Circor International Inc (CIR) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to CIRCOR International's fourth-quarter and year-end 2010 financial results conference call. Today's call will be recorded. At this time all participants have been placed in a listen-only mode. There will be an opportunity for questions and comments after the prepared remarks. (Operator instructions).

I'll now turn the call over to Mr. David Calusdian from Sharon Merrill Associates for opening remarks and introductions. Please go ahead, sir.

Thank you, and good morning everyone. 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 www.circor.com on the Investor Relations page. Please turn to slide 2.

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 these factors, the Company advises you to review CIRCOR's forms 10-K and other SEC filings, including the 2010 quarterly reports on form 10-Q. 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, February 24, 2011. While CIRCOR may choose to update these forward-looking statements at a later date, the Company specifically disclaims any duty to do so.

In today's call management will often refer to adjusted operating income, adjusted operating margins and adjusted EPS. These metrics exclude any pretax, special charges, as well as asbestos bankruptcy charges relate to the Company's Leslie Controls subsidiary.

The reconciliation of CIRCOR's non-GAAP adjusted operating income, adjusted net income, adjusted EPS and free cash flow to the comparable GAAP measures are available in the financial tables of the earnings press release on CIRCOR's website.

I will now turn the call over to CIRCOR's Chairman and Chief Executive Officer, Bill Higgins.

Thank you, David, and good morning, everyone. We ended 2010 with solid Q4 financial results, with revenue and earnings within our guidance ranges. Since this is our year-end call, I'd like to take a few minutes to outline some of our major achievements in 2010. So if you would, please turn to slide 3.

First, on February 7 we announced the successful resolution of our Leslie Controls asbestos liability with the last major milestone being the affirmation by the US District Court of Leslie's bankruptcy plan. This is a tremendous accomplishment for CIRCOR, our shareholders and our employees after years of behind the scenes effort. And so with this burden behind us now, we can focus even more attention on executing our growth strategy.

During 2010 we also accomplished quite a bit toward our organic and acquisition growth strategy, repositioning CIRCOR toward higher profit long-term growth. Midway through the year we acquire Mazda Limited in India which gives us a platform to grow in the Indian power generation industry. We also significantly expanded our engineering, sales and low-cost sourcing in India.

More recently, we announced the acquisition of S.F. Valves in Brazil. This gives us a platform to grow in Brazil's rapidly expanding energy markets, particularly with Petrobras, the national oil company.

And with the acquisition of Castle Precision Industries we enhanced our aerospace aftermarket position, and this acquisition expands our landing gear, engineering and production capability, enabling us to serve a broader set of OEM and aftermarket customers.

Across CIRCOR, all of our business segments are developing and commercializing new products for more organic growth. For example, we won new business on the A350 and A330 Airbus aircraft, two high volume platforms that provide great long-term growth opportunities.

So after Fred reviews our financial results for the quarter, I'll describe our end markets and provide guidance for the first quarter of 2011. So with that, let me turn the call over to Fred.

Thanks, Bill. So please turn to slide 4 and I'll begin with consolidated financial results. Revenues for the fourth quarter increased 23% to $194.1 million compared with the fourth quarter of 2009, and up 9% sequentially. The year over year increase was due to organic growth of 23%, 3% from acquisitions, partially offset by 3% negative foreign exchange.

Adjusted operating income in the lower right chart was $13 million, up 56% from the fourth quarter of last year, but down sequentially 18%, driven by energy which I'll discuss in a moment.

On an adjusted margin basis we came in at 6.7%.

Our net income for the quarter was $7.7 million compared with a net loss of $20.7 million in Q4 of '09. Fourth quarter 2010 net income included pretax Leslie bankruptcy and asbestos charges of $2.2 million. 2009 included $40.4 million of pretax Leslie asbestos charges and a $0.5 million impairment charge.

Adjusted earnings per diluted share, which excludes special, impairment and Leslie asbestos and bankruptcy charges, increased 56% to $0.53 for the fourth quarter of 2010, from 34% (sic - see press release) in 2009.

