Circor International Inc (CIR) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the CIRCOR International's first-quarter 2014 financial results conference call. Today's call will be recorded. (Operator Instructions)

I will now 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 Scott Buckhout, CIRCOR's President and CEO, and Rajeev Bhalla, the Company's Chief Financial Officer. The slides we will be referring to today are available on CIRCOR's website at www.CIRCOR.com on the Webcasts & Presentations section of the Investors link.

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 Form 10-K for 2013 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, April 22, 2014. 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, adjusted net income, adjusted EPS, and free cash flow. These metrics exclude any pretax special recoveries and charges, restructuring inventory reserves, and intangible impairments. The reconciliation of CIRCOR's non-GAAP adjusted operating income, adjusted operating margin, 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 Mr. Buckhout.

Thank you, David. Good morning, everyone. We had a strong start to the year with adjusted EPS of 50% to $0.78 including $0.03 of favorable FX. Our margin improvement initiatives continue to yield positive results. We increased our adjusted operating margins year-over-year by 230 basis points to 9.4%.

Revenues were up 3% over last year to $211 million. Our upstream large international project business showed strength in the quarter. Offshore platforms and FPSOs drove solid growth in our instrumentation and samplings business.

We generated strong free cash flow of $14 million, or 98% of net income, primarily resulting from margin improvement. As we have discussed in the past, a key driver of our margin expansion efforts is our ongoing simplification program. Restructuring programs in 2013 are largely complete and on track to deliver annualized savings of $9 million, with full run rate to begin in the second half of this year.

We are also focused on transforming CIRCOR into a growth company. As part of that transformation, we are investing approximately $7 million into accelerating organic growth. We are increasing the size of our salesforce in growing markets, opening international sales offices in Brazil and Malaysia, and increasing our investment in new products. This investment in growth will be entirely funded by another restructuring program focused on reducing G&A, as well as closing three small facilities -- one in North America and two in Europe.

Finally, last month we named Vince Sandoval as Group President, CIRCOR Aerospace and Defense. Vince joins us from TransDigm Group, where he was most recently the President of Semco, a division focused on the sale of electrical harnesses and sensors into the aerospace, commercial, and military markets. Prior to TransDigm, Vince spent more than 20 years at Parker Hannifin in roles of increasing responsibility.

Vince brings a wealth of experience and improving operational performance in growing global aerospace businesses. We welcome Vince to the leadership team.

With that, I will turn the call over to Rajeev. I will come back later to provide more detail on recent order trends and our guidance for the second quarter.

Thank you, Scott. Good morning, everyone. We have reviewed the results overall, so let's move right to the segments, starting with energy on slide 4.

Energy revenues of $163 million for the first quarter increased 3% year over year. As Scott mentioned, this was driven by growth in our upstream large international projects business with continued strength in the North Sea as well as growth in our instrumentation and sampling business.

This growth was partially offset by a modest decline in the upstream North American short cycle business as distributors continued to reduce inventory levels early in the quarter. However, order rates did improve through the quarter, further supported by higher rig counts and more boots on the ground as we increased the size of our salesforce.

Energy's adjusted operating margin was up 300 basis points to 13.8%, primarily due to increased volume, favorable product mix, productivity, as well as savings from restructuring. As I noted during our last earnings call, based on our backlog and booking expectations, we anticipate higher volume and improving margins in the second half of this year.

For the aerospace and defense segment, please turn to slide 5. Aerospace and defense revenues increased 1% to $49 million from the prior year due to favorable foreign currency fluctuations.

Organically, revenues were down 2% year over year, in large part due to a decline in our French actuation business, partially offset by higher revenue from our defense businesses. This decline in France was a result of our decision to exit certain low-margin build-to-print products, as well as a slower ramp up of new programs which were expected to replace declining legacy programs.

Aerospace and defense adjusted operating margin improved to 9.1% compared with 5.9% in the first quarter of last year, primarily due to restructured savings. In addition, margins were up this quarter compared with the 8.4% in the fourth quarter last year as we put the incremental costs due to the supplier fire behind us. However, we continue to work through some operational inefficiencies after the factory consolidations and in launching our new landing gear programs, which will continue to put downward pressure on margins in the near term.

