Enovis Corp (ENOV) 2009 Q1 法說會逐字稿

Good day, and welcome to today's Colfax Corporation First Quarter 2009 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Ms. Mitzi Reynolds. Please go ahead, ma'am.

Thanks, Tamara.

Good morning, everyone, and thanks for joining us. My name is Mitzi Reynolds, and I'm the VP of Investor Relations. On the call today, we have John Young, our President and CEO, and Scott Faison, Colfax's Chief Financial Officer.

I'd like to point out that our earnings release is available in the Investor section of our website, ColfaxCorp.com. We will also be using a slide presentation to supplement today's call, which can be also found on the Investor section of our website.

Both the audio of this call and the slide presentation will be archived on the website later today and will be available until our next quarterly call.

I would also like to note that in order to help you understand the Company's direction, we will be making some forward-looking statements during the call, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. It is possible that actual results may differ materially from any forward-looking statements that we might make today. The forward-looking statements speak only as of the date that they are made, and we do not assume any obligation or intend to update any forward-looking statement except as required by law.

During the presentation, we will describe certain of the more significant factors that impacted our year-over-year performance. Please refer to the accompanying slide presentation in the MD&A section of our first quarter Form 10-Q, which was filed this morning, for details regarding additional factors that impacted year-over-year performance.

With respect to any non-GAAP financial measures during the call today, the accompanying information, required by SEC Regulation G, relating to those measures can be found in our earnings press release under the Investor section of the Colfax website.

Now I'd like to turn it over to John.

Thank you, Mitzi.

Good morning, everyone. I'll begin with some of the first quarter's more significant highlights and some of the key performance measures that we've achieved. Then I'll update you on our cost-reduction initiatives, our end markets, and outlook. Finally, I will review the financial results, and then we'll open it up for our question-and-answer session.

As we announced in the press release issued this morning, Colfax had a solid first quarter. Adjusted net income was up slightly to $10.4 million, or $0.24 per share, from $10.1 million, or $0.23 per share, in the first quarter of 2008.

Net sales for the quarter were $136 million, an increase of 4%. Organic growth was 18%.

During the quarter, our results were negatively impacted by a foreign currency translation as the US dollar strengthened against the euro and the Swedish krona, resulting in a 14% negative drag on sales and a $0.05 reduction in earnings per share.

Adjusted operating income declined 7% to $17.1 million, and the margin declined 150 basis points to 12.5%. This decrease was driven by lower fixed cost absorption and an increase in public company and selling costs, including commissions.

Adjusted EBITDA also fell 7% to $20.5 million, and the margin declined 180 basis points to 15%.

Currency translation was a significant drag on both adjusted operating profit and EBITDA, reducing both by approximately $3.5 million.

Without this impact, adjusted operating profit and EBITDA would have increased about $2.2 million over prior year.

As a reminder, we were a private company in the first quarter of 2008 and went public in May of 2008. In fact, today is the one-year anniversary of our listing on the New York Stock Exchange.

Orders for the quarter were down 33% overall and 25% organically. This includes commercial marine cancellations of $6 million during the quarter. The sequential organic order decline from Q4 2008 was 3%.

We ended the quarter with backlog of $306 million, down $32 million, or about 9%, from year-end 2008. About half of this decline was related to the negative impact of foreign currency.

We had robust organic sales growth in four of our strategic end markets -- commercial marine, up 45%; oil and gas, up 25%; power gen, up 24%; and global navy, up 32%. General industrial, our only down market, declined by 2%.

In contrast to our strong sales growth, our order rates continued to be affected by weak global business conditions. Orders declined quarter over quarter 33%, with organic orders down 25%.

On an organic basis, commercial marine orders declined by 57%, and general industrial orders declined by 28%.

While power gen orders were down 12% organically based on timing of project orders, we expect growth in this market for the remainder of 2009.

Oil and gas and global navy orders grew strongly, up 22% and 75% organically, respectively.

A significant portion of our business operates on fairly long lead times, which provides us with the opportunity to scale our production capacity and cost structure based upon minimum customer demand.

