Circor International Inc (CIR) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, welcome to CIRCOR International's third-quarter 2012 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 Dr. 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, Company CFO. The slides we will 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 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 Form 10-K for 2011 and other SEC filings. 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 1, 2012. 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 pretax special charges, repositioning inventory valuation reserves, intangible impairment, as well as asbestos and bankruptcy charges related 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. I'll start with a few opening remarks before turning the call over to Fred for the financial overview.

We reported a solid quarter from both a top- and and bottom-line perspective. Revenues at about $210 million were driven by strong demand in our Energy segment and both the short-cycle North American market and the international projects market. We executed well operationally, and we delivered an improved bottom-line, reporting $0.76 in non-GAAP adjusted EPS.

Let me remind everyone that our strategy for long-term growth is to target opportunities where there is sustainable demand for valves and actuation control devices, specifically in three large global markets -- upstream and midstream oil and gas, power generation and aerospace.

To be successful executing this strategy, we're focusing on four key strategic initiatives -- first, attracting and developing talent; second, improving our operational capability with lean and operational excellence to win customers and grow organically; third, building out a competitive global supply chain and manufacturing footprint to service customers around the world; and fourth, repositioning operations to consolidate factories, drive margin expansion, and enhance competitiveness.

In the third quarter, we continue to make progress in all four of these strategic initiatives. Specifically, we just announced three repositioning actions in Brazil, California, and India. We expect all to be completed over the next three quarters, and it's notable there is one repositioning action in each of our three segments.

These initiatives include consolidating facilities, shifting supply to lower-cost regions, and exiting certain non-strategic products. We estimate the total annualized pretax savings from these repositioning actions to be approximately $7 million. We expect to begin to full realize these savings in the second half of 2013.

As a result of these repositioning actions, we took certain charges, primarily non-cash, during the quarter that consisted of inventory valuation reserves, intangible impairments and special charges, which include employee-related costs and asset write-offs. We expect additional charges over the next three quarters.

At this time, I'll turn it over to Fred to review the quarter and our repositioning actions in more detail before I come back and discuss our markets and provide guidance for the fourth quarter.

Thanks, Bill. Due to the repositioning actions and the related impact on earnings, I want to remind you that we often discuss and measure our performance using adjusted operating income, adjusted margins, and adjusted EPS, which exclude repositioning-related inventory, impairment and special charges, as well as historical Leslie asbestos and bankruptcy charges.

As a note, in our financial statements, the repositioning-related inventory charges are recorded in cost-of-goods sold. I will discuss this further in a minute. So please move to slide three.

Revenues for the third quarter of $209.8 million were up 4% organically, offset by a negative 4% from unfavorable foreign currency. Backlog was up 1% year over year and by 5% sequentially from the second quarter. Adjusted operating income significantly improved at $18.5 million, up 18% from the third quarter of last year as AOI margins expanded to 8.8% compared with 7.5% in 2011.

Net income for the quarter was $1.9 million or $0.11 per diluted share compared with net income of $10.9 million or $0.63 per diluted share last year. The decrease was primarily due to the repositioning charges. Excluding those charges, we exceeded our guidance by delivering adjusted earnings per diluted share of $0.76 for the third quarter of 2012. This is an increase of 23% from the adjusted earnings per share of $0.62 in the third quarter of 2011.

Please turn to slide four for the charges with the three repositionings Bill has discussed with benefits in all three segments, and let me describe these actions in a little bit more detail.

In the Energy segment, we are shifting our non-core manufacturing out of Brazil operations to low-cost regions and are exiting some nonstrategic products. We purchased the Brazil subsidiary in 2011 as a way to enter the $1.4 billion oil and gas valve market in that country. The repositioning actions will enhance profitability and better position the business to capitalize on the opportunities in Brazil.

In Aerospace, we are consolidating two of our California landing gear facilities and exiting some small, nonstrategic product lines. As we've previously discussed, we have been winning aerospace actuation control business on large, long-term platforms such as the Airbus A350 and Sikorsky Blackhawk helicopter, and we are continuing to pursue additional opportunities.

The aerospace repositioning in California increases our ability to focus on large and complex landing gear component manufacturing and enhances our profitability as we continue to invest in this strategic area.

In Flow Technologies, our repositioning actions include consolidating two India-based operations into a newly constructed manufacturing and shared service facility.

We are using our presence in India as a launching pad for the power generation market in Asia. CIRCOR had virtually no presence in India just a few years ago prior to our acquisition of Mazda. With the plant consolidation, which we had discussed previously, we will have a much larger and more efficient operation capable of supporting our future growth.

The repositioning actions that we are announcing today position us to better penetrate key strategic markets while providing enhanced efficiency and greater profitability. As Bill mentioned, we expect annualized savings of about $7 million from these initiatives.

As depicted in the slide for Q3, these repositioning activities resulted in impairment charges of $10.3 million, made up of inventory charges of $4.1 million and special charges of $1.4 million. Of the charges, $0.5 million were cash and $15.4 million were non-cash.

Now I will turn to segment performance, beginning with Energy on slide five. Energy bookings were up 26% year over year, primarily due to continued strength in large international projects and growth in pipeline orders. Ending backlog of $210.4 million was up 4% year over year and 7% sequentially. The increases in backlog were primarily due to higher order levels within our large international project business, partially offset by ongoing shipments of a large pipeline of project booked in 2010 and slightly lower short-cycle backlog.

Energy revenues of $110 million increased 6% year over year, comprised of 11% organic growth across most markets, primarily short cycle North American and large international projects in Brazil, partially offset by 5% negative foreign currency. The segment's adjusted operating margin was 14%, up from 7.2% in the third quarter of 2011. This increase was primarily driven by favorable penalty reserve adjustments as we closed several large international projects. We also benefited from improved pricing in our backlog and increased volume and associated leverage.

Now Aerospace on slide six. Bookings were down 32% year over year, primarily due to lower landing gear orders. This segment typically has lumpy orders due to large programs, and last year in the third quarter, we booked a $26 million multi-year military landing gear order. We ended the quarter with relatively flat segment backlog compared with the prior year at $162.7 million.

Revenues of $31.8 million were down 3% from prior year due entirely to a negative foreign currency impact.

Segment adjusted operating margins were 4.2%, down year over year from 5.6%, primarily due to the timing of operating expenses, as well as investments in future programs, partially offset by favorable mix and pricing. The third quarter is typically our weakest margin quarter due to European seasonal slowdowns.

Now let's move to slide seven and the Flow Technologies segment. Year over year, total segment bookings were down 9%, more than half due to the LED equipment.

In addition, we are seeing some softness in our European businesses. Revenues came in at $68 million, down 8% year over year, but 9% due to the LED equipment market and 2% due to negative currency. This is partially offset by 3% growth in all our other markets.

Flow's third-quarter adjusted operating margins came in at a strong 13.1%, just slightly lower than prior year 13.6%. The decrease was due to lower volumes, growth investments and power, partially offset by favorable mix.

Slide eight includes highlights from our consolidated P&L, most of which we've already discussed. Corporate, general and administrative expenses to the third quarter of 2011 were $7.2 million compared to $3.6 million for the same period in 2011. The increase was primarily due to a favorable settlement of a long-standing litigation matter recognized as income in the third quarter of 2011 of $1.6 million, as well as higher third-quarter 2012 professional fees and variable compensation.

Our tax rate in the third quarter was significantly impacted by repositioning charges we took. If you remove the impact of repositioning, our tax rate would have been 20.9% compared to the reported negative 92.8%. This adjusted 20.9% rate was better than expected, primarily due to reduced UK tax rates and other favorable discrete items. We still expect our full-year tax rate to be in the low 30% range.

Now turning to slide nine, during the quarter, we generated a very positive $18.7 million in free cash flow compared with using $5.2 million in the third quarter of 2011. Our current cash position and our credit facility continue to provide us with the flexibility to continue investing in opportunities for organic and acquisition growth.

Now I'll turn the call back to Bill.

