Circor International Inc (CIR) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to CIRCOR's International Third Quarter 2011 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.

I would now like to turn the call over to Mr. David Calusdian from Sharon Merrill 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.

Today's discussion contains forward-looking statements that identify future expectations. These expectations are known -- 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 2011 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, November 3rd, 2011. While CIRCOR may choose to update these forward-looking statements at a later date, the company specifically disclaims any duty to do so.

On today's call, management will often refer to adjusted operating income, adjusted operating margins and adjusted EPS. These metrics exclude any pre-tax special charges, as well as asbestos and bankruptcy charges related to the company's Leslie controlled 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 on the earnings press release on CIRCOR's website.

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

Thank you, David, and good morning, everyone. I'll start off the call with a few brief opening remarks before turning the call over to Fred for the financial overview.

We're pleased with the results this quarter. We made good progress in the execution of our growth strategy. We're winning new customers that provide for long term growth. We improved Q3 performance over Q2. We expect to continue improving in the fourth quarter and into 2012, particularly with our increasing ability to capture new customers and the solid backlog we have to work with.

We reported revenues at the high end of our guidance range, reflecting solid demand across all of our segments. Bookings are up 10% for the quarter, including a five year, $26 million aerospace program award for landing gear.

This contract award, which is on a major aircraft platform, and is with a new customer for CIRCOR is another example of our improving competency and ability to win highly engineered projects with excellent long term growth potential.

Our backlog was up 12% overall, reflecting the longer term steady improvement that we've seen across many of our end markets. We reported earnings of $0.63 per diluted share. This includes a $0.06 benefit as a result of a pre-tax $1.6 million favorable litigation settlement. Excluding the benefit, we achieved EPS at the high end of our guidance range.

With that as background, I'll turn it over to Fred to review the quarter in more detail, and after Fred reviews our results, I'll describe our end markets and provide guidance for the fourth quarter.

Thanks, Bill. Please turn to slide three and I'll begin with consolidated financial results and then get into the segments.

Consolidated revenues for third quarter increased 18% year over year, to $210 million, compared with the third quarter of 2010, and we're up 9% sequentially from the second quarter. The year over year increase was due to 14% organic growth, 2% from acquisitions and 2% favorable foreign exchange impact. Energy and aerospace drove much of the growth for the quarter.

Adjusted operating income was $15.7 million, down 1% from the third quarter of last year, but up 27% sequentially. Our net income for the quarter was $10.9 million, or $0.63 per diluted share, compared with net income of $10.4 million or $0.60 last year.

Net income included pre-tax Leslie asbestos bankruptcy recoveries of $200,000 this quarter, compared to charges of $2.3 million last year. Exclusive of this impact, adjusted earnings per diluted share for Q3 2011 was $0.62 and $0.69 for Q3 2010.

As Bill mentioned, net income this quarter includes a favorable litigation settlement of $1.6 million pre-tax, or $0.06 per diluted share. This relates to the successful outcome of a claim which we have been litigating for several years.

Now I'll turn to our segment performance, beginning with energy on slide four. Energy save in bookings were down 5% year over year. The short cycle in North American segment continued to grow at double digit rate, but this was more than offset by large international projects, whose order patterns tend to fluctuate quarter to quarter and do a difficult comparison for pipeline solutions, which had a large $12.4 million order received in Q3 of last year. Ending backlog of $202 million was up 32% over year over year.

Energy revenues of $103.3 million increased 28%, due to 21% organic growth coming from all areas, 3% favorable FX impact and 4% positive impact from the Brazilian acquisition we completed in the first quarter.

The segments adjusted operating margin was 7.2%, compared with 11.1% in the third quarter of 2010 and 5.3% in the second quarter. The year over year decrease was primarily driven by the dilution of acquisitions and pricing pressures in large international projects. This was partially offset by favorable mix and lower spending.

Sequentially, we improved 190 basis points, which reflects progress that we are making in the large project businesses.

Within our aerospace segment on slide five, bookings were up more than 100% year over year and 88% sequentially from the second quarter, primarily due to the $26 million multiyear military landing gear order that Bill mentioned.

We ended the quarter with a segment backlog of $160.4 million, an increase of 5% year over year and 20% sequentially.

Revenues of $32.7 million were up 15% year over year, driven by 14% organic growth and a 1% favorable FX impact. The organic growth was across all areas, with the exception of military landing gear at the market weakness.

Adjusted operating margins were 5.6%, down year over year from 9.6%. The margin decrease was primarily the result of recently acquired Sylmar, California, landing gear facility, where we continue to implement the CIRCOR business system and invest in capital and engineering support through large landing gear programs.

These investments are critical to our strategy for the future growth. They will help support the programs we have already won, such as the A350, A330 and the new military landing gear program that Bill mentioned. The quarter was also adversely impacted by unfavorable mix.