Turn to slide 6 for selected P&L items. Our all-in tax rate for Q1 was 28.5%. Excluding the impact of special charges, the comparable tax rate was slightly lower at 27.9%. We expect our second-quarter adjusted tax rate to be in the range of 26% to 27% as we continue to profitably grow our businesses in emerging markets, which helps to drive down our overall effective tax rate.

Including the favorable FX impact, Q1 2014 adjusted earnings per diluted share was $0.78. This is a 50% increase compared to $0.52 in the prior year.

Slide 7 shows a special adjustment that we recorded during the first quarter. These include a recovery of $2.2 million from a legal settlement, a net charge of $300,000 also related to a legal settlement, and $800,000 in costs related to restructuring actions announced in 2013.

For Q2, we anticipate charges relating to restructuring actions to be in the range of $5 million to $6 million. As Scott mentioned earlier, we expect the actions announced today will result in approximately $7 million of additional annualized savings to be offset entirely by the investments in accelerating growth.

Turning to our cash flow and debt position on slide 8, Q1 was a good first quarter for cash flow. We continue to focus on working capital reduction to drive incremental cash into our business.

With that, I will turn it back over to Scott to provide an update on our orders and guidance for the second quarter of 2014.

Thank you, Rajeev. Before I get into our guidance, let me start by providing you with an overview of our first-quarter order intake as well as current market trends. Let's start with energy.

As a reminder, we compete in the upstream, midstream, and downstream oil and gas markets as well as power generation. Most of our revenue is in the upstream market today and it's important to point out that approximately half of our revenue is project related, which can lead to significant variation in order intake from one quarter to the next.

For Q1, incoming orders were $160 million, down 8% versus last year. While activity and quoting remains strong, particularly in upstream and power, we had a number of large project orders in the North Sea and Brazil slide out of the quarter. We still expect to close on these orders. Market demand and pricing remain positive.

We saw improving demand in our upstream North American short cycle business with orders up double digits sequentially, although slightly down year over year. This trend is consistent with increasing rig counts in North America.

As we discussed in our February call, we expect bookings in this business to improve in the second half of this year. Our first-quarter performance gives us further confidence in this outlook.

Our instrumentation and sampling business continues to experience strong orders from upstream projects in Australia and the North Sea as well as downstream petrochem in the Middle East. Quoting activity in our power business, particularly for projects in emerging markets, remains strong. In addition, we believe our global MRO market share is increasing, driven by shorter lead times, better on-time delivery, and a more effective mix of distribution partners.

In aerospace and defense, orders were down year over year to $40 million, due primarily to our landing gear business, which included the loss of the CH-47 program and the exit of certain unprofitable build-to-print product lines. Our French businesses saw lower year-over-year orders, primarily driven by weak Asian demand from Airbus helicopter.

We expect a moderate increase in orders for the remainder of the year, driven by a broad mix of aerospace products in the commercial markets. Domestic and foreign military orders, including the Joint Strike Fighter program and certain missile systems, such as the Hellfire and SM3, are also expected to grow.

That brings us to our guidance. We expect that second-quarter revenue will be in the range of $220 million to $230 million. We expect to report adjusted EPS in the range of $0.88 to $0.94, which represents year-over-year growth of 9% to 16%.

Going forward, we will continue to focus on our top three priorities: growth, margin expansion, and strong free cash flow. We are looking forward to meeting many of you at our upcoming investor day on May 15 in New York City, where we will discuss longer-term targets for CIRCOR.

With that, Rajeev and I are available to take your questions.

(Operator Instructions) John Franzreb, Sidoti & Company.

Good morning, Scott and Rajeev. I guess I want to start really with your new sales initiative. Do you have a specific targeted market that you're going after? You didn't really give us much color on if it's energy versus A&D. Could you just elaborate a little bit about the sales side of that initiative?

Sure, it's fairly broad but I think that what I will do is I will outline the top three areas for you.

As a general statement, we are not starting from zero in any of the areas that we are increasing our investment in sales. We are increasing our investment where we have seen and expect to continue seeing high activity.

