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Edited Transcript of CIR earnings conference call or presentation 28-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 CIRCOR International Inc Earnings Call

BURLINGTON May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of CIRCOR International Inc earnings conference call or presentation Friday, April 28, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David C. Calusdian

Sharon Merrill Associates, Inc. - President

* Rajeev Bhalla

CIRCOR International, Inc. - CFO and EVP

* Scott A. Buckhout

CIRCOR International, Inc. - CEO, President and Director

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Conference Call Participants

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* Charles Damien Brady

SunTrust Robinson Humphrey, Inc., Research Division - MD

* James K. Foung

G. Research, LLC - Research Analyst

* James Picariello

KeyBanc Capital Markets Inc., Research Division - Associate

* Nathan Jones

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Ryan Curtis Cassil

Seaport Global Securities LLC, Research Division - Director of Flow Control and Engineering and Construction and Senior Industrials Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, welcome to CIRCOR International's First Quarter Fiscal Year 2017 Financial Results Conference Call. Today's call will be recorded. (Operator Instructions)

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

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David C. Calusdian, Sharon Merrill Associates, Inc. - President [2]

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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'll 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, 10-Qs 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 28, 2017. 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 non-GAAP metrics exclude any special charges and recoveries. The reconciliation of CIRCOR's non-GAAP metrics to the comparable GAAP measures are available in the financial tables of the earnings press release on CIRCOR's website.

I'll now turn the call over to Mr. Buckhout.

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [3]

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Thank you, David, and good morning, everyone. CIRCOR delivered solid first quarter results, with revenue of $145 million, adjusted earnings per share with $0.32 and free cash flow of $13 million, all in line with our expectations.

In addition, we're pleased to report a positive inflection point on orders and backlogs. Building on the momentum from Q4, overall orders for the quarter were up 35% year-over-year and 26% organically.

Orders in our Energy segment were up 45% due to strong demand for stocking orders in our Distributed Valve business and the recent acquisition and Critical Flow Solutions.

In our Advanced Flow Solutions segment, we reported a 26% organic increase in orders, primarily due to bookings on defense platforms, including the Joint Strike Fighter and the Multimission Maritime Aircraft.

We're encouraged by the robust order intake on both sides of our business, which should translate into strong top line growth as we progressed through the year. Despite seasonally high disbursements in the first quarter, our working capital and cash generation actions delivered $16 million in cash from operations as we improved our inventory position and receivable collection efforts. Our strong cash flow performance is also tied to our focus on operational excellence and the CIRCOR operating system.

Operationally, we continue to make progress in executing our supplier consolidation and low-cost sourcing plans. And as you may recall, we've been focused on consolidating our manufacturing footprint and migrating production to lower-cost manufacturing locations.

During 2016, we closed our production facility in China, which was serving our distributed valves customers in North America and opened a new manufacturing facility in Monterrey, Mexico. This new facility significantly shortens lead times, while also providing a cost benefit.

Monterrey will supplement the manufacturing capacity at our Oklahoma City facility, allowing us to meet increased levels of demand from our North American customers. Currently, Mexico produces approximately 15% of our total distributed valves demand. In addition, over time, this facility will manufacture products for North American customers and other energy businesses and AFS.

With low-cost manufacturing facilities in Mexico, India and Morocco, we're well-positioned to migrate additional production to these facilities to better serve the regional markets with a more competitive cost structure.

After Rajeev discusses our Q1 financial results, I'll provide more context on our order intake and expectations relative to each of our end markets.

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [4]

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Thanks, Scott. Let's review the segment results, starting with Energy on Slide 4. As expected, Energy sales of $80 million decreased 4% year-over-year due to the weakness in our long-cycle engineered valves business, which was down approximately 60% as well as lower shipments out of our instrumentation and sampling business. This was partially offset by increasing revenue out of our Distributed Valves business, up double digits sequentially and the acquisition of CFS.