Thank you, Fred. Please turn to slide 10 where I'll be covering our market assumptions and key growth and profitability drivers. Let's begin with Energy.

The North American short-cycle business remains strong in the quarter. Rig counts, particularly for oil and liquids, are still at high levels, and we've been able to win business to offset the drop in gas rigs. The short cycle business has been a growth engine for CIRCOR, but recently there appears to be a flat to slightly declining trend in overall North American rig counts, which indicates a general softening in demand.

In large international energy projects, pricing and quotation activity continues to improve. We've seen extended lead times for manufacturers, indicating a tightening of supply. And this tightening of capacity in a large project business should benefit pricing going forward.

Our pipeline business, which is primarily driven by capital spending, is seeing increased demand also. We expect this end market to improve with the need for pipeline infrastructure, particularly in the United States and Canada.

Turning to Aerospace, commercial OEMs such as Boeing and Airbus have strong backlogs as they continue to ramp up production. This may be the bright spot in Aerospace today. The aftermarket side of commercial aerospace driven by the airlines has softened. Business aviation remains weak, which we expect will continue into 2013.

That said, there is some growth in demand for larger business jets.

On the defense side, we remain cautious as sequestration draws near and Gulf activity winds down. As such, we're continuing to expand our customer relationships and pursue new business, including export sales to offset US defense spending declines. We expect demand for aftermarket, repairs and spare parts sales for military air craft, including the Chinook CH-47 program, to continue to be weak.

Looking at the Flow Technologies end markets and process and industrial end markets, we've seen recent weakness in European demand, and this may continue with the slowdown in Europe and softness in demand from emerging markets for European OEM exports.

In addition, we don't anticipate improvement in the LED equipment market for the foreseeable future.

We are optimistic about the long-term outlook for the power generation market, despite delays in some emerging markets for large power projects. In developed economies, there are growth opportunities for MRO and efficiency upgrades and for the conversion to natural gas-fired power plants in the United States.

The chemical, refining and petrochemical demand environment continues to show signs of improvement, and our maintenance business is strong. The low price of natural gas and related liquids as a feedstock for petrochemical is creating growth opportunities in the North American market. And maybe we remain cautious due to sequestration and the limited visibility and uncertainty of defense spending.

In the HVAC and steam markets, demand is improving for energy efficiency upgrades, and we're starting to see some recovery in the commercial construction market for institutions such as hospitals and universities, which may be finally investing in new infrastructure. In North America, spending here has increased 7% for the first seven months of 2012. This is the first time there's been growth in construction investment since 2006.

So that brings us to our expectations going forward. Please turn to slide 11.

As we mentioned earlier, our repositioning initiatives will continue over the next three quarters. We expect to incur pretax repositioning and related charges of between $3 million and $3.5 million during the fourth quarter of 2012 and between $5 million and $6 million during the first half of 2013.

For the fourth quarter of 2012, we expect revenues to be in the range of $203 million to $212 million, and excluding repositioning charges, we anticipate adjusted earnings to be in the range of $0.50 to $0.62 per diluted share. This guidance assumes a 30% tax rate on adjusted earnings, and then exchange rates remain at present levels.

I'll wrap up by saying that we're focused on executing our strategies to grow and to improve profitability by taking advantage of great long-term growth markets for valves and actuation control devices in oil and gas, power generation and aerospace.

We're well positioned to grow revenue, expand margins and deliver shareholder value. So with that, let's go to your questions.

(Operator Instructions). Charley Brady, BMO Capital Markets.

Can you quantify the reserve adjustment in Energy?

Yes, it's around $3 million, about 300 basis points in the quarter.

Thanks. And then you commented a little bit on the softness in some of the rig counts. As you look to that short-cycle business, though, has that shown up in some of the orders in Q3 yet, or is that something that is on the come? And when you look at the Energy business orders in Q3, can you parse out how much of that was driven by the international side versus the short-cycle business?

The short-cycle business -- I would describe it in a 5% range decline in the quarter on bookings at pretty high levels. So that business has still performed quite well.