Our GAAP and adjusted earnings for the fourth quarter this year were affected by two items. First, we incurred significant cost overruns of $0.11 on certain large international energy projects to be shipped in 2011. We recently discovered that when these projects were quoted during 2010 they included an underestimation of material quantity and machining cost, although after a thorough root cause analysis, we have corrected this error in our quotation process and took a charge in 2010 due to projected loss positions on some of these orders.

Second, we recognized a gain of $0.05 per diluted share related to a small divestiture in our Flow Technologies segment.

Now I'll turn to our segment performance beginning with Energy on slide 5. The Energy segment bookings increased 50% year over year and 23% sequentially, due to continued strength in our short cycle business and a rebound in orders for late cycle large energy order -- projects. Ending backlog of $179.9 million was up 35% year over year and 18% sequentially.

Energy revenues of $90.2 million increased 37% year over year as a result of 41% organic growth, with contributions from both short and long cycle businesses. This was partially offset by unfavorable foreign currency of 4%.

The segment's adjusted operating margin was 6.7% compared with 3% in the fourth quarter of 2009 and 11.1% in Q3 of 2010. The year over year margin improvement came from organic growth, associated operating leverage and productivity improvements benefiting from a strong short cycle business. However, we were very disappointed with the margins -- were hampered by late cycle project business, pricing pressure, and cost overruns.

Compared to the third quarter, adjusted operating margin was down due to a third quarter 2010 benefit of $2.3 million from a penalty accrual adjustment associated with a previously concluded project, plus the fourth quarter charge for the cost overrun.

Now turning to Aerospace on slide 6. Within our Aerospace segment bookings increased 24% year over year but were down 2% sequentially from the third quarter. The majority of the year over year increase was due to the acquisition of Castle Precision Industries in August of 2010. We ended the fourth quarter with segment backlog of $147.2 million, an increase of 28% year over year.

Revenues were up 24% year over year, driven by growth from acquisitions of 15% and 12% organic growth, partially offset by 3% foreign currency decrease. Adjusted operating margins were 14.1%, down year over year from 14.7%, but up from 9.6% in the third quarter of 2010. The year over year margin declined as a result of higher operating expenses to support new programs and integration costs for Castle acquisition. Sequential improvement came primarily from volume expansion and lower acquisition transaction costs.

Now let's move to Flow Technologies on slide 7. Bookings decreased 12% year over year and 21% sequentially. Both comparisons were primarily related to lower semiconductor maritime orders which tend to be lumpy. Outside of these areas we experienced growth in most markets. We ended the fourth quarter with segment backlog of $77.2 million, up 14% from last year.

Revenues increased 8% year over year due to organic growth of 9%, the result of strength in semiconductor, maritime, instrumentation and process, 1% from acquisitions, partially offset by negative 3% foreign exchange impact.

The segment's adjusted operating margins were 12.5% compared to 11.7% in the fourth quarter of 2009 and 13.1% in Q3. The year over year increase resulted from higher volumes and cost reductions in addition to the gain on a small divestiture which contributed 180 basis points. The small sequential reduction was from unfavorable product mix, slightly lower volume and investments for growth, partially offset by the divestiture gain.

Slide 8 shows highlights from our P&L, some of which we've already discussed. Q4 included a $2.2 million pretax expense related to Leslie bankruptcy charges. Leslie's asbestos charges last year were $40.4 million. To complete the Leslie bankruptcy process we expect to incur approximately $0.6 million in legal expenses in Q1.

Corporate expenses were up 22% year over year to $6.5 million due to higher share-based and variable compensation.

The adjusted effective tax rate in the fourth quarter, which excludes the impact of asbestos charges, was 22.3% versus our guidance of 26%, primarily due to lower income and higher tax rate jurisdictions.

Now turning to slide 9, during the quarter we generated $15.6 million in free cash flow compared with generating $11.7 million in Q4 of 2009, due primarily to working capital improvements and lower capital expenditures. The cash on our balance sheet and our available credit facility continues to provide us with the flexibility to fund the Leslie bankruptcy trust of $75 million and to invest in organic and acquisition growth opportunities.

Our total debt is $1.5 million versus $7.5 million at the end of 2009.