Energy segment operating margin was 8.6%, a decrease of 250 basis points year-over-year. The decline was primarily related to lower volume in our engineered valves business, where we continued to manage costs through the filler program as well as other cost-reduction actions. During the quarter, we incurred approximately $1.6 million for startup costs at our Mexico manufacturing facility as well as a program-specific warranty charge. Finally, productivity actions and sourcing savings continued to help improve the bottom line.

For Advanced Flow Solutions, please turn to Slide 5. Advanced Flow Solutions revenue of $65 million was down 3% year-over-year, but essentially flat excluding the impact of foreign exchange rates. Sales in our power and process businesses were stable year-over-year. The aerospace businesses were flat year-over-year, with growth in fluid controls and our U.K. defense business, offset by lower sales from a low-margin commercial actuation program that we exited at the end of 2016. In addition, the Industrial Solutions business showed a slight decline, mainly due to lower navy program shipments.

Advanced Flow Solutions segment operating margin was 11.8%, lower by 70 basis points compared with the prior year. This was primarily due to a mix change in our power and process product line, partially offset by restructuring savings. FX had a negative 20 basis points impact on margins.

Turn to Slide 6 for selected P&L items. Special and restructuring charges totaled $1.7 million end of quarter. We recorded $1.6 million of restructuring charges related to the exit of our China and Brazil operations. In addition, we recorded $2.5 million gain as we updated the fair value estimates for the CFS transaction. However, that gain was fully offset by a $2.6 million charge for the noncash acquisition-related amortization expense.

Given the higher debt levels and interest rates, we incurred approximately $1 million of higher interest expense this quarter compared with the prior year. Our adjusted tax rate for the first quarter was 25% and our adjusted EPS was $0.32.

Turn to our cash flow and debt position on Slide 7. We generated approximately $16 million in cash from operations and more than $13 million in free cash flow during the first quarter of 2017. In addition to converting our earnings into cash, we are focused on managing inventories and improving collections, resulting in better working capital performance.

This brings us to our guidance for the second quarter. Please turn to Slide 8. Overall, we expect revenue in the range of $150 million to $160 million and adjusted EPS in the range of $0.38 to $0.48 per share. The revenue from improved order intake in Q1 does not fully offset the expected revenue decrease in our long-cycle engineered valves business in Q2. However, we do expect the bookings and backlogs to support increasing revenue in the second half of this year.

Regarding special and restructuring charges for the second quarter of 2017, we anticipate charges to be in the range of $3 million to $4 million or $0.14 to $0.16 per share. This range excludes any additional fair value purchase accounting adjustments related to the CFS acquisition. We expect our second quarter adjusted tax rate to be approximately 27%.

With that, let me turn it back over to Scott.

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [5]

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Thank you, Rajeev. Let me provide you with an overview of the trends in our end markets, starting first with energy. Energy segment orders increased 45% in the first quarter versus the prior year due to strong demand in our Distributed Valves business as well as the CFS acquisition. This growth was partially offset by the expected decline in our engineered valves and instrumentation and sampling businesses.

In our Distributed Valves business, orders more than doubled year-over-year and we're up 25% sequentially. We're seeing a significant increase in stocking orders from our larger distributors. In addition, we're generating strong order momentum for our midstream applications. Higher rig count and the completion of previously drilled wells, especially in the Permian Basin, are driving higher order levels.

Rig counts in the U.S. are up over 25% since the beginning of the year and up 80% over the prior year. We're optimistic about the positive signs in the market and are actively managing supply chain constraints to deliver against the higher demand. We expect a consistent order rate sequentially in the second quarter. Q2 revenues should increase significantly as well as the quarter-end backlog.

As expected, orders in our long-cycle engineered valves project business were down in Q1. We're in our third year of low CapEx spend in upstream exploration and production. The market continues to be weak globally, with intense pricing pressure from the competition. However, customers are signaling a gradual increase in activity as the year unfolds, with 2018 spending expected to be higher than 2017. We're currently seeing moderate, but improving activity in the Middle East. Outside of the Middle East, a limited number of projects are starting to move forward. Overall, we expect continued pressure in this part of our business through 2017, with the second quarter at a consistent revenue level sequentially.