The project business bookings activity, as I mentioned, Charley, in the quarter were quite good and activity through the quarter was good, including ending the quarter. So we had other opportunities we're still working on after we closed the quarter. So we expect that to continue.

Are you expecting in Q4 Energy revenues to be up sequentially from Q3?

Charley, this is Fred. No, you can't really from the outside is that last year in the second half of last year, especially Q3 and Q4, the large project business was significantly depressed, our orders. And so that's now impacting our shippable backlog. So we've had great -- three really strong quarters in the large international projects. But in Q4, we're really living off of bookings, obviously, from a year ago. So that's why we're actually going to be down sequentially.

Got you. Okay, that's helpful.

And then just one more and I'll get back in the queue. On the Brazil operations existing there, they are really big on local content, and I'm just wondering how that plays into your decision process. Is there going to be any kind of impact by not having the local content there anymore?

Let me just describe it a little bit further. We are fully committed to the Brazil market and the reason going down there to service the oil and gas industry. The rest of our business down there services more of the general, industrial, the ethanol marketplace. So we intend to have local content where it's appropriate, where it's strategic to service the local -- the requirements for having that local content on the ground in Brazil. But then we can leverage the rest of CIRCOR, our other products from other business units, as well as our operations in China and India to develop a low-cost supply channel for products that we don't necessarily need the local content in Brazil to sell in Brazil.

That's helpful. Thanks a lot.

Kevin Maczka, BB&T.

The first question, just to follow up on this reserve adjustment, is this truly a one-time thing? Are there more of these coming? Should we be expecting similar things to affect quarters positively or negatively going forward?

It's a good question. We probably will have some in the future when we've had some in the past. This has not been the first quarter this has happened. When we actually shipped our projects, if they are late, we accrue a certain amount based on the best history we have. And then it takes us quite a period of time eventually to go back and re-negotiate those or re-negotiate why were we late. Sometimes it is the customers' requests, etc.

So it is -- we book the expense really more on a steady basis, and then depending on the size of the project, they can be large when we actually close it out at a later date.

I think the difference here is we've really cleaned up the operations as we improve execution. This is bigger than normal.

Yes, this is absolutely --

But there is -- it is a normal part of a business process to have the reserves.

Okay. But this is tied to projects that were shipped some time ago, nothing that happened in Q3?

Absolutely.

Bill or Fred, can you just give a little bit of color on your margin expectations generally? When we look at Aerospace and Energy especially, the margins have been all over the place. Aero has been as high as 11% and as low as 4% now just this year. If we backed out this charge on Energy, it's still a double-digit margin, but it's just been recent that we've got to that level. And even Flow, which has been more stable, has been pressured by some growth investments. Can you just give some color on what to expect since some of these margins on a quarterly basis tend to really fluctuate?

Yes, I think we can give you a little bit more color. On the Energy side, as I just said about obviously the favorable tendency in the quarter but yes, you are correct. We're around -- we've been last couple of quarters around 11% run rate. And we would anticipate, we obviously have activities to improve that over time, but that's going to be a slow progression. We've gotten through some of the worst backlog that we talked about for quite a long time that kept us down well below the 10%, 11% range. But I would expect we should hopefully, over time, slowly build from here. Again, long-term, we still expect that this market in a normal cycle can be in the 15% AOI range.

On the Aerospace side, we are definitely being impacted by the large programs we have won, and we've really had no production shipments to date. We'll start to get some of that in some of the programs next year, so we'll get gradual improvement. And also with the repositioning in the second half of next year, we should get more improvement. But it is still going to be a slow improvement over time from where we are today until we get more volume, which will be probably more in the second half of next year or starting to get into 2014.

And the Flow group, they've done excellently. They're in the 12% range today -- obviously 13% in the quarter, but I think they're somewhere in that range, even with the growth investments.

So, again, I think as we get volume in the power space over time, that will start to help us expand those margins. But, again, it's a slow progression from where we are today, and I would say we're really in the 12% range.

Okay. Very helpful, Fred.

And then on growth investments, can you just describe a bit more -- where are we in the spending cycle in each of the business units?