Now let me turn it back to Bill for a view of our end markets.

Thank you, Fred. Please turn to slide 10 where I'll cover our 2011 market assumptions. Starting with the large international energy projects, we see improving demand in the Middle East and other markets around the world. With the increase in demand for large international projects and improved capacity utilization in the industry, we expect that pricing will continue to improve in large projects.

Due to the long lead time nature of this business, however, any benefit of improved pricing would be realized in the latter part of 2011. The North American short cycle business has remained strong. We expect that to continue. The market for pipeline equipment which is driven by capital spending appears to be improving in North America and globally as well.

Turning to Aerospace, we believe the commercial Aerospace market bottomed in 2010, later than most of our other end markets. The OEM and aftermarket is gradually improving, driven largely by freight and passenger traffic. The growth of new aircraft deliveries is expected to be in mid-single digits for 2011 after 2010 passenger traffic grew 8% and freight traffic grew 21%.

The one exception in commercial Aerospace is the business jet segment which continues to lag.

On the ,military side we expect a slowdown in aftermarket repair and spares spending, While most of the OEM platforms that we're on are stable for now, we are watching for further possible defense budget cuts in both the US and Europe.

Moving on to Flow Technologies end markets, in HVAC and steam-related markets we continue to see a lack of new construction related to spending in North America. However, demand for MRO and energy efficiency driven upgrades continues at a stable level.

Within the industrial and process end markets semiconductor remains strong and other general industrial markets are improving around the world, particularly exports to emerging economies, emerging markets.

In power generation markets we continue to see solid demand, especially in China, India and emerging markets. Developed economies, North America and Europe, continue to focus on MRO and efficiency upgrades.

The petrochemical and refining end markets continue to be weak due to global excess capacity, but we do see niche opportunities for growth, and maintenance activity continues to be stable.

Turning to our maritime navy business, we don't anticipate growth and there's limited visibility due to the uncertainty of defense spending.

So this brings us to our expectations going forward. And if you would turn to slide 11, please, to review our guidance for the first quarter of 2011. We've seen improvements in most of our end markets in 2010, first in the short cycle businesses and, finally, in the later cycle project businesses as we reported in our improved bookings and backlogs ending the year in Q4 and coming into Q1. As a late cycle company, this sets us up for continued improvement through 2011 and into 2012. However, during the first quarter we'll continue to work through lower margin pricing in our energy projects backlog which we expect will improve as we proceed through the year.

For the first quarter we expect revenues in the range of $193 million to $203 million and adjusted earnings per diluted share in the range of $0.41 to $0.51. This excludes $0.02 per diluted share and charges related to Leslie's bankruptcy process and no impairment or special charges. It also assumes higher interest expenses and a tax rate of 30% compared to 24% for the full year in 2010.

But before we go to questions, I have included slide 12 which shows highlights from our growth strategy. And while I won't go through it, let me comment that with the successful resolution of the Leslie asbestos liability behind us, we now have the focus and the wherewithal to execute this strategy. As a result, we believe that over the next three to five years we can double the size of the Company, expand operating margins and generate significant value for our shareholders.

So with that, let's go to your questions.

We will now be conducting a question-and-answer session. (Operator instructions.) Kevin Maczka, BB&T.

Bill, first question on the energy margins. I think at one point in the first half you were pretty adamant about getting back to double digits in the second and, of course, we've got pricing pressure, we've got this cost overrun charge. I'm just wondering if you can separate out in the Q4 how much of the margin pressure was due to pricing in your backlog, how much was due to the charge. And can you just clarify the charge? Was that all for Q4 projects that were shipped or did that account for projects that were shipped over the prior couple of years?

As we noted in the commentary, the short cycle business has done very well in 2010 and continues to. So the pricing and margin shortfall is attributed to the project business. And there's a component of that that is basically the lower pricing margin from the competitive environment and then on top of that, one thing we did not anticipate was these cost overruns in the estimation process. And Fred can maybe add some color or detail on the split.