Within our instrumentation and sampling businesses, bookings were down year-over-year. However, we did see sequential improvement in our order run rate. In addition, we're bidding on a number of refurbishment projects in the North Sea with Statoil. While we don't expect to begin receiving orders related to these projects for several quarters, it's a positive sign for the market. We're optimistic for a gradual year-over-year improvement in orders as the remainder of the year unfolds. We expect roughly flat revenues sequentially in Q2, with moderate growth in the second half of the year.

The integration of CFS is progressing well and remains a high priority. The downstream refining market for our CFS products continues to see healthy levels of activity, and we have a strong pipeline of quoted projects.

The TapcoEnpro products are performing well, with strong bookings and a healthy order pipeline for both capital and aftermarket projects. We're seeing solid growth for the DeltaValve aftermarket products.

The expectations we provided in February for the DeltaValve capital project orders are unchanged. While DeltaValve capital project order intake is lumpy and timing is uncertain, most of the currently active projects are expected to close in the second half of this year.

We remain excited about our new product pipeline at CFS. We recently started taking orders for our new isolation valve for refining operations, and we expect to begin shipping in June this year.

Turning to Advanced Flow Solutions where we serve the aerospace, power and process and industrial end markets. Our outlook for aerospace remains positive on both the commercial and defense sides of the business. We received several large orders in the quarter on our major defense platforms such as the Joint Strike Fighter and the Multimission Maritime Aircraft.

On the commercial side of the business, we're leveraging our fluid and motion-controlled technologies to win new platforms. In the quarter, we were selected to provide the main hydraulic assembly for a confidential commercial program that will now enter the development phase. This major program is a great example of how we're positioning our Aerospace business for long-term growth.

In our power and process business, the power market, while still active, has been soft. Orders were slightly lower in the quarter compared to prior year. We're focused on pockets of growth in the U.S. and parts of Asia. The majority of our recent orders are related to aftermarket parts, replacement valves and services, especially for process applications. Based on our opportunity pipeline, we expect project orders to improve as the year unfolds. Near term, we expect moderate growth in orders and revenues.

Our Industrial Solutions business serves a number of end markets, including HVAC, Maritime and other industrial markets. As anticipated in our last earnings call, we saw sequential order growth, driven in large part by MRO orders from Maritime and HVAC applications. Looking ahead, we expect a slight uptick in orders and revenue year-over-year, driven by our expanded focus on aftermarket and moderate growth in industrial end markets.

In conclusion, with the exception of engineered valves, we're optimistic about the market outlook across all of our product lines. We're addressing the cost structure in our engineered valves business. We're focused on mitigating supply chain constraints to meet the improved demand outlook for distributed valves. And at the same time, we're executing on our simplification and low-cost manufacturing initiatives, with the expectation that we will improve margins and working capital performance as our end markets continue to recover.

And finally, we remain focused on delivering long-term value for shareholders by investing in growth, both organic and through acquisitions, expanding margins, generating strong free cash flow and being disciplined with capital deployment.

A final note before we turn the call over the questions. We're looking forward to meeting many of you at our upcoming Investor Day on May 25 in New York City, where we'll discuss our long-term operational and financial targets.

With that, Rajeev and I are available for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Ryan Cassil of Seaport Global.

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Ryan Curtis Cassil, Seaport Global Securities LLC, Research Division - Director of Flow Control and Engineering and Construction and Senior Industrials Analyst [2]

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I wonder if I could start on the energy side, just given your commentary for orders on the distributed valves in the second quarter. I know visibility is limited, but could you talk to what you're hearing on the sell-through? I presume it's pretty positive.

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [3]

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Yes. So we're expecting the rate of orders in dollars that we saw in Q1 to more or less carry through in Q2. So we had -- I'd say a bias more towards stocking orders in Q1. We're not sure if we're going to see that mix shift or not here in Q2, but we're expecting the rate in absolute dollars to be about the same as what we saw in Q1.

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Ryan Curtis Cassil, Seaport Global Securities LLC, Research Division - