rebound.

Moving on to slide 8, I'll review our Energy Products segment. For the first quarter, Energy segment orders declined 63.6% compared with the first quarter of '08 of which 9.3% was currency related. The decline is the result of the expected softening in both the project and short-cycle areas. We saw a rapid reduction of rigs in North America approximately 50% off the peak levels of last year. Consequently, orders for our short-cycle business fell sharply in the first quarter.

On a positive note, we saw only a 5.2% drop in energy orders from the fourth quarter of 2008, as we did book some project orders in Q1 from the Middle East.

For the first quarter, Energy segment revenues came in at $89.3 million, up 1.3% including the negative 8.8% FX impact. The 10.1% increase in organic revenue was driven by large international project work.

Backlog at the end of the first quarter was $127.3 million, down 56.5% from the first quarter of last year and down 26.4% from Q4. As Fred discussed, the segment's operating margin was 18.1% in the first quarter and that compares with 16.2% for Q1 2008, and 20.1% in Q4.

Now let's turn to slide number 9, which reviews our end-market assumptions. Let's start with our largest end market, which is energy projects primarily focused in the Middle East. As I had mentioned, we are seeing decent quoting activity in the Middle East. Lead times for materials are shorter, pricing has continued to be tougher, and this will likely affect future margins. We are still not seeing any cancellations.

Consequently, we have little visibility as to when orders will be finalized, but the fact that we're up sequentially in large product orders from Q4 is at least a good sign.

Looking at our short cycle business, orders are down approximately 50% from the peak level in 2008, and this is in line with a decline in North American rig activity in the same timeframe due to lower oil and natural gas prices and over-supply. We anticipate our distributors will need approximately two quarters or more, once rig counts stabilize, to get supply and demand back in sync before we start to see a rebound. Again, this assumes a stabilization of rig activity, which we haven't seen yet.

Aerospace has been one of our strongest markets, since more than half of the Aerospace business is military and defense-related, and that looks good for most of 2009. The commercial side has dropped off faster than anticipated, particularly the business jet market where we have seen some order cancellations.

We continue to have strong backlog on the military side, however, which includes our contract for the landing gear for the Boeing Chinook CH-47 helicopter program. As a side note, the recently proposed military budget is a mixed picture for us, longer term. Some of the programs, where we have -- sorry -- we have content that are currently candidates for termination such as the F-22 and the C-17. On the other hand, it's important to note that these programs are still funded through 2010.

Other programs where we have content that are being supported in the proposed budget include the [lotoro command] ship and unmanned aerial vehicles.

The commercial OEM side of aerospace markets, we'll try and lower in the second half of the year, although they have been steady, so far. The commercial after-market business, which is a smaller part of our aerospace operation is also down driven by the reduction in the airline passenger traffic and aircraft capacity.

Turning to the HVAC and steam-related markets, we are seeing little to no new project activity in the North America. Engineering firms have little backlog and see little construction taking place anytime soon. We do expect (inaudible) to see repairs and upgrades to existing systems, which supports our MRO work. We also expect to see an uptick in business internationally as we enter new geographic markets such as Latin America and Asia that are relatively stronger.

In industrial markets, orders are down significantly for general industrial valves at both North America and Europe. One of the most significant declines we've seen has been for German exporters of equipment in the capital-dependent industrial process and infrastructure around the world. MRO activity is still solid, and while it's a small part of our business, overall, semiconductor capital spending is down in North America and Europe, while we're starting to see some semiconductor activity in China.

In Power Generation markets, the demand that we've seen is primarily for maintenance, repair, and upgrade work since uptime and efficient operation of power plans is critical and continues. Internationally, the demand we're seeing seems to be solid in China and India and emerging markets.

In the Chemical and Refining end markets, weakness in the Industrial Gas industry has caused major gas companies to cut back on capital investments and their plants this year. After-market activity continues to be steady as gas companies focus on compliance, safety, and efficiency.

Orders for our maritime business were quite healthy in Q1. We expect that maritime revenues will continue to be strong in the near term as a result of ongoing orders related to US and international Naval programs as well as the UK and US Navy repair and replacement business.