Now let's move to slide six and the flow technology segment, which had a very strong quarter. Bookings were down 9% year over year and down 8% from the second quarter. These declines were primarily related to recent softness in the LED equipment market, driven by slower demand from China for LED manufacturing equipment, which until last quarter was a very strong growth driver.

We ended the third quarter with segment backlog of $77.8 million, down 9% from last year and 7% sequentially. This was primarily related to the lower LED equipment and maritime project shipment that occurred in Q3.

Revenues increased 8% year over year, to $74 million. Improvement was due to the organic growth of 6% as a result of strength in most markets, excluding LED, and we also had 2% positive foreign exchange impact.

Those third quarter adjusted operating margins were very strong, at 13.6%, up from 13.1% in the third quarter of 2010, and 12.4% in Q2. We have performed well in leveraging the increased volume and productivity partially offset by increased growth investments. Slide 7, our highlight from our consolidated P&L, most of which we have already focused on.

Q3 of this year included a relatively minimal pre-tax recovery related to the Leslie bankruptcy, of just over $200,000. As we have stated previously, we do not expect to incur any significant expenses related to the Leslie bankruptcy going forward.

Corporate expenses were down 26% year over year, to $3.6 million, due primarily to the litigation settlement recovery we discussed earlier. The adjusted effective tax rate in the third quarter was 25.5%, better than our guidance, mostly due to several discreet items.

Now turning to slide eight. During the third quarter, we used $5.2 million in free cash flow, which is defined as net cash from operating activities, less capital expenditures. We anticipate the fourth quarter free cash flow to be much improved over the third quarter, primarily driven by earnings and inventory improvements.

Our current cash position and our credit facility provide us with the flexibility to continue investing in opportunities for organic and acquisition growth.

And now I'll turn it back to Bill.

Thank you, Fred. Please turn to slide nine, where I'll cover our market assumptions, starting with energy and large international energy projects.

The demand environment for large international energy projects still appears healthy, with a solid quoting stream. We continue to be more disciplined in pricing and the margin in our backlog is slowly improving.

The short cycle business continues to be quite strong, where we believe we are winning new customers, taking market share and performing well operationally. Rig counts remain high and demand from distributors remains strong. Within our pipeline business, our order levels are steady and pricing is slightly improving. Overall energy markets are still expanding.

Turning to aerospace, even as passenger traffic growth rates are beginning to moderate somewhat, commercial OEMs are pressing forward with planned production ramp ups, which are a critical part of our business demand.

In business aviation, there seems to be an improved sentiment recently that the business jet market could improve as early as 2012. We continue to watch the defense side of aerospace due to current budget constraints and the winding down of activities in Iraq and Afghanistan.

Specifically, we have experienced weakness in demand for after market spares and repairs for Chinook helicopter landing gear. However, the cutbacks on spending have been very program-specific and we continue to bid on some good opportunities that are not candidates for cutbacks. In our recent $26 million contract win, for example, is a great example that shows even in this environment, we're winning strategic orders for long term growth.

Moving on to flow technologies end markets. In HVAC and steam markets, MRO activity and demand for energy efficient upgrades remains steady and improving, while there's little construction-driven demand in North America and Europe.

Most of the process and industrial end markets have remained solid, with some improvements, which we believe reflects a slow but steady long term recovery in global industrial markets. The one recent exception is the LED equipment market, which we mentioned, which dropped off in Q3 after a number of strong growth quarters.

It's anticipated to be soft for a few quarters as a result of a slowdown in demand from China. I might add that we've seen the end market for LED equipment slow down before, only to take off a few quarters later, so we'll watch it for now.

The power generation market continues to be strong, especially in emerging markets. In fact, we're selling control valves that are being used in both nuclear and conventional power plants in China, and we continue to win new customers in India. Our team in India tells me, in fact, we've added over 40 new customers in 2011 alone.

Also in the developed economies of North America and Europe, there continues to be steady demand for MRO and efficiency upgrades to existing power plants.

And to reinforce this last point, one of our key growth areas in our strategic plan is power generation. We've been investing in global sales, marketing, product development and we're now pleased to announce we just last week purchased land in India to build a new manufacturing facility there, which will help position CIRCOR to capture a greater share of the steadily growing global power generation industry.

Turning to petro chemical and refining, while this market continues to be relatively soft, we've seen some positive signs in petro chemical.

In Navy, longer term visibility is uncertain, as defense cuts may delay new programs. In the near term, however, the outlook is positive for CIRCOR as we continue to have a strong backlog for aircraft carrier control valves and other international orders.