The three primary areas that we are going to invest from a salesforce standpoint are Southeast Asia. It's EPC focused. It's oil and gas focused. We have been seeing a lot of activity, particularly in large projects, in Southeast Asia and Asia broadly and we think it makes sense to increase our footprint there.

I think it's important to understand that we are not just adding salespeople; we are adding technical resources as well. So application engineers that partner and sit down with the EPCs and serve as advisors upstream in the process of making a sale. We talk broadly about adding sales; when we say that we were including application engineers.

The second area is Brazil. I think everybody knows how much money is being invested over the next 10 years in Brazil by Petrobras. We have an operation and existing facility in Brazil in Piracicaba.

We don't have a presence in Rio, which is people say the center of gravity for Petrobras engineering and procurement. So we will be -- actually we just opened an office in Brazil and, again, we will have a combination of technical and sales resources in Rio co-located there with the Petrobras engineering and procurement team.

The third area that we are increasing our investment is in North America. We have parts of North America, regions of North America that are I don't want to say uncovered, but not as well represented by us as they should be. So in terms of feet on the street we will be increasing the number of people representing North America in distributed valves.

And we also are going to be putting people on the ground to increase our presence from an engineered valves perspective in North America, where we are relatively weak today. So I would say those are the three primary focus areas from a salesforce standpoint.

Okay. Scott, how much of the $7 million is dedicated to the salesforce increase compared to the increase in R&D -- I'm assuming it's R&D -- into new products? Is that R&D increase -- should we view it as a permanent increase or is it some sort of temporary spike?

That's a good question. So roughly between -- we will say between $4 million and $4.5 million is going to be on sales and engineers, salespeople and application engineers. The remainder will go into R&D.

The majority of that remainder will be in engineering, engineers, so we will have some engineers going into the markets where we are selling. It could be Western Europe or North America. But we will also have a decent percentage of them going into our engineering center of excellence in India, where of course we can add a lot more capacity and engineering capacity in India than we can in North America, for example.

So it will be a combination of a split, if you will, but the majority of the engineering will go into engineers.

Just add to that, this is not a one-time shot. We expect to -- our R&D spend has been very low historically and so we are taking that up a little bit here over the longer term.

If you look at our engineering, our R&D as a percentage of sales that we run less than 1%, which if you were to compare us to most engineering companies that's very low. So we are being very careful and very specific with where we are investing here, but the focus is on new products and R&D engineers as opposed to other types of engineering.

Okay. And I guess one last question on this topic. How should we think about the incremental cost? When does it role in or how do you expect to roll it in versus the incremental savings, the timing of the two? How does that play out in coming quarters?

John, I will take that. It's Rajeev. As we look at this, obviously there are going to be some timing differences between when we do take the restructuring actions and when we add the resources to drive the new investments here. But we do expect the restructuring savings profile to generally offset our investment for the remainder of this year, so we do expect those to be generally offset.

Okay, all right. That's it, guys. I will let somebody else on.

Jim Foung, Gabelli & Co.

Good morning, Scott and Rajeev. Great quarter, guys. Let me just follow up on the last theme here. Do you have a number in terms of how much you are planning to spend for the year in terms of investments for growth?

Yes, I think as you look at that $7 million, bulk of that will be this year. There will be some that moves into next year, Jim, but I would say at least half of that will be this year.

Oh, okay. So that is pretty much it then? That's pretty much all you're planning to spend for now then in terms of (multiple speakers)?

But it also depends on timing of some of the things that we want to do. Obviously, if we can wrap up a little faster, we will in terms of adding some people and getting some of the R&D projects off the ground. But conservatively we are looking at it at that level.

Jim, just to clarify, we're talking at the incremental spend. Obviously, we already spend money on engineering and growth, so this is over and above what we have in the past.

Right. Then I guess on this incremental spend, when do you think we could see the results from some of this spending? How soon do you think you might get some payback from this?

We have actually done a lot of work on this and there's a pretty broad range, I would say. It helps that we are not starting from scratch in any areas that we are investing.

So for example, in Southeast Asia, where we are opening this office to focus on EPCs, we already quote business in Southeast Asia. We already win business there and ship there, so that's not -- so we are expecting traction sooner rather than later.