Our process end markets are largely driven by capital spending and maintenance, and new project activity has slowed down quite a bit due to the general economic downturn in both Europe and North America. On the positive side, the energy-related process customers are holding up nicely. We expect to see continued maintenance repairs and replacement business in our installed base.

This brings us to our expectations, going forward. Market conditions are still in constant flux, and the visibility is limited. We expect to continue to face economic headwinds as we progress through 2009. We are providing guidance for the second quarter of 2009 based on what we believe today, and as we discussed in our news release, we currently expect revenues for the second quarter of 2009 to be in the range of $164 million to $171 million, and earnings, excluding special charges, to be in the range of $0.34 to $0.42 per diluted share.

We remain confident that we are better prepared than ever to weather the current worldwide economic downturn. We have a strong balance sheet with a significant cash position and very little debt. We also have a substantial unused credit facility. In times like these, our balance sheet enables us to compete from a position of strength.

This also enables us to invest in strategic areas and execute our growth strategy. As a result, we'll be in a great position to take advantage of an eventual rebound. So we are optimistic about our long-term prospects. Our growth strategy is focused on four areas. First, we are seeking to grow organically by investing in new products, adding value to component products, and increasing the development of mission-critical subsystems such as the work we do in the Chinook helicopter program.

Second, we plan to acquire complementary businesses or technologies that are accretive or in line with our critical strategic initiatives. For example, our recent acquisition of Bodet Aero in France and Atlas in Morocco expands our geographic presence in Europe. It adds engineering and manufacturing capabilities and a reputation for service excellence that complements our aerospace business in France and provides us with a low-cost manufacturing facility in Morocco.

Third, we continue to leverage lean to execute well and maximize margins as we capture market share through better performance and shorter lead times.

Finally, we are enhancing our sales and global supply chain reach and capability by expanding our presence in China, India, Latin America, and the Middle East. For example, we have recently opened our Indian operation. We opened that on April 1st. In addition to building up this operation we are using consultants, and they need to help us expand and develop sourcing and channels to market.

We are confident that we will continue to demonstrate our ability to execute well in 2009. We have plans in place in every business to manage through this downturn. Specifically, we have enacted a number of productivity and cost-cutting measures to reset our cost structure to new levels of demand.

For example, we have already, in the first quarter, reduced our total workforce by more than 12% across the Company and by more than 20% in the Energy segment and more intensively in our short cycle business in Energy, which has suffered the fastest drop in demand.

We plan to maintain a high quality of earnings and protect cash flow as we continue to invest in strategic areas.

We have the right people and the right processes in place to perform much better through this downturn and emerge a stronger company in the longer run.

So, with that, Fred and I are available to take your questions. We'll open up the lines here.

Thank you. (Operator Instructions) Kevin Maczka, BB&T Capital Markets.

I guess, Fred, first on the asbestos, such a big expense this quarter. I'm just wondering -- I know you can't predict when new cases are going to come in or how much they are going to spike from one quarter to the other, but can you give us a sense on this $8.3 million how much of these costs are recurring, how much are one time, what's included in your Q2 guidance? And maybe also what the status of your insurance is now, because it looks like you've got less coming in from insurance this quarter.

Sure, Kevin. Just to talk about the quarter, in total -- first of all, as I said in the conference, and then we've talked many times before, it sits very volatile. So there is -- if you look at Q4 versus Q1, obviously, a totally different story, and it could be a totally different story next quarter.

The quarter -- of the numbers, $2 million was the insurance adjustment, so that is a one-time issue in the quarter, and so it was $8 million. If you take that out, you're going to have $6 million.

We also had, you know, we really did -- had an unusually high new claims, average cost per claims, and even some of our legal costs were high, so I don't think you can use that as a predictor of the future but, on the other hand, some of the activity is real. So it's unpredictable.

As it relates to our guidance for Q2, the same thing goes, it's very unpredictable, we don't think the same amount will recur, but we obviously have to put something in our assumption for guidance, and so we're somewhere in the range of $4 million put in.