Given our recent order trends, we have implemented several profit protection plans -- reducing expenses where appropriate while protecting our current backlog, as well as our breakthrough initiative programs that will drive profitable sales growth in the future.

We grew revenue 12%, 13%, and 14% organically over the last three years without adding any manufacturing square footage due to our CBS initiatives. As a result, we have flexibility to reduce costs during the present downturn.

Since the beginning of the year, we have completed about $11 million of cost reductions. Reductions to date have focused on volume-related headcount reductions affecting both contract workers and full-time associates.

In addition, we've consolidated a small maintenance and service facility in North Carolina.

In total, we've reduced headcount by about 120 people, or 5%, as of May 1. In Germany, we are leveraging the government-sponsored furlough programs, which allows us to reduce hours and pay without actually eliminating jobs. We are currently using this program for about 628 workers, or nearly 30% of our total workforce.

If the current economic conditions persist or worsen, we may need to take additional cost-cutting steps, and we have those contingency plans in place.

In the interim, we are well positioned to weather these uncertain conditions. We have a very strong balance sheet with a debt-to-adjusted EBITDA of under one times. We have cash of $34 million and $130 million available on our revolver at the end of the first quarter.

Our main priorities are to reinvest in our business and to pursue acquisitions. Acquisitions continue to be a key component of our growth strategy. We're hopeful that there will be an increase in opportunities as the year unfolds, and we believe that we are well positioned to take advantage of these opportunities due to our low-leverage and untapped credit facilities.

Now, moving on to a more detailed look that we're seeing in each of our end markets.

The commercial marine market is our largest single end-market and represented 29% of our first-quarter sales. Organic sales grew 45% for the quarter, while organic orders declined 57%. Orders of $23 million are net of $6 million in cancellations during the quarter. We continue to monitor our backlog closely and expect to have additional cancellations.

We've seen some recent support programs in China for this market, however. The China XM Bank is providing financing to the shipyards, and the Chinese government has agreed to buy any ships made in state-owned shipyards that are canceled by foreign owners.

We continue to be a market leader in commercial marine, and we're pleased to report that our Imo AB division in Sweden recently supplied the engine room pumps for the world's largest container ship delivered by Daewoo Shipbuilding.

We'll continue to focus on the high-spec ship segment, including floating production storage and offloading vessels, and growing our aftermarket sales to help mitigate the slowing activity in new ship construction.

Moving on to oil and gas, sales in this end market were 15% of our total sales for the quarter. Sales on an organic basis were up 25% for the quarter, while organic order growth was up 22%.

Customers continued to take a wait-and-see approach based on the current price of oil; specifically, a number of Canadian projects, where exploration costs are higher, are on hold. However, other customers are moving forward with development.

National oil companies, which are restricted by their boundaries, tend to continue developing their resources even as oil prices change. For example, Saudi Aramco will continue to invest in new oil, gas, and petrochemical projects and is planning on spending $129 billion in CapEx over the next five years. Also, Shell, Exxon, and Chevron all have reaffirmed their plans to maintain CapEx spending this year.

Turning now to power generation, which accounted for about 13% of first quarter sales, organic sales in this market were up 24%, while organic orders were down 12%, principally due to project timing.

The outlook for the power generation market for 2009 remained solid. Longer term, we expect activity in Asia and the Middle East to continue to remain strong as economic growth and [inaudible] undersupply continues to drive significant investment in energy infrastructure projects. Both Iraq and Saudi Arabia have recently announced plans to significantly enhance their country's power generation capabilities. In the developed economies, we expect efficiency improvements to drive demand.

Sales into the global navy market for the quarter were 6% of our total sales. Organic sales and orders increased 32% and 75%, respectively, for the first quarter, primarily related to the navy's new ship construction program. We are currently working on several new shipbuilding contracts for the US Navy, including the Virginia-class submarine program, [CBN78G] Ford Class Aircraft Carrier, the DDG1000 Zumwalt Class Destroyers, and the LPD-Class San Antonio Amphibious Vehicle. We're also working on projects with several European navies and also the Indian navy.