I just want to make, also want to clear up just any confusion on the cost overrun. The cost overrun had to do with projects we quoted during 2010 and even possibly at the end of 2009 for some specific types of valves. That charge has to do with orders that have not shipped yet. So that is a charge we took because some of those projects as we look at them going forward were in a loss position, so we had to take that charge.

And it's worth about 300 basis points in Q4. It's $2.8 million. And so we haven't seen a recovery. I think what's happened, Kevin, is it's not so much that our pricing has changed that dramatically other than, obviously, this one issue. It's more that it hasn't recovered in the order. So as Bill said, it will be late next year -- late this year when we start to see that come back.

And Fred, you don't expect to take any further charges when those projects actually do ship?

No. No, we do not. They obviously are at -- those specific projects are obviously at breakeven margins so we won't take another charge. But obviously it's very -- it's dilutive to our overall margins when they do ship.

Sure. And generally, it sounds like you're starting to see some bottoming in pricing on the large project side, and maybe that gets better in the second half. And on the short cycle side, you previously talked about a 5% price increase. Can you give some update on that?

Yes, we have. Your comments are correct. We do expect it to get better. The bookings have been good in Q4 and coming into Q1 in the project business. Pricing seems to be getting better. What was his other question, on the -- ?

On price increase.

Yes, the price increase, we have put it into effect and we're waiting to see on how that works out in the market. It looks like so far it's holding, but it's probably a little too early to call.

Okay, Bill, and then just shifting gears over to Aerospace, just a kind of high level question. As we look out to 2011 if you've got commercial that it sounds like you're fairly optimistic about but, of course, there's a lot of uncertainty around the military side. Do you expect Aerospace as a segment revenue to grow in 2011 given these crosscurrents?

Yes, we do.

And you expect -- should we thinking about it relative to the Flow segment? Should it grow faster than Flow because, of course, Flow has some military budget constraints as well but not nearly as significant.

From an organic standpoint, Flow might have a little bit better opportunity, but there's a mix there as well. So I consider them both in sort of the mid to high single digits growth opportunities. It's not just what the market is doing. We've added the acquisition of Castle, for instance, where we can pursue more business and more growth in the aftermarket. And we'll continue to execute on our new product strategies as well. I expect it to have decent organic growth.

Do you get any revenue yet in 2011 from the A350 or 330?

No.

That starts in '12?

Probably the end of '12 more likely on the A350.

Okay, I'll get back in queue. Thank you.

Charles Brady, BMO Capital Markets.

Good morning, this is actually Tom Brinkmann standing in for Charley Brady. Can you just talk about the impact before tax of your asset divestiture and how that affected the margin there?

Yes, as we said it was about $0.05, about $1.2 million pretax.

And as far as these crosscurrents going on in the Energy segment, you're talking about pricing improving [in the] short cycle but it remains competitive in the large cycle? How -- the mix of backlog there, I'm just kind of curious as to how much of the Energy segment backlog would be short cycle and how much would be longer cycle?

In total it's obviously more longer cycle by nature. Our short cycle business has a couple -- a quarter's worth, round numbers, probably only about a quarter's worth of backlog and the long cycle is up to three quarters' worth.

Three or four.

Got you. So I guess at the extremes, how long does it take for the long cycle Energy projects to come through? You said in some of these cases they were quoted in late 2009 and they're going to ship later in 2011. So a year and a half, two years, I guess, at the outset, at the outlier?

Well, let's make a distinction. The lead time from booking from when you would see orders, would probably typically be around three quarters. Could be longer, but I'll call that an average for the large project business. But what Fred was referring to when we talked about quoting and estimating, the projects may have been worked for 6 or 12 months even before that from an engineering costing standpoint. But from a time of booking to translation through the P&L it would typically be three quarters.

Okay. And you mentioned in your prepared remarks that the refining markets continue to be weak. I understand that the margins in that business have improved the last several months. You're saying you really haven't seen an improvement yet in the end market demand as far as capital spending is concerned?

I think if you look around the world there's some pockets of places where there's spending, but my comment was more general across the world where there's an excess amount of capacity in place today.