I think your final question was insurance. Yes, our insurance coverage for indemnity, as you know, left us -- we had it from a book purpose -- we had no indemnity coverage as of last year around midyear. From a legal side, though, we do still have coverage, but that has now dropped to around 50% on a go-forward basis. Predictability of how long that will last is probably one to two years. You can read our Q when it comes out, but it's somewhere -- if you look backwards and use that as a predictor to look forward, it's probably one to two years of insurance coverage -- so just a legal piece.

Okay, thanks, Fred. I guess in terms of your Q2 guidance, it looks like, as I run the math, about 45% or so decremental margins there. And you've still consistently surprised us to the upside in terms of margins in the last five quarters or more. I'm just wondering in terms of all the lean activities, other cost side activities you're doing, should that margin maybe hold up better than down 45%?

Well, I would say our forecasting process is still the same. We do -- we'll give you what we think is our best case, what we think is the middle of where we think we're going to come in. There are a lot of things going on in the quarter as every quarter. Energy is dropping of faster than the rest of our businesses, so there is definitely a segment mix that hurts us as that part drops faster. And there is also a lot of deleveraging because we are now obviously bringing inventories down as we go forward to make sure we stay in line.

So I think those are the two factors and, you know, our -- the biggest pieces that are driving the change in margins q-over-q.

I think if I can add a little color to it, Kevin, I think one of the things that makes it difficult is the speed of the change for our businesses -- if you went back into December, we were running full out in almost all of our businesses. So all of the work that we've done to reset to lower demand has all been condensed, so far, into Q1, and that continues into Q2. So we have the costs of severance, the cost of change in the business structure, how fast we can readjust our structure to it, and then how fast each of the individual market segments we serve are changing.

So it's quite volatile, and we believe our teams are doing a good job adjusting to it, but it makes it very difficult to predict.

Got it, thanks, Bill. And I guess just finally, Bill, I wanted to clarify your comment on your distributors and lagging -- the eventual bottom in rig counts by a couple of quarters. I guess so much talk about destocking running its courses in various businesses, but it sounds like that's not what you're saying at all, and so my question is would -- if rig counts were to stabilize today at this level, you would still be expecting very large, maybe even 50% order declines for the next couple of quarters in that energy business?

That's not how we were thinking. What we were thinking was that in our channels, there is an overhang of inventory that will take a couple of quarters for that overhang to be burned down, so that supply and demand are in check.

If it were simpler in the sense that the -- simpler in the sense of the specific products that had to be burned now are just one or two product types, it would be a lot faster, but there is a mix of products. So we're still seeing demand to replace product that is consumed, and there is other product that's going to take longer. So I'm looking at that two-plus quarters to really reset all of the different product types that we put through the channels.

Kevin, just to sort of make sure we understand your questions, too -- if on a year-over-year basis, assuming rig counts just stayed where they were, we would guess we would see a continually large year-over-year decline in orders, because last year, obviously, the orders were higher.

On a sequential basis, though, we do think we'd see lower orders because of destocking. So it's not obviously 50% q-over-q if things stayed the same, but we would see probably a continual drop a little bit because of the destocking, which will probably take them a couple of quarters to get through it.

Right. So sequentially you would still see declines for the next couple of quarters even if rigs were to bottom today?

Yes, I don't think we're going to go from the top to the bottom in one quarter here.

Charles Brady, BMO Capital Markets.

Good morning, this is actually Tom Brinkman standing in for Charlie Brady. I just wanted to clarify one comment you just made there. So your guidance for the second quarter does include $4 million of asbestos costs, but you are excluding other special charges in the earnings guidance, is that correct?

Yes, our guidance, Tom, always excludes special charges, but it includes asbestos.

Okay. And then, also, just curious as to where the strength in Aerospace is coming from? You mentioned that that was one of the stronger end markets.