Now looking at the market environment going forward, energy is expanding, commercial aerospace build rates are rising and we have won several large future programs. Flow technology is on a steady growth and improvement track, and while we're watching the recent softness in the demand for LED equipment from China, we believe that longer term this segment's end markets, what I often refer to as the general global industrial markets, will continue steady measured growth.

Overall, we're optimistic about 2012, given our current backlog positions, our new customer wins and our prospects for continued execution of our five year strategy of doubling CIRCOR's revenues and improving margins.

So that brings us to our expectations for the fourth quarter. We expect revenue for the fourth quarter of 2011 to be in the range of $213 million to $222 million, and we anticipate earnings to be in the range of $0.53 to $0.63 per share and a 30% tax rate. This compares favorably on a year over year basis to our adjusted earnings for Q4 of 2010, of $0.53, when we had a lower effective tax rate of 22.3%.

And finally, before we go to Q&A, I'd like to just note our announcement. We're quite pleased to have Andy O'Donnell joining our Board of Directors. We appointed him yesterday. Andy is a vice president of the Baker Hughes Corporation, is president of Western Hemisphere Operations for Baker Hughes and brings a tremendous amount of expertise and knowledge about the oil and gas and energy end markets. So we're quite pleased to have Andy on the Board of Directors.

So with that, we'd like to go to your questions.

Thank you. We will now be conducting a question and answer session. (Operator Instructions). Our first question comes from the line of Charlie Brady from BMO Capital Markets. Please proceed with your question.

Morning, guys.

Morning, Charlie.

Hey, on the aerospace side, can you give us some indication of the margin impact on the investments that you've been making in that business? You know, development costs, how that's impacting the margin and will that continue into Q4 and into 2012?

Sure, Charlie. As we -- I think we said in the past, the sort of direct investments in the programs is probably impacting our margins by a couple hundred basis points. Certainly in Q3 we also had a very large impact of we call -- you know, it's really because of our European operations we have, you know, a slow down in those operations due to vacations in Q3 that impacts us.

But beyond that, there are a couple things. There is the -- there was some more investment in the, as we talked about, the Sylmar facility, so that was, you know, in the quarter probably 100, 150 basis points, plus we had some unfavorable mix. So the mix will correct itself as we go forward and the investment in Sylmar, we expect improvement in Q4 and that will slowly come out of the mix during the next couple quarters.

Okay. On the -- switching gears here. On the aerospace side, can you tell us what the platform is specifically?

At this point we cannot divulge that information.

Okay. And then on the energy side, and I guess also given your new board member, can you give us some idea of what you're looking at in terms of rig counts or maybe what you're hearing from your customer base on the tenor of directionality of rig counts going forward?

Well, rig counts, as we know, have been quite strong, stronger I think than anticipated, if we go back earlier this year up until now and continue to be today. I think there's some question about next year, but it's really hard to call. I think there's concern with just the general, you know, global economic environment. But none of our distributors have yet seen any evidence of a slowdown.

Okay. One more and I'll get back in the queue here. On some flow, what's the pricing environment in flow technologies look like these days? Are you getting price through?

Yes. We are in some places, yes. We've put in several price increases in the different segments of our business during the year, Charlie, and we've been able to get some read-through on those.

Are you covering increases in raw material costs at this point?

It's obviously difficult to say when you -- you know, you -- measuring the complete offset. I would say with the price increases in the productivity, we have, definitely.

Thanks.

And with the continued expansion of our global supply chain activities.

Right.

Right. Thank you.

Our next question comes from the lines of Kevin Maczka, from BB&T Capital Markets. Please proceed with your question.

Thanks. Good morning.

Good morning, Kevin.

Bill, I'm interested in your margin expectations that are baked into your guidance. We've been talking about energy for some time now, trending back towards double digits and perhaps doing that by Q4. I guess is that -- is that still your expectation and can you kind of frame the expectation for double digits in energy in 2012 as well?

And then on aerospace, can you just say a little bit more about the timing to now return that to double digits as well?

Yes, our expectation is still to get energy to a 10% level in Q4. That requires us to continue improving the large project business, working through a price in backlog, particularly as we shed the lower price backlog, and we've been more disciplined this year in pricing.

It also requires that we ship some of the larger projects we have in the quarter and the mix that we anticipate. So there's pluses and minuses around that, but our target is still 10% fourth quarter.

And as we go into 2012, while particularly the project side of the business is lumpy and the short cycle business is hard to really predict quarter to quarter, we expect to keep improving from there on a longer term basis. So as we look towards the end of 2012 with things we're working on, particularly the longer cycle improvements, we expect to keep us progressing next year.

On the aerospace front, as Fred indicated, the third quarter was a low quarter for a number of different reasons, but we expect that business to get healthy again as we go into 2012 and to be back in the kind of range it was in before, with a couple of hundred basis points for continued investment in new programs.

As we were investing in this program for the current win, it's hard to talk about that pursuit when it's -- before it's actually a won program. But there are other programs, other large -- particularly in the landing gear space, other large programs we're pursuing as well.

So we should see -- Kevin, we should see improvement in Q4 in the aerospace business getting close to that double digit back again.

And again, just to be clear on that, the investments you're making in the California facility, those do not carry over into Q4 or they do? And you said, I think, mix corrects itself, but the other development costs are ongoing. Is that all accurate?

Yeah, let me just -- let me just feed it back, make sure I understood. The downward pressure because of Q3 shut downs, vacations, that will definitely go away. The big mix impact we had in the quarter, that will be going away, and the investments we're making at Sylmar will get better, but they will not -- they are not totally going away in Q4.

Okay. And then on the top line in aerospace, we've had this kind of cross-current for some time now with commercial getting better, and of course you're winning new programs there in military with uncertainty. As you look out into next year, you know, with those cross-currents, with what you know now, does it still look like a growth year on the top line in aerospace in '12?

Yeah, I think it does, Kevin, and we've already looked at a pretty good degradation in the aftermarket spares for instance, for the Chinook program. So we don't expect that to get any worse from where it is, and as we win these new programs, we should see some growth.

Some of the programs are much longer term, particularly the large ones we talk about, but some of them are shorter term and smaller that we'll add as we grow into next year.

OK, thanks. I'll get back in the queue.

Our next question comes from the lines of Matt Summerville, from Key Bank. Please proceed with your question.

Morning. Just back to aerospace. In terms of absolute dollars, can you give us an idea of what your RD&E expenditures would look like, either as a percent of sales or in absolute dollars in '10, '11 and '12, so we can think about really trying to model that correctly?

Yes. It's more of a -- I think the best way to put it together, as I said, is probably a couple of hundred basis points this year. Last year it was less than that, probably more in the hundred basis point range. And we haven't talked much yet about next year, but next year should be somewhat close to what we're doing this year.

It's probably a little bit more than this year, but close, just because this is a whole new program we're adding on top of the A340, A350.

So the margin hit, if you will, similar in magnitude, the dollar spend slightly higher, Bill, in '12 versus '11?

Probably a little bit higher. The revenue streams will have different timing. The air bus wins are -- particularly the A350, as we know, is a couple years out. This other program that we just won will start next year.

Okay. And is that -- that $26 million, is that fairly level over the five year period beginning in 2012?

I wouldn't say it's level in 2012. Beyond that --

Yeah, it's actually shipping very late 2012, maybe even 2013. So it's really -- it's really a 2013 impact and it will fairly level after that.

Okay.

And then I guess from the spares standpoint with the Chinook, how much additional degradation to you see there, Bill, from here?

Well, it's hard to have a crystal ball, but it doesn't look like on the aftermarket side we're going to see much more. We've already seen quite a bit.

Okay. And then with regards to the energy business, is anything -- the order trend that you experience in the quarter, is that all market related or are you guys maybe being more selective on the business you're bidding on, walking away from business, or maybe, you know, a couple of years ago you weren't willing to think about that?

We are more disciplined. That could be part of it. The quotation activity is still quite strong and it's a very competitive market on the large project business. I would say all of the businesses outside of what we consider the large project business, which would be pipeline, the short cycle, all of their bookings and orders, if you look at it sequentially actually grew from Q2 to Q3. So it's hard to call it.

The large project is a very lumpy business and for a company our size, it can move the needle for us quite a bit in the quarter. We probably need a couple of data points, a couple of quarters to really make that call. But we are being more disciplined on the pricing front.

And we -- as you know, we saw three pretty -- four, actually, strong bookings quarters and then this quarter was down. If you look at that trend, and as Bill said, it's hard at this point for us to tell you the total picture.

The significance, just to put it in perspective, within flow, it seems like, you know, you're calling out some of these high tech markets. I would assume it's not all that substantial in revenue, but it is in terms of profit. Is that why you're bringing, you know, the LED dynamic to our attention?

Actually, it's quite -- you know, it's quite large, from a revenue perspective. I think it's not so much the -- obviously they contribute, but, you know, it's a pretty -- it's in the process. It was around, you know, half of our largest segment in the -- in that -- in the flow group. And it's -- the last couple of years it's been a fairly large component of that.

Okay. I think that's all I have. Thank you.

(Operator Instructions). There are no more questions at this time. I would now like to hand the floor back over to Mr. Bill Higgins for closing comments.

We thank all of you for joining us this morning on the call. We appreciate your interest in CIRCOR and we look forward to speaking with you on our next call. Have a good day.

This concludes today's conference. Thank you for joining us. You may disconnect your lines at this time.