In Aero, as I just said, it's really about these large programs, the biggest being the A350, and that doesn't really fly until late 2014, 2015.

Yes.

So the program spend in Aero will be with us for a while.

On the Flow group, that spending isn't going away. That spending is infrastructure build that will over time we'll get the volumes that will help us use that sales, marketing and engineering investment that we're putting in today.

Okay. So it's more of a matter of the spending will continue, but eventually we'll have volume to leverage that spending versus making a big spend for a few quarters and then not having that continue.

In the Flow group, that is absolutely correct.

Yes, I think that's fair for the Flow and the Energy groups where we'll invest, but we are going to drive the incremental continuous improvement to expand margins as we go forward and help fund some of that.

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

Nathan Jones, Stifel Nicolaus.

If I could go back to flow margins for a minute, you said 300 basis points from the reserve adjustment, which would put you right back to the same margin as 2Q. In 2Q we were talking about a very rich mix that you didn't think was going to continue into Q3. I think the expectations were probably for margins, below the Q2 level. Can you talk about what improved over what we were talking about last quarter in terms of mix or execution or what got you to that underlying 11% margin, which is probably better than expected?

Sure. And you're talking about the Energy?

Energy, yes.

Again, it was good execution. We did well in the quarter, and we did have some good mix. And other than that penalty, the penalty piece I think was really about productivity and execution during the quarter. It was really well done. It also kept expenses under control.

And I think as we look at the fourth quarter, if we had more volume, we would continue that. There's a little less volume in the fourth quarter with the project business, as Fred alluded to earlier.

But the pricing in late 2011 that we're working off in the international part of the Energy business, is pricing still poor in that, or had pricing improved then?

Yes, we have definitely improved -- our pricing has improved over the last I would say -- well, the first three quarters of this year, our pricing is simply improving.

And how much of the legacy low-margin backlog shipped in Q3, and how much do we have left?

Of the loss-making contract we talked about, they are done.

They are done?

Yes, it was a rounding error, but they're done, basically. We ended the year with $50 million, and we have now shipped that $50 million.

How much of it was shipped in the third quarter?

I think the round number is $10 million.

$10 million? Okay. Thanks. I'll get back in queue.

John Moore, CL King.

It looks like you took a fairly sizable impairment charge in Aerospace this quarter. I was just curious what that related to.

That's related to, obviously, the repositioning we talked about where we're combining two facilities, one of which is the Sylmar facility. And we are exiting some unprofitable, nonstrategic product lines. And so the impairment primarily has to do with either the inventories and/or trade names, customer lists intangibles that we had set up at the original time of the acquisition.

Got it. Thanks. And then you put out a press release here mid-quarter talking about a fairly sizable shipment you had into a desal project, the Energy division had to do a desal project in Saudi Arabia. I was curious, how big of an impact is that either to the third or the fourth quarter? And I was also hoping, I guess I was a little surprised to see such a strong order in the desal market. I was hoping you could talk about your opportunity in that market going forward?

Well, the specific release you're referring to, I believe, is the one where we were talking about the largest control valve we've made for water application in a desal plant. It really speaks to the strength of what we call the international project markets, which would include is cage ball control valves that go into water control where there's turbulence and other technologies required.

So I think as we look back over the years, it's a very lumpy business. The projects can be sizable or they can be smaller ones, but it's more representative of the technology that we're developing and the strength we're building in the project business.

Okay. And is that project shipping, and is it a meaningful benefit to the fourth quarter?

No, it's not -- it's obviously meaningful, but it's not like a material, huge project.

Yes, no. And I think as we mentioned before, the fourth quarter in the project business is a little light because the bookings 12 months ago were light. So all of the last three quarters of strong bookings we've had in the project business because of customer schedules and the lead times associated with the sophistication of those valves will ship over the 12 months following the bookings.

Got it. Okay. That's all I've got, guys. Thanks.

(Operator Instructions). Matt Summerville, KeyBanc Capital Markets.

A couple of questions. First, the $7 million in anticipated savings, can you allocate that to the segments in terms of where you would expect that to fall out?