Yes, more than half of our Aerospace business, Tom, is military and defense-related, and the lion's share of it is the Chinook CH-47 helicopter program. And that helicopter is extensively used in Iraq and Afghanistan, and its superior performance is due to its ability to operate at high altitudes. So any extra effort that's going to go on in Afghanistan will benefit the Chinook.

Okay. And can you talk about your monthly orders trends -- January, February, March and so far in April -- what you've seen in terms of which markets are deteriorated the fastest or which ones are more stable?

On a monthly standpoint? I don't know that -- in general, as we think about the Energy business, the short cycle North America rig count-related business has come down commensurate with the slow down in rig activity, and that hasn't been a surprise. But that has confirmed what we expected to happen. So that would be the most dramatic drop.

The project business is lumpy, and if you look back from our Energy project businesses, we had a couple of really big order quarters and then even in the second half of last year, a fairly low order quarters. We've seen some order pickup there, so it's a lumpy business on top of order trends. But we think the good news is that our focus for our large project business in Energy primarily has been and continues to be in the Middle East where we have very strong relationships.

So we think we're going to pick a place to have an Energy Project business and have an expertise in customer relations. That's a good place to be.

Okay.

The other side of the business -- Instrumentation and Thermal Fluids, we have product that goes through distribution that has seen expected slowdowns with capital spend, and then we have other products that are longer-term in both Aerospace and Navy that have longer backlogs that go out almost like project businesses go out further into time that are in pretty good shape.

Okay. You mentioned that some of the favorable improvements in Energy Products margins came from large international projects and fabricated systems in North America. I'm wondering about the remaining backlog you have in Energy Products and how much of that is that type of business, which obviously carries favorable margins, or other types of business?

It's a little bit of a -- let me answer that question with a few comments. The comment was that's true compared to last year's first quarter. We had some very good project business. However, if you look at the quarter sequentially, we've come down a little bit because the peak pricing we were able to last year when demand was really high is now leaving our backlog. So we talked before -- probably somewhere around 300 basis points of margin is going to be coming out of the project business as we go into 2009.

The mix of projects versus short cycle -- you know, over time, it's gone back and forth. Sometimes it's higher; sometimes it's lower. In 2009, it was higher, though, so that will hurt us as we go into -- excuse me, 2008 was higher. So as we go into 2009, it will hurt our margins.

Okay, last question -- you mentioned that you are still looking to do mergers and acquisitions as part of your growth strategy. Do you have a bias towards any particular end market? Obviously, you made a couple of Aerospace acquisitions within the past year or so. Does that continue to be a focus for possible targets?

Aerospace continues to be a focus, but we haven't ruled out our other markets. The reason that we haven't focused on some of the other markets, like Energy, in the past is the pricing was high, and even Aerospace was very high historically, so our financial models didn't allow us to finalize some deals in those markets, and that's all changing, we believe.

So on the other side of that, our thinking on the strategy is we are working through a longer-term strategy for the corporation, and that will affect it, over time. But there is -- fundamentally, right now, there are two types of acquisitions we would look for. One is a small, accretive tuck-in from a product technology channel standpoint that we could include right within our business and expertise today and use lean in our other efforts to improve it.

And a good example of that is the Bodet business we just acquired in France. It fits right in with our Aerospace group, improves our channel, improves our customer relationships, accretive in the first year, and adds some good technology and good machining and a low-cost source out of Morocco.

The other type of acquisition we might do is something that gives us a more strategic platform in a market and demographics that fit with our strategy, where perhaps we would include some of our existing businesses into it. So we'll keep working at it as we going forward, but we believe in the second half of this year, the pricing in acquisitions will become more and more favorable as we going forward.

John Moore, Robert W. Baird & Company.

I'm just curious -- what were you including in asbestos expense for the first quarter guidance? I presume you weren't expecting $8.3 million.

No, we were not. We were much closer to what we have for the second quarter. We are actually a little bit less than that.

So it seems like adjusted for that, the operating EPS actually came in above or close to the high end of your guidance range?

That's fair to say.

Okay. What drove the outperformance versus what you were expecting? Was it higher energy margins in the backlog or the cost savings you've put in? Can you talk a little bit about that?