Okay, and this is the last question. I missed your comment about how much you said traffic is expected to rise, mid-single digits in 2011. I wasn't sure if you meant passenger traffic or freight traffic?

I think what I was referring to was the production and delivery of new commercial aircraft.

Okay, thanks.

John Franzreb, Sidoti & Company.

Is it fair to assume that you're already getting pricing in large projects, hence, that's why you're confident you'll see a recovery in the latter half of 2011?

It's been gradually improving. I mean it's not blowing through the roof here or anything, but it's gradually getting better than it was a year ago.

Okay. And when you consider that outlook, what are your thoughts about the unrest in the Middle East? Is that something that's even on the table at this point, because you're citing the improving demand there as one of the catalysts going forward. Can you just talk about that? Does that not impact you at all? And what are your thoughts there?

Well, we are watching it. It's a little too early to make a call. We don't know if this is going to continue for a long period of time or how quickly it will get resolved. So we're concerned about it. I'm not sure I'm smart enough to tell you what the impact is longer term just yet.

Okay, so we see no delays related to that?

No, and we wouldn't typically. We're late in the cycle in the projects that we're serving. So it's not likely we'd see delays.

Great, that's helpful, Bill. Now in the Flow side of the business, one of the reasons you cited for the drop in the orders was semiconductor. But in your 2011 market assumptions you say the activity remains strong. Can you kind of reconcile those two comments, what's going on there?

Yes, absolutely. It's a very lumpy end market and it grew quite a bit last year. And we expect longer term it to continue to grow. The market studies that we've looked at basically say this is kind of a forming year, 2011 might be flattish, and then it's supposed to pick back up again in 2012 and beyond.

Okay, so generally pause and then recovery.

We've underestimated how strong that market has been just about every step of the way.

Okay, that's fair. And in the military side, it seems to me, Bill, like you're taking a more cautious stance. But my expectations were that you guys weren't platformed -- were kind of insulated from some of the spending cuts. Am I reading that properly or no?

I think that's fair. The military OEM platforms, that would include the production of the Chinook helicopter in Philadelphia, Boeing Philadelphia. We look at it -- through at least 2011 looks stable to us. Where we see some weakness and some risk is in the sale of aftermarket spares and repairs as the government tightened up its budgets everywhere, purchase of smaller quantities versus larger quantities in the past. So we are seeing some softness there.

Our strategy has been to diversify more into commercial to balance that. And that's why the earlier question about do we expect aerospace to grow? We absolutely do.

Great, thanks. That's it for me.

Matt Summerville, KeyBanc Capital Markets.

Good morning, this is actually Joe Radigan on for Matt. You've talked about pricing headwinds in the project business for awhile now as a result of the excess capacity. It sounds like that's starting to ease a little bit. Do you have a sense of where industry utilization rate stands currently?

I don't know that I could give an accurate number. I guess the market information that we see shows more projects have been let in Q4 and continuing into Q1. So I think there's a fair amount of work coming out into the market that's been released. But I don't know that I can call a number on what utilization is. It's improving, it's much better than it was 6 months ago or 12 months ago.

Okay, and then just on the pricing side. I know that's a 6 to 12 month backlog, but it seems like you've talked over the last several quarters of pricing in that business getting incrementally better off the bottom. Yet it still seems like the pricing pressure is still impacting margins. So I know you've talked about it, but why has that been so slow to come back? And is there a risk that at the end of 2011 if we haven't seen -- if you're not seeing an inflection point in pricing now, when we get in the back half of '11 is it still going to be a pressure kind of pushing off into 2012? It just seems like that's been ongoing. How much confidence do you have that that's actually going to ease in the back half of '11?

Yes, it's a fair question. The driver for that pricing pressure sort of moving into the future longer than we had anticipated goes hand in hand with the volume and the number of projects that were sort of pushed to the right as well. Not that they were cancelled but they were delayed through -- if you remember back through a number of quarters, 2009 through 2010, we had expected project orders to pick up sooner than they did. They did pick up in Q4. They looked strong coming into Q1. So really that's the key determinate of is there enough work in the industry to fill up the factories and allow pricing to come back up.