Yes, we can give you a rough idea, Matt. There will be fairly little in the Flow group. The Mazda is a fairly small acquisition. So the improvement from doing that is really all about what we're doing in India. It's not so much -- it's not a huge driver. And so it's less than $1 million.

In the other two, it is pretty well split between Aero and Flow. It's not significantly different for either of the remainder.

Okay. And then in terms of the international project business, I think it was either on the last conference call or the one before, there was more talk about implementing a similar process or practice with lean and OpEx I believe to the Italian business. No mention of that today. Can you just revisit what you're doing to improve the cost structure overall in the large international business, excluding what you mentioned today on Brazil?

Yes, this is Bill, Matt. We're working that diligently as we did in the United States and as I described it before, as I described it as a blueprint. In the project business, we've got a much stronger team on the ground in Italy. We brought in resources from other parts of the Company and best practices. And there is a thorough rebuilding of that business that has been underway, and that is showing up in the results of execution, getting projects done, getting the projects from the past, the reserves accomplishing a good negotiation with them as we have cleaner processes and better execution.

The go forward opportunity is to continue leveraging what we've done in the other businesses to improve material costs, improve gross margins, benefit from building a supply chain with lower-cost countries, improving our engineering and front-office processes with transactional Kaizen to improve additional cost.

So there's a lot more to do, and with a lead-time business that is 50 weeks or between 40 weeks and a year, the improvements we made six months ago are beginning to show up. The improvements we make today will show up somewhere from six to 12 months from today. So it's a long-term, incremental improvement with still plenty of opportunity in front of us.

How are you looking at the manufacturing footprint in that business? If you think out a year or two, will it look like what it does today?

No. And that would be the same case for the facilities that we have -- what we call our model line facilities that we've leaned out significantly. They look very different than they did three years or so before we started the intense work like we're doing today in Italy. So I expect the business to continue to change.

We will leverage the highly value-added work that we do in Italy with advanced materials, with cladding and special applications of welding for more sophisticated valves such as the cage ball control valve that we had the press release on for the application of desalination.

So we are going to continue leveraging the capabilities we have there around the forged valves, the higher metallurgy metal-to-metal type capability that many companies around the world cannot do. So I expect the footprint will look different for years from today, and it will leverage the highly-engineered products.

And then lastly, I want to make sure I understand how you're thinking about CIRCOR in the context of M&A going forward and the kinds of things you are looking at. If you look at what you invested the last two years between Castle and SF, it is somewhere in the neighborhood of, I think, $50 million. You've already impaired $10 million of that. Are there things that you're not finding in due diligence? Help me put all that together.

I think the acquisition of these two smaller businesses has required more investment and more work than we anticipated.

That said, for instance the Castle acquisition in California has brought us the capability to work on larger, more complicated landing gear that we didn't have the facilities to do before. And while we look at the acquisition by itself, it might not look so good. We would not also have won the A350 program and some of the A330 work that requires capability for a larger actuation of landing gear system.

And so it's a critical part of our strategy to grow. And when we acquired the business, we had also the benefit from the acquisition of, in 2005, the beginning of the landing gear business that we had subsequently moved into the corona facilities. And we had the intention of consolidating sites when we were ready, and we're getting closer to that point today.

There was some business in there that turned out, as Fred mentioned, to not be as strategic as we had hoped. But there's other business in there that we believe is a long-term growth opportunity for us, including the A350-type large landing gear.

In the Brazil application, we have the opportunity there to continue to transform that business in a marketplace where the local content is critical for serving Petrobras and the oil and gas industry in Brazil. In the industrial markets, it's almost a bifurcated marketplace. The industrial market for ethanol and other products is a much more highly competitive market where the repositioning of the business makes a lot of sense for us to leverage lower-cost supply.

So the market has changed a little bit with the ethanol market they are shifting. However, we still believe the opportunity long-term for oil and gas is a very large growth opportunity.

Across the businesses you mentioned as part of this program, restructuring, repositioning that you are deliberately going to look at revenue attrition, Fred, how much revenue do you expect to exit Company-wide? Is there a number on that?