Based on current activity, we believe that both the short and long-term growth prospects for this market are positive.

Now for a look at our general industrial end-market, which comes through several different end-markets and represented 37% of sales during the quarter. On an organic basis, sales were down 2%, while orders were down 28%. We've seen demand soften in this market, especially in the chemical, building construction, and distribution sub markets. The chemical market has been particularly hard hit in Europe and the US.

The majority of our general industrial business is in Europe and North America, and it is reflective of the weak economies in those regions.

Longer term, we believe that continued infrastructure development throughout the world will drive capital expenditures in our sales in the general industrial market.

Turning to a geographic look at our sales for the quarter, about 49% of our sales came from Europe, 27% came from the Americas, and 24% from Asia and the Middle East. Organic sales were up across all geographic regions.

Gross profit margin for the quarter decreased 170 basis points to 35.2% due to lower absorption and changes in the mix of projects compared to the first quarter of 2008. Our gross profit margin in the first quarter of 2008 was the highest percentage achieved for the year last year.

Selling, general, and administrative expense was increased $1.7 million during the quarter, primarily due to $1.6 million of expenses related to public company costs and $1.3 million of additional selling costs, including commissions. Note that foreign exchange rates had a positive impact of $3 million on SG&A.

Now for a look at the balance sheet --

Our financial condition remains strong. At the end of the first quarter, our debt to adjusted EBITDA was less than one times. We had about 139 available under our revolver, and cash at the end of the quarter was $34 million.

Working capital increased about $1 million since the end of the year. Receivables declined approximately $10 million, while inventory increased about $3 million due to large project orders. We will continue to focus on working capital turn improvement and believe it is even more critical in today's economic climate.

Net cash flow from operations was $10.7 million for the quarter. Asbestos was a cash outflow of $1.1 million, which is net of $7.2 million received for reimbursement of past costs.

At the end of the quarter, the asbestos insurance receivable was $37 million. The start of our coverage litigation trial has been delayed -- was delayed in late 2008 due to a change in the presiding judge. We anticipate that the trial will begin later this year.

For the year, claims and the cost to resolve claims continued to track along our earlier projections, which is an annual cost of about 5 to $7 million. We expect our insurance coverage litigation costs to be about $12 million in 2009.

As a reminder, we have booked an asbestos insurance asset in the asbestos liability on our balance sheet. The amount is based on estimated claims over the next 15 years. It's important to note that the estimated liability is about $350 million, and we have insurance coverage in excess of $1 billion. In addition, we have a receivable of approximately $37 million due from insurers for costs that we've already paid.

In summary, we had a solid first quarter. However, we expect that the second half of the year could be difficult if current economic conditions persist. We remain focused on reducing costs while continuing to fully fund our growth initiatives and pursue acquisitions. We will remain agile, and we will continue to make adjustments to our businesses as conditions warrant.

We remain cautious on our outlook and expect organic sales to decline in the range of 2% to 4% and expect adjusted earnings per share of $1 to $1.07 for 2009, which includes about $0.07 of negative currency impact compared to our prior guidance of $1.10 to $1.17.

With that, I'll open up the floor for Q&A.

(Operator instructions)

We'll take our first question from John Inch with Merrill Lynch.

Thank you. Good morning.

Hi, John.

Hey, John. Good morning.

I guess if we could start out, could you talk a little bit of the progression of orders through the quarter and through April, what you saw, and perhaps maybe provide a little bit of geographic color behind that, as well? What happened sort of to get the down 26, and where are we running today?

Yes, I mean the progression during the quarter, there was no real perceptible change during the quarter. I mean our orders tend to be a little lumpy anyway, but there wasn't any sort of trend line that I would say persisted during the quarter or into the first month of this quarter. It's been fairly consistent from a timing perspective.

In terms of geography, clearly, Europe and Asia, with the commercial marine business being down, has been the hardest hit from an orders perspective.

North America has held their own in terms of power gen and oil and gas. We've seen some softening certainly in general industrial, but the Americas have fared better than Europe or Asia, principally of the China region. India, however, continues to be relatively strong.

Have you noticed any discernible prices changes, John, or competitive dynamics that are somewhat reflective of the deteriorating order book? Because I'm assuming this is going to be fairly reflective of what's going on within these industries. What's happening on the competitive front and with respect to pricing?

Yes, I would say overall certainly pricing has been more challenging than last year, and I think, clearly, it's a more competitive market. I wouldn't say I could point to any large projects that we lost on the base of pricing. I think we're certainly competitive on our pricing in the marketplace, but it's certainly -- you know, it's one of those things we're watching pretty closely. I think as conditions may start trending further downward, that could potentially be an issue.

What was pricing in the quarter to the contribution of revenue?

It was basically -- it was up a little bit because a lot of what we shipped in the quarter was booked last year was in backlog, so we probably had a little bit of positive pricing impact.

And if you look at the backlog today and sort of the trend based on your guidance, what are you assuming for pricing, like it's going to obviously shift downward, I'm assuming; how much?

Yes, I think for the year, we're relative -- we're anticipating relatively flat, maybe down a hair, but relatively flat for the year based on what we have in backlog.

Right. One more question from me. Just the restructuring expense, the $0.01, are you planning to do additional restructuring? And I guess just from more of a sort of an observational standpoint, why are you not including these charges in the presentation of your earnings the way other companies do? It just -- you know, it just -- I'm just curious.

Well, I mean we have a fair number of adjustments in the earnings, and so we put it in the adjusted earnings category. I mean I think there's a mix of folks that do it both -- you know, either one way or the other, and I think our thought was, given the number of adjustments we had to earnings, we wanted to line-item that in the adjustments.

That's fine, but are you planning more, John? Or where do we stand in restructuring? What should we--?

Yes, I mean I think we're clearly on the front end. I mean we still had very strong shipments in the first quarter. And so we're -- I would say we're in the -- and certainly in the initial stages of implementation on restructuring, and so, yes, I would probably anticipate we would see additional restructuring in the second quarter.

All right. Thank you very much.

Sure.

We'll take our next question from Kevin Maczka with BB&T Capital Markets.

Good morning, everyone.

Morning.

Hi, Kevin.

John, I guess my first question, on the marine side, there's been a lot of talk about the macro conditions stabilizing, a lot of maybe your competitors seeing that recently, as well. But it sounds like comments out of the dry bulk carriers recently, they're not looking for that. It sounds like they're looking for a very prolonged and severe freight recession. So I'm just wondering, are you positioning your -- for that, as well? Is that your outlook, as well, for your marine business, or are you expecting this to be a kind of a couple quarter phenomenon?

Yes, I mean -- well, there's a couple factors at work in commercial marine. I mean dry bulk is one subcategory, and I think that certainly is a market that was hit extremely hard last year from a rate perspective with massive declines in rates. I mean there has been certainly some recovery from the bottom there, but that recovery's been fairly modest given the massive reduction in freight rates.

You know, I think part of the issue in commercial marine is there is a very large number of vessels currently on order with the shipyards. There's a very large backlog, kind of multi-year backlog. The question will be sort of two-fold.

One is, is how will that backlog be delivered? You know, over what period of time. Is it going to take, you know, one year or five years to deliver that? And that will stretch out the revenue stream.

And I think depending upon the timing of the overall economic recovery will certainly be a factor in the timing of recovery of new ship construction. We went through several months basically of zero new ship orders. There have been several here in the last couple of months. I think we had 20 or 25 new ships ordered in April, so there is some life in that market, but it's obviously very modest compared to what we saw last year.

So it's going to be a multiple quarter issue in shipping in the commercial marine market. It's a market where, like the ships themselves, that market moves fairly slowly in both decline and uptick.

Okay. And, separately, I'd like to kind of understand the relation here between your backlog and your guidance for organic growth. Your organic growth was very strong in this quarter.

It looks like now you've got about two quarters of backlog on hand right now. You're looking for organic growth to be down, though, for the full year. So I'm wondering, do you expect to burn through most of that backlog and then see a really material decline in organic growth as we get out into Q4, for example? Or is that backlog -- does that have a longer life to it and a lot of that backlog won't be -- isn't planned to be shipped until 2010 or later anyway?

Well, it is a longer backlog, and we certainly won't burn through all of our backlog this year. I mean we had scheduled shipments into next year, both in the marine market and in navy. Those tend to be our longest lead-time, and a little bit of power gen that extends out, particularly on some of the large project businesses. So I mean I think our guidance is based on what we see currently booked for the order book this year plus an anticipation of sort of book-to-bill business within the year based on current trend lines in the order rates.

I think we -- our business does have fairly long lead-times in certain of the segments, so if you look at that backlog, I certainly wouldn't assume that we'll ship 100% of what's currently in backlog during -- in calendar 2009.

Okay, great. Thank you.

Thanks, Kevin.

We'll take our next question from Michael Schneider with Robert Baird.

Good morning, all.

Hi, Mike.

Maybe we could first just start with the adjustment to the guidance. I'm curious, on my rough math, it looks like currency alone was 7 of the $0.10 in reduction. Is that accurate?

Yes, that's correct.

Okay. And then the organic growth was lower by 5 points at the midpoint, so I guess by implication, you actually raised your operating margin expectation. Just interested to understand the dynamics there. What is it about the margin performance and/or the pricing that's been a positive surprise for you?

Yes, it's actually about flat, Mike. Our goal here for the year is to maintain margin in the declining environment, and I think part of that will result from what we've been able to take out in cost upfront. We were -- in the quarter, we were driving 18% organic growth. We were driving costs out of the system. So I think really where we're positioning ourself is to continue to maintain margin despite the fact that the organic growth is going to come in a little bit lower than we anticipated.

Okay. And then just focusing on the parts business or aftermarket, can you describe just what went on kind of month by month? Because I presume you saw a seizure at some point here when everybody froze during the quarter, but what you've seen most recently and what you've heard or [in] seen with some of the maintenance and kind of ongoing parts demand within your business.

Yes, I mean the parts demand was relatively stable as a percentage of our total business, in fact, even a touch higher, and that's part of which has been -- we've had some fairly specific programs targeted on the aftermarket. I think that that part of our business will remain fairly stable over the course of the year in terms of a percentage of revenue. We certainly don't see any indication in the incoming order rate that maintenance business will go down. I mean somewhat it's a trade-off. Sometimes folks defer on new equipment purchases and will either refurbish or repair existing, so you do have some customers that are going to back off their maintenance budgets and others that will increase them, as opposed to buying new equipment, so I think our anticipation on aftermarket is we'll have a relatively stable flow of aftermarket business for the year.

And pricing in the aftermarket? I've seen letters out of the major oil and chemical companies basically addressed to all vendors saying give us your updated quotes on part supplies based on the deflation in raw materials. What have you seen in your mix, and what has been the result of pricing in your aftermarket parts?

Yes, I mean I would say certainly it's a little more competitive. I mean you've got a lot more shopping going out there in the aftermarket, that's clear. We have -- I think we've been able to reasonably maintain our pricing in the aftermarket. I mean you've got some plusses and some minuses, but overall, our pricing has been relatively stable in the aftermarket.

Okay. And then just again another question on the backlog in orders. So if we look at the guidance of just down a few points here in the -- it's basically down in line with the backlog a few points year over year, it seems to me 2009 is effectively in the bag and you're just working now on 2010? Is that the right way to look at it?

Well, I don't plan on taking the rest of the year off.

No, but I mean in terms of orders.

[Inaudible - multiple speakers] but, yes, I mean I think we certainly have a portion of our business that has booked out for the year, but we'll continue to have more of that book-and-bill business that comes in for the balance of the year.

So we still have plenty of work to do for this year, but we are working aggressively on next year. Particularly in the project part of our business, the oil and gas and power gen, there is a fair amount of quote activity out there; in fact, a very large amount of quotes out right now because folks have taken much longer period of time to move on quote activity to order. Therefore, we've got a lot in the quote pipeline that we're working on and, hopefully, with economic situations starting to stabilize a little bit towards the end of the year, we'll see that activity in that time between quote and order start to shrink a little bit.

So as we try to model 2010 now, the order growth in Q4 was down 16% organic. This quarter, it's down 25. Is that the -- I mean given that that's a nice six-month window now to give us a view into 2010, should we be looking for 20% declines in backlog in 2010 just based on what we've seen over the last six months in 2010?

Yes, I mean -- well, it certainly depends on how order activity goes in the back half of the year. I think we will certainly see declines in backlog during the course of this year. I certainly don't anticipate building backlog, though we do have a fair amount -- I would say a reasonable amount of backlog that's scheduled for next year already. So we will go into next year with backlog. So it really depends on the order trend in the back half of the year as to really how that's going to play out.

And orders specifically during April and early May, have they bounced or acted much differently than this kind of minus 16 to minus 25 range?

It's relatively stable.

Okay. All right. Thank you.

I mean one-month trend -- we try not to look at one-month trends anyway just because of the lumpiness in the business. I mean we try to look at it over a longer period, so I'll certainly wait until the end of the quarter to have a full view on that.

Well, I'm just curious if there are any large orders that were pushed out from March to April that we don't see in the stated numbers.

No.

Okay. Thank you.

Yes.

We'll take our next question from Jeff Hammond with KeyBanc Capital Markets.

Hi. Good morning.

Hi, Jeff.

Just on the oil and gas, I mean the order growth continues to be good there. You mentioned the national oil companies and some of the larger companies holding CapEx. Do you think those order rates are sustainable in the double digits as you go forward? And then just would you say that oil and gas is surprising to the upside, or are those order growth rates you've expected to see?

Well, a couple of things. I think the first answer is no; we certainly don't expect double-digit growth in oil and gas. I mean we were somewhat back-end loaded last year in our oil business. The first half of the year was a little bit slower, so the comparison on oil and gas year over year wasn't as difficult.

We did have some pretty good project business that did book in the first quarter, but I think it's going to be a fairly modest year on oil and gas in the near term just because of the -- I think, again, that wait-and-see approach by folks in terms of it's taking much longer to go from quote to order than it did, so just the timing of orders keeps getting pushed out.

Okay, and then just how are you thinking about share repurchase versus maybe what's in your acquisition pipeline?

I think right now -- we certainly didn't buy any shares back in the first quarter. We felt that maintaining liquidity in this environment was important, and so we decided to not buy back any shares. We'll continue to look at the share buyback during the course of the year. We have 10 million in our program available for repurchase during 2009, and if we find the conditions right, we'll buy, and if not, we'll hold off.

Okay, thanks.

We'll go next to Shannon O'Callaghan with Barclays Capital.

Morning, guys.

Hey, Shannon, how are you?

Good. On the organic revenue outlook then just for the year, I mean at what point now do you expect that to go negative, and what do you expect the exit rate to be this year?

Third quarter, it should turn. I think second quarter will be kind of flat to modestly up in the second quarter. I think third quarter we'll certainly see it turn the other way. We had a very strong finish to the year last year, so the comparables are going to be pretty tough.

Okay. So I mean that trajectory suggests a pretty down fourth quarter, and then when do you feel like you get kind of a stabilization?

Well, I think we're probably looking at sometime in 2010 before we stabilize. We certainly had a very strong first quarter this year, as opposed to first quarter -- first quarter of last year actually was, by far, the smallest quarter of the year, so the comp from a revenue perspective was part of the -- it's certainly going to be the easiest that we face. So we should see some downward pressure really throughout the year.

And the second quarter, as I said, maybe flat to up slightly, but it's certainly possible that that could be -- you know, could go negative considering I think we shipped about 161 last year versus 130 in the first quarter. So we had some real substantial growth from first quarter to second quarter last year.

Okay. So I mean based on the cost actions you're taking, I mean even when the real big negative deltas come, you feel like you're still going to be able to hold margin?

Yes, I mean I think for the outlook for this year based on what we see from a revenue perspective and the cost actions that we have taken to date plus what we have planned in case of a further deterioration, I think we feel pretty confident we can do that.

Sure, and that's the cost reduction activity. There wasn't a significant impact on the first quarter results. It's going to happen in the last three quarters of the year.

Okay. Do you have any more feel for in terms of the power market? I mean what kind of growth are you looking for in that market, and is it more -- is it very new project related? Is it upgrades of existing facilities? What are you seeing?

Well, I think that the higher dollar volume will be new capacity expansion, though we do have a fairly steady stream of upgrade business, as well. But, really, the higher dollar business for us is in new generation capacity.

And no -- you mentioned the timing issue. I mean have you seen really any impact on investment patterns there based on the economic pressure?

No, that was just more a timing of order. We had some pretty good project business booked in the first quarter of last year, so it was really more of a comparison issue. That business, the project business, is very lumpy from quarter to quarter, so it makes comparisons on a quarterly basis more challenging.

But you're not seeing any deferrals or cancellations on that side of the business?

No, the power gen business is -- I would say of all of our markets with the exception of Navy, which has its own patterns, the power business, I think, is holding on better than the rest.

Okay. And just, finally, I guess on acquisitions, are you kind of waiting for expectations to get down, or is it just what you're seeing in the pipeline? I mean are things -- do you feel like you're closer, and is it more a matter of waiting for the actual things you want to buy, or is it buyer expectations still aren't low enough? Where are you at? Just give us a little more color.

Yes, it's a little bit of both, Shannon. I mean I think that the pipeline on acquisitions certainly was -- came to a grinding halt during the end of last year. That pipeline certainly has filled back in some, and I think we're seeing more activity out there in the M&A market. There's still a spread -- a bid/ask spread on valuation, but we feel that that certainly has the opportunity to start narrowing as the year goes on.

Okay, so I mean sellers are still clinging to higher expectations at this point, or what do you think?

Well, sellers always do that.

All right. Thanks, guys.

(Operator instructions)

We'll go next to Joe Mondillo with Sidoti and Company.

Good morning, guys.

Hi. Good morning.

First off, I was just wondering if you could touch on the gross margin and how that came down versus organic sales growing? I missed that in your commentary.

Yes, the biggest issue on margins was really mix in the business but also in some fixed cost absorption. We ran extremely high positive variances on absorption in the first quarter of last year as we were building up for a strong second quarter. Had a lot of project business ship in the second quarter, so we had very high absorption rates in the first quarter, so it was a tough comparison on gross profit margins as a result. So we did see a little bit of decline as a result of that. I mean on a gross margin basis, pre-variance, we actually had pretty good performance in the quarter versus prior year.

Another thing to consider, our margin for the full year last year was 35.9, and so we're 35.2 for this quarter. The first quarter of last year, as John said, was very strong. It was stronger than any quarter that we had last year, and we -- last year, we pointed out that we didn't expect that to really continue through the balance of the year, that we expected more in the 36 range.

Okay, great. And then just one more question from me. I was wondering if you could comment on your general industrial market, where you are right now, what you're seeing in orders, do you expect another couple quarters of down, or is there a stabilization within that market?

Well, I mean certainly that's our broadest market. We touch a lot of different end markets there. There are several that have been pretty hard hit, particularly chemical, building products, and sort of the general manufacturing part of our business and certainly we've seen the biggest impact on, and I really don't see any positive change in that market for a couple quarters. I mean I think we're going to see -- I think we've sort of leveled out in terms of a level of order intake, but I don't see any major upside, and if anything, we will see some -- maybe a little bit of downside continuing in that market.

Okay, great. Thank you, guys.

Sure.

And having no further questions in the queue, I would like to turn the conference back over to Ms. Reynolds for any additional or closing remarks.

Thank you. Thanks for joining us today, and we look forward to updating you next quarter.

Ladies and gentlemen, that does conclude today's conference. We appreciate your participation.