And we have seen slight improvements in our backlog. It's not like it's been flat.

Yes, when we look through the gross margin that we have in our backlog it does improve as we go through the year.

Okay, that's fair. And then on the short cycle side, how would you characterize distributor inventories? Did you see any pre-buy ahead of the price increase? Do you still think they're in line with actual demand?

On the distribution side are you referring to here?

Yes, on the short cycle side, are you seeing any signs of overstocking at the distributor level or are inventories still in pretty good shape?

I think demand is pretty well in line. We don't see oversupply at this point.

Okay. And then lastly, can you give a little more color on the acquisition in Brazil? I know the release said it was about $20 million in revenue. Do you expect that to grow in line with the market growth rate that you cited or is there an opportunity to exceed that? And then maybe how robust is the project pipeline in that business? And is there less pricing pressure in that business because there's relatively few domestic valve manufacturers there?

Well, I don't want to get ahead of ourselves here. We're very excited about being in Brazil. This gives us a good production platform on the ground, good customer relationships to build. We do have the certifications with Petrobras. It also gives us channels into the ethanol and cogen power industries in Brazil. But it's a $20 million platform that we're going to have to invest in to grow and add capability and pull through our other products. So there's a longer term opportunity here. I don't want to get too excited that it's going to grow in the next quarter or two. But we look out over the next several years and see a tremendous opportunity to grow it.

Okay, thanks, Bill.

Jim Foung, Gabelli and Company.

Hi, good morning, Bill and Fred. Just regarding your asbestos closure here. So after you settle...after you kind of fund the trust, is that [it] regarding your asbestos liabilities? Are there any other liabilities outside of Leslie Controls?

The Trust specifically deals with the asbestos liabilities at Leslie and gives [channeling injunction] for the corporation for Leslie. There are other liabilities. I mean, we could be sued for product warranty or other things at Leslie. This is specifically geared toward Leslie Controls asbestos liability.

Okay. But there's no other asbestos liabilities?

There have a little bit across the Company in some of our other products over time. Nothing that has been significant, nothing like at Leslie.

Okay, so nothing in that order of magnitude then. And then the $75 million contribution that you need to make, when do you plan to do that?

We anticipate that, Jim, being probably in the month of March.

In March, okay. And then also what was the cash taxes you paid in the last few years?

The cash taxes we paid in the last couple of years?

Yes, last three years?

I don't have that off the top of my head. I can get you that, though.

Okay, so we'll just follow that online. We can do that. And then just last question, just listening to your commentary -- so should we look at each quarter to be improving sequentially? Typically your seasonal strength is in second, in the second quarter being your strongest. Because of the pricing and the backlog improving as you go through the year, should we look at this year as being a little different with sequential improvement in earnings in each quarter?

I think we do expect that. I think there's a little bit of better history or, I should say, lower performance in Q3 with the summer shutdowns in Europe. But I think as we go through the year we expect the second half of the year to be much stronger than the first half of the year and sequentially to improve through the year.

Okay, and by the time you get to the fourth quarter, that could be a good baseline for 2012 then?

Yes, it could.

Okay, great, thanks a lot, gentlemen.

Thank you. (Operator instructions.) Alex Blanton, Clear Harbor Asset Management.

Thank you. Just a clarification on slide 5. The adjusted operating income for energy, does that include or not include the charge for the underestimating of costs there?

It does include the $2.8 million.

Okay, so if we wanted to see what it would be without that, we'd add the $2.8 million back?

That's correct.

The 300 basis points, I think you said, Fred?

Yes.

Just on that point, two questions. One is you've been in the business a long time, how did that actually occur? Now I'm new to the Company so you may have answered that in previous calls and everybody on the call may already know the answer, I don't know. But I'm curious as to how that could occur in a business that you've been in for awhile. And secondly, just wondering about the idea here of taking your loss in advance before you've actually delivered these projects. I'm not sure I understand the accounting theory behind that.

I'll let Fred comment on the accounting theory. It's actually an accounting requirement.

It is.