We will see -- we expect to see incremental orders as early as the fourth quarter with it ramping up through next year. That is the way we've model this and of course there's a range on that. Maybe we could start seeing orders sooner, probably won't be a lot later than the fourth quarter.

Okay, good. Let me just shift gears on your aerospace side. You talked about spending on your landing gear program and that is going to kind of constrain margins on the aerospace segment. Could you just talk a little bit more about the landing gear program and how much you think it can kind of depress margins a bit?

Sure, Jim. This is Rajeev. You know that the landing gear program that we talk about, the three major ones here -- the CH-47 Chinook and that, as you know, ends in the next few months here. And then the other two bigger ones are the Black Hawk with Sikorsky and then the A350. We do have some A330 business as well.

The issue we are having here is after the consolidation of the facilities we are still working through some of the operational issues. So we do see some pressure from that and the fact that the new business is not coming in as fast as we had originally expected, just based on the profile of what we are dealing with from an OEM standpoint. So we do expect margins to probably be under pressure here but not -- it's not going to drop substantially, but we won't expect it to be higher than what you saw in the first quarter.

I would say flat to maybe moderate pressure. I don't think you will see much drama here, but I think the upward trajectory for the next quarter or two we just want to manage expectations here. We are absorbing a lot of costs with the launch of these new programs and we are ramping up volumes now on the A350 that's starting to begin now and Sikorsky as well.

We are just anticipating some costs along the way as we ramp up, so we want to just manage the expectations here to basically roughly flat margins, maybe very slightly down. But no big jumps up or down.

Okay, very good. Then just on the energy side I guess, Scott, you alluded to the fact that major projects are kind of lumpy and you had more confidence in second half of this year. Are you still seeing a big bulge of major project orders coming into the pipeline for that industry this year and then you'll pick up some nice orders towards the end of the year?

We are and we track that pretty closely, Jim. We have looked -- we follow our quoting activity every month and every quarter and so we do still see a nice bulge. We are not very good -- actually I don't know if anybody is very good to predicting when these orders close, but we are bullish on the remainder of this year on order intake for large projects in oil and gas.

The other area that we are excited about -- it's much smaller than our oil and gas business, but we expect that it's going to grow over time -- is power generation. We mentioned on the last call that we are seeing good activity, particularly in emerging markets.

We still see that. We didn't close as many orders as we hoped in the second quarter, but the pipeline continues to grow. We had a pretty big pipeline going into Q1 and we have a bigger pipeline going into Q2, so we are feeling pretty good about power generation as well right now.

Great, thanks so much for your time.

Nathan Jones, Stifel.

Morning, Scott. Morning, Rajeev. Just on the R&D number, you are looking at $2.5 million to $3 million increase in investment in R&D, which is only going to be about 30 basis points starting from less than 1%, which is still going to have you pretty significantly below other engineering companies. Should we be expecting further ramps in R&D as we go forward?

I think the right way to answer this question is that we can only add so much capacity effectively at a certain point in time. So you're right, $2.5 million to $3 million isn't necessarily a big number, but it's quite a few engineers and we have to make sure we have very good projects for them to work on.

So a long answer to your question; yes, you should expect us to continue to increase our investment in R&D and new products over time, but there won't be any huge spikes up. We are going to absorb the capacity at we will say a moderate level so that we make sure that we invest it well and it's effective.

So we are going to follow a disciplined approach here, Nathan, as you would expect, and make sure that there is good payback as we look ahead.

We have some very specific projects, Nathan, that we are pretty excited about. New products that we want to launch late this year and in 2015 that, if we increase the capacity and we do a good job here, we can accelerate the launch of these new products. So that's what we are focused on right now.

Okay, that makes sense. So we should expect increases in R&D but not rapidly?

Correct, that's correct.

I think on the sales initiatives, I know we've talked about this before as being sell more of what you already have. I would also think that, given these investments, there's probably still significant room to make further investments to sell more of what you already have. Is this kind of along the same themes as the R&D; we should expect those to increase, but not rapidly?