Yes, I think we definitely had some better read through on pricing than we had anticipated in the first quarter. We also, I think, we were able to get our costs in line probably faster than we had thought, and we had favorable mix in the quarter.

And it was across the board. Both sides of the house improved operationally.

Okay. And then just digging in a little bit more on the energy orders, can you guys talk a little bit about how the order decline broke out between the North American short cycle business, and your large international -- the large project international business? Were the declines in North America actually more than the segment average?

Yes, actually, we had positive -- sequentially, we actually had some growth in our orders in international projects and we, as you said, we declined in the short cycle.

I guess it depends on how you compare, whether it's sequentially or year-over-year or a quarter or take an average for last year. I think the key point is that the short cycle business sell commensurate with the rig activity. So I think approximately around that 50% level throughout the North American, particularly US, gas rigs. And we saw an increase from Q4 to Q1 in projects in the Middle East -- increase in bookings.

Okay, but -- so on a year-over-year basis --?

On a year-over-year basis, they were fairly comparable. We had first quarter last year was a particularly high order quarter for the project business. So we saw declines (inaudible).

Okay, and then a final question -- I don't want to belabor the point on the asbestos expense, but I know you said $4 million for next quarter. Just wondering if you could maybe comment on what, I guess, a logical number would be to build in for the rest of the year. Should we just be assuming $4 million each quarter? Is that the best guess?

I don't have my Ouija board, so I can't give you the answer, but I don't have any other information I can give you than what we already did. It's very volatile.

We had two quarters last year that were a little over $1 million a quarter, and now it's 8, so it's really difficult.

Thank you. (Operator Instructions) Jamie Sullivan, RBC Capital Markets.

A question on your outlook in Energy -- just wondering what your internal plans or what you're prepared for given you're adjusting the cost structure, et cetera, for when the rig count sort of bottoms? Are you looking -- are you trying to adjust one quarter out, or are you thinking 3Q or 4Q will reach bottom -- just your thoughts there?

No, our teams are not waiting -- so to speak, waiting for the volume to come back. We are adjusting for what we think will be the bottom, so to speak, and this is the point we've made. Each of our businesses has contingency plans, and as we go through into a new or lower phase of demand, so to speak, we would enact the next level of contingency plans to readjust the cost structure, take cost out. Energy on the short cycle business has moved very aggressively to do that, looking forward.

Right. Do you have what you're working against right now -- what your current base case is for when you see rigs bottoming?

I wish I knew what the bottom was in the rig counts. We're just going to have to let -- we're going to have to get some data on the scoreboard so we can start to see some trends where we could validate. There has actually been a stabilized level. I'm not sure we're far enough along yet to see that.

Okay. And then the cost structure is basically the moves you did in 1Q was basically on what the 1Q rig counts are or what 2Q looks like?

No, it's been -- we've tried to do it based on our outlook and demand, talking with our distributors, looking at inventories they have in the channel, looking at what it's going to take for them to burn off the overhang they have and adjusting to what expected future demand is looking as best we can.

Right, okay, that's helpful. And then once -- do you feel confident that once rigs do bottom, and the distributors start to need to build the channel again, that you can ramp up quickly enough to meet that?

I do. We've done a lot of work with lean in our energy business. We have a tremendous team in place and have built a world-class process, and I think we're demonstrating that we can respond very quickly, also, as a management team. And as we've built a leaner process, we'll be more effective in dialing up or dialing down that process as demand cycles up and down. Our goal, longer term, is to build a process that's capable to withstand the cycles and do well in the cycles.

Right, okay. Then -- just on the asbestos, what was the net cash impact in the quarter?

It was probably in the range of $3 million.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Mr. Bill Higgins for closing comments.

So for now I'd like to thank all of you who took part and took time to speak with Investor Relations firm as part of the recent Investor Perception Audit that we just did, and this is part of our effort to enhance our Investor Outreach efforts, and we look forward to seeing many of you on the road in the coming months. So thank you for joining us today.

And that concludes our conference call. Thank you for joining us today.