It's in the range of -- it is $5 million to $7 million.

Great. Thanks, guys.

Chris Bamman, Capstone Investments.

Just a couple of quick questions. First, on the Energy side, just looking at the backlog, so if I understand this correctly, with regard to the backlog, you have some of that shipment that you booked in 2010. That is no longer on the books. So, therefore, we should view the backlog in Energy to be a little bit smaller but better in pricing? Is that fair to say as we go forward?

It's better in the sense that from 12 months ago as we were booking business, it began to improve in pricing. I want to stress it is a gradual improvement over time. We're not expecting a step change improvement.

Okay.

And actually, Chris, the actual backlog in that business is quite healthy right now.

Right. Okay. So that was really just one large project that maybe inflated it, but you are continuing to book other business but perhaps maybe not at the scale as that one particular booking. Is that fair? Is that how --?

I'm not quite sure I --

I guess what I'm saying is that there was one big large project that was booked that has been worked through. That insulated backlog number, and then when you look over year-over-year comparisons, the number might be a little bit lower.

No, I think maybe you're confusing -- we talked about $50 million of backlog that had very low margins. That was actually many customers. It wasn't just one.

Okay. And all that is pretty much gone at this point.

Yes.

All right. That's helpful. Thank you.

And just looking at the Aerospace segment, just trying to just get a little bit better grip on that, some of the dynamics in the third quarter, you have the European slowdown, but you didn't really have much shipments and made investments. How should we look at that? Was it more of the seasonal slowdown, or is it just the way the lumpiness of the orders go along? How should we view that?

Are you talking about the revenues in the quarter?

Yes.

Well, it's primarily the slowdown. Plus, we've obviously on a year-over-year basis, we've had some weakness in the military side, especially on the helicopter spares and repairs on a year-over-year basis.

Okay. And then pretty much with the Flow control, other than LED, there was some organic growth across most other businesses. But that's probably not going to hold true given that lower levels of military spend, so have you looked forward here, or are you projecting lower levels of military revenue than where you are today?

In the Flow Control group, we expect the Navy-related revenues over time to be weak. But in the larger Flow group, there is a real mix of end markets here, and they are behaving quite differently.

We sell instrumentation-type valves and regulators into oil and gas, into petrochemical, into power. So there are some areas that are strong, and there are some areas that are weak. So it is a mixed picture. So I wouldn't classify -- I wouldn't categorize the entire group as being weak.

Okay. That's helpful. Thank you very much.

(Operator Instructions). Kevin Maczka, BB&T.

Yes, just wanted to clarify on the timing. I think I may have missed that. You plan to take these $16 million in charges and realize the $7 million in savings fully realized in the second half. The $7 million is annualized run rate. You won't achieve all $7 million in the second half; is that correct?

That's correct.

And what was the timing on completing these charges again, Fred?

They will be -- in the first half of next year, they'll be completed.

So the charge is completed in the first half. You'll be at the $7 million run rate in the second, and that's an annual basis, okay. Got it. Thank you.

Nathan Jones, Stifel Nicolaus.

I would think that at the moment the international Energy business is largely baked for 2013. I wonder if you'd be willing to comment on what your expectations there are for 2013 versus 2012.

The backlog going into 2013 is quite healthy. I don't know I'd say it's completely baked yet, but it's close. We will be holding business reviews with all of our businesses next week to get a better look at it. So it would be premature for us to comment on the year.

Okay. And could you comment on when you think you'll begin to see the savings from the restructuring? Will that start in 1Q, start in 2Q, or it won't start until the second half?

Obviously none of these things -- these are not step changes. So will get a little bit in the first half of next year, but we really at this point I would anticipate from a planning you would say -- it's really the second half of next year.

Okay. Thanks very much.

Yes.

There are no further questions at this time. I would now like to turn the floor back over to management for closing comments.

We want to thank everybody for their interest and support, and we look forward to speaking with you on our next conference call. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You made disconnect your lines at this time. Thank you for your participation, and have a wonderful day.