I think that's right, but I would maybe phrase it a little differently. I think in the past I've mentioned that we have an OpEx -- we have too much OpEx at CIRCOR, too much SG&A and that over time through simplification, through operational excellence we're going to continue to reduce the G&A portion of that while we invest part of that back into sales and engineering.

And so long answer to your question here but, yes, you should expect that over time we will continue to increase our investment in sales and engineering. But we also intend to more than offset that with reductions in G&A and other overhead types of costs as we simplify CIRCOR.

Understood. I think that they are very good investments to make any way to drive organic growth.

Do you have any targets that you are thinking about for the increased sales generated? Say, if you look at the $4.25 million to $4.5 million for sales and engineers, what kind of impact you are expecting that to have on organic growth rates and when you are expecting to realize those?

We have. We've done quite bit of analysis around that, Nathan, so we have internally put some targets in place. We have also put in some process to kind of manage that and we will watch that carefully.

Yes, I don't know that we want to necessarily give a specific number, Nathan, but you know our long-term goal is to grow better than the market and grow better than our peers and I think if you look at our historic numbers it would be hard for us to make an argument that we've done that.

So I would rather not put a specific number on it, but to say that organic -- we know that organic growth over the medium term is a big value creator for all of our investors, so we are going to keep focused on it.

Fair enough. Then you talked about a few, a couple or few large orders slipping from an expectation that you would realize those orders in the first quarter. Is it now your expectation that you will realize those in the second quarter or is the timing on that still uncertain?

We would expect that in the second quarter, Nathan. We would expect to nail those down here pretty quickly.

Okay, thanks a lot. I will get back.

Matt Summerville, KeyBanc Capital Markets.

Morning. Just in terms of CH-47, what would the revenue headwind be in 2014 and whatever carryover there will be into 2015?

There shouldn't be any carryover into 2015, but the headwind into 2014 is probably about 10% of our aerospace and defense segment revenues.

We have headwind in the sense that we ship product in the first half of this year that we won't ship next year. So to that point, yes, it would be a similar headwind because we looking at about half a year left here and then the first half of next year obviously we wouldn't have.

And then how are you handicapping your ability to retain the aftermarket side of that?

It's actually a little more difficult to penetrate that given a variety -- the way that business is being sourced by the Army or by the US military. So it's going to be tough for us to really break into that market, Matt.

Then with respect to the short cycle energy business here in North America, Scott, you mentioned that as the quarter went on it kind of got better. I guess I'm curious; did it start out like down 5, then flat, then up 5? Just a little more granularity on the magnitude of inflection maybe you are seeing there and what your expectation is for incoming order rates there in Q2.

What we did see, Matt, was that it wasn't really down and then spike up. It was up slightly and then it improved throughout the quarter. So sequentially we were up 20% versus the fourth quarter and that kind of momentum carried towards the end of the quarter. And we are seeing that continue into this month.

So on a year-over-year basis, though, you were still down?

Correct.

Yes, year over year we were down, but sequentially we were up substantially.

Got it. Then with respect to pricing, I think there was a comment in the prepared remarks that pricing is still looking pretty good. Is that true for both the project side as well as the short cycle business?

Yes, that's true for both. Keep in mind for the short cycle business we are --- while we do go out and price aftermarket and short-term product and we tend to get very good prices on that, for the most part that business has a price lift and it doesn't change dynamically like the large project business.

So large projects, yes, pricing remains favorable. We are confident with the book log or the backlog that we are building right now. Short cycle there's really not much change from what we have seen in the past. We have pretty good pricing there.

Then just with respect to the aerospace business, just thinking about margins, you mentioned some inefficiencies, some heightened level of RD&E spend. If we just lump all that together right now, how much headwind is that in terms of basis points? And I guess when do you see that start to normalize?

I will answer your second part of that question. We expect it to normalize probably towards the end of the third quarter so there's at least a couple of quarters of headwind here. It could be 50 to 100 basis points or so would be my expectation today, but things can change here, both favorably and unfavorably, as we go through the quarter. Hopefully out of the woods by the end of the third quarter.

Then just back to kind of the research and development engineering spend overall for the Company. I think you mentioned, Scott, that that had been trending at 1% or below 1% of revenue, which that's a bit striking, I guess. Where do you think for a copy like CIRCOR that number ought to be and over what time frame will you get it there?

So maybe it's easiest answered this way. So for an engineering company like CIRCOR you would normally see R&D as a percentage of sales in the 4% range. For us, again, I just want to emphasize you won't see any dramatic increase in the short term there.

We will, in a moderated and careful way, increase our investment in R&D over years, not months, but I think eventually that you could expect that we want to be an engineering company. We want to be a company that launches new products regularly and gets the margins and growth that come with that. Over time you should expect us to take it up to at least the average.

But we also have the benefit I guess, if you could call it that, of having a significant amount of G&A to reduce over time and to fund that so you will see the mix change over time. So I think we're talking about 4% but years, not months or quarters.

Have you done any work in terms of what CIRCOR's historical vitality index looks like and where you want to take that?

No, it's not measured today, but I can look back and see the products that we've launched over the last few years and it would be a very low number. It would be something that -- we are just starting to measure it, so I think maybe over time we will start reporting that but right now there wouldn't be much to report. So we are not -- it's not something that we are going to be sharing soon.

Then just my last question. In terms of the sourcing procurement strategy that you have kind of laid out going forward, have you made any progress there yet and when can we start to hear about meaningful reductions in your direct spend?

We have been seeing some effect already, Matt, in the numbers here. Our expectation is to kind of give you a little more color around that on May 15 on what we think the longer-term targets should be and how that will factor into our overall numbers.

I think, just from a process standpoint, we are making very good progress. We used to not be able to measure material productivity at all. We now have a commodity data warehouse that's up and running, so we can track what we spent last year and what we are spending this year by SKU for all of CIRCOR which is a big step up. Obviously if you can't measure it it's hard to drive the number.

And we have a plan for this year, so we have a stack of projects. We know when they are going to cut in, when the savings cut in and so we are tracking it monthly and quarterly already. We are making good progress and we will put some numbers out there for you on May 15.

Sounds good. Thanks, guys.

(Operator Instructions) Nick Prendergast, BB&T.

Good morning. Just to clarify on the Chinook here, you said that is 10% of your order book there in that segment. Is that correct?

Of revenues for that segment, yes.

Okay, so revenue-wise then we are looking at a 10% headwind in Q3 and Q4, because there should be a little bit in Q2. Is that about right?

That's right.

Okay. Then finally, on your tax rate, you are guiding the 26% to 27%. Is that a good run rate for the remainder of the year?

It is at this point. It may come down a notch here depending on how the kind of apportionment between the US and international income ends up, Nick, but at this point that's the way I would look at it. If it changes, obviously we will let you guys know next quarter.

Right. Okay, well, that's it for me. Thanks.

Charley Brady, BMO Capital Markets.

This is actually Patrick for Charley Brady. Just on the energy side, how much were orders for the large projects down year over year?

The orders overall were down kind of in the mid-single digits for that kind of piece of business. It wasn't dramatic, but there were a couple of nice big orders that did move to the right.

So I think that sequentially they were down obviously a lot. We had a big quarter in Q4, but if you remember Q1 last year was a low quarter for us to begin with so we had a relatively easy compare. And so just keep that in mind how lumpy this business is. Q4 we had a tremendous quarter in that business, which -- so sequentially you would see a bigger number.

Got it. And on the distribution side of the business, was that up or down for the year? How much was it up or down?

For orders?

Yes.

The orders we just said were down year over year.

On the distribution --?

Slightly.

Slightly.

Slightly, low single digits.

Low single digits year over year.

And I guess moving into second quarter, do you expect the energy orders to be up year over year? I guess what are your general expectations?

We do, we do. We do expect the energy to be up year over year.

Okay. What do you guys mean by solid order intake for the year? Are we are talking about 1%, 2%, 5% or 6% here? Any color.

I think a solid would be mid-single digits.

Okay. And just very quickly on the margin improvements for both of the segments, on the energy side what do you guys attribute that to, the 200 basis points? Is that a better mix or how much was it from restructuring on the A&D side? How much of that was from restructuring?