But the cost estimation, the cost overruns due to the estimation mistakes that were made, obviously there was a series of mistakes made that contributed to it. It wasn't just one thing. There is a higher degree of engineering mix change over the last couple of years with the use of special alloys, very expensive alloys. So the product mix that we've been manufacturing has been changing over the years and the system, the cost estimation approach to it had some faults in it.

And when that mix of product was a much smaller part of our business we may have not caught that in that past, and then in the context of much lower profit in the business overall because of the down cycle it became apparent very quickly when we started shipping these projects. So there is a series of engineering cost estimation errors that contributed to the overall cost overruns and we've since rebuilt the estimation process and the software, everything that we use.

I wish we had caught it sooner but we feel like we have a good handle on it today. We understand what happened and it is because of a mix change in the business and a growth in highly engineered products.

So the error has been occurring, it's just been a very small part until now?

Possibly. Possibly we had some outdated calculations in our software that more frequently should have been reviewed and updated. And with the cost of alloy and the use of the expensive machining these alloys require, it added up very quickly. Do you want to comment on the --?

As to the accounting of this, these specific projects when we did the analysis and found what had happened and we looked -- project forward when we would ship those valves, at that point there would have been a loss taken on those projects. So what we did is we had to -- so that's a liability. We know that's a liability right now to our best knowledge. And therefore, what we're really doing is providing for that knowledge of that liability, that loss.

I understand that, but someone said it was a requirement.

It is. That will be a GAAP, that's GAAP. And any other company would have to do the same thing.

Okay, fine. I'll take that up with you later so I completely understand that. Thanks a lot.

Thank you. (Operator instructions.) Kevin Maczka, BB&T.

Yes, Bill, just to follow up on the Energy margin in Q4 and the expectations going forward. So as we go out into 2011 you're not going to have this charge recur but what you are going to have is basically some big break-even projects hit that will skew the margin down. So if we look at the Q4 margin as something closer to 10% than closer to 7% when we back out that charge, I'm just wondering if you can give some color how we should think about that going into the first half and then presumably better in the second half?

I think your description is correct and we have the -- as Fred described I think -- break-even projects, most of which will go in Q1, some of which will ship in Q2, but the majority in Q1. And there may be a little bit that trails in Q3 because of the long lead times. So we expect that part of the backlog to work its way through in the first half of the year.

Okay, so then I guess presumably baked into your Q1 guidance is a much lower margin than what we just saw here in Q4?

Yes, it's not significantly lower. It is lower, Kevin, you're right. It's not significantly lower in the sense that we still have the short cycle business doing well and we've had pricing pressures all along. So the sort of level of pricing is probably fairly consistent quarter to quarter, but this change in some of these projects wills definitely drive the Energy margins down some extent in Q1 and that's part of our guidance.

Thanks, Fred. And that's lower relative to the 6.7% or the 9.7%?

No, to the normalized number.

Okay, got it. And then just quickly on this larger than normal corporate expense, how should we think about that trending in 2011?

2011, I would think of 2011 as being fairly close to 2010 on an annual basis.

Okay, got it. That's all I had. Thank you.

Charles Brady, BMO Capital Markets.

Again, this is Tom Brinkmann. Just a couple of details on the Aerospace backlog. How much of that came from the Castle acquisition?

The Aerospace backlog is about $30 million or so at the end of the year.

I was just curious how much of that stemmed from the Castle acquisition?

That is the impact of Castle.

Okay. And then you mentioned that you expect the production on the Boeing Chinook helicopter to be stable in 2011? Just curious how much of the backlog is that program?

I don't have that information in front of me, Tom.

Okay.

It's the single biggest OEM program we have today.

Okay, last question, just roughly how much of the Aerospace backlog do you expect will be shipped in 2011 versus out years, other years?

I don't have -- typically that's -- half of it's next year, this year I would say now that we're in this year. Maybe half of it this year, maybe a little bit higher than that.

Okay, that's helpful, thank you.

Thank you. At this time we have reached the end of the Q&A session. I will now turn the conference back over to Mr. Bill Higgins for any closing or additional remarks.

Thank you, everybody, for your interest and joining us this morning for the call and we look forward to speaking to you on our next call. Have a good day.

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