Okay. I will take that, Patrick. The energy market, let's start with that. We're up about 300 basis points, as you know, year over year.

Two big items there, the favorable product mix from international part of the business was probably just under half of that and then the restructuring savings was predominantly the remainder. So those two factors were key on that.

The aerospace and defense margins were restructuring driven, but we also exited some of the unprofitable build-to-print type of business so that helped margins. And we also did get some sourcing savings in that number as well.

Okay. Anything quantifiable?

Mostly. We were up, as you know, 320 basis points for aerospace and defense quarter over quarter. I would say majority of that was restructuring and probably a third for the other two pieces I mentioned.

A third, okay, great. Thank you. That's all I have.

Nathan Jones, Stifel.

You did talk again about some destocking in short-cycle energy business I think at least partially driven by some distributor consolidation. Are you seeing that abate? Is that finished? Should we still be expecting some in the second quarter? And when do you think that runs off?

I think the destocking is pretty much done. We are starting to see kind of more of a rebuild than a destock, so it seems to have run its course through the first quarter here, Nathan.

Do you think there was any potential overshoot there and perhaps there is some inventory restocking that needs to be done?

You know, there usually is with these distributors. I don't know if history is going to repeat itself, but we've seen that happen in the past. Maybe they're a little more disciplined this time around, but they could be. They could be. We are not baking that into our expectations though.

Some other companies that play in this industry have talked about increasing well completion rates, which should be driving demand for you in that business. Are you beginning to see the ramp up in that or is that just part of your expectations for that ramp up in orders that you are looking for for the rest of the year?

We are seeing some more activity and we do expect more on the well completion side.

So, yes, Nathan, that's part of our expectation for the rest of the year.

Great, thank you. That's it for me.

(Operator Instructions) John Franzreb, Sidoti & Company.

Just can you remind me how much of pricing on large jobs is impacting 2Q results? If I remember correctly, I thought any lingering pricing issues should be done by the end of the second quarter. Is that still the case?

Yes, the pricing impact, lingering pricing impact that we mentioned should be done for the second quarter, John.

All right. Will there be any impact in the second quarter?

No, there shouldn't be any significant impact from pricing. There will be an impact from mix associated with that, whether it is aftermarket or kind of new business.

There's two -- I would say there's three things that really affect the margins in that large project business, John. The first is, as you asked about, which is pricing. As we win the business and as we put orders into our backlog we get good or bad pricing, so we feel pretty good about the pricing.

The second two pieces that affect the margin, the first is spare parts. We get significantly better margins on spare parts than we do projects, as you would expect. So the mix of the revenue that we drive in spare parts can vary a lot from one quarter to the next and, of course, pushes our margins up and down proportionately.

The last piece is change orders. So when we win these new projects, we win them at a certain margin and there is inevitably a certain number of change orders that come in through the life of the project. We tend to get better pricing on change orders than we do on the original projects, so that can also push margins up or down relative to other quarters depending on how many change orders we are managing through the quarter.

So those three things can move it around quite a bit, but from a pricing standpoint, we feel pretty good about where we are.

Got it, got it. You had a couple projects that were delayed the last two quarters. Were they delayed due to change orders or something else?

Actually, the movement out of the first quarter into second quarter was associated with that. The orders were actually given to us and then the EPCs decided to revise the spec and the design and kind of pull that back to do that. So that's why I responded to an earlier question where we feel pretty good about getting those orders signed up here in the quarter, because a lot of work has already been done on that.

Long term that's a good thing for us, so while it's unfortunate that we had lower orders in the quarter, that's a good reason. So long term we feel good about that one.

Got it. That makes perfect sense, thank you. One last question, which three facilities are being closed and what businesses are they associated with?

We won't get into the names just yet, John, but two are in energy. There's one in Europe that is in energy, one in aerospace that is in Europe, and then one in the US that's in energy.

Thank you for the color, guys. I appreciate it.

At this time there are no further questions in queue. I would like to turn the call back over to management for closing comments.

I guess first I would like to thank everyone for joining us this morning. We look forward to seeing you, hopefully, at our upcoming investor day on May 15 and speaking to you on next quarter's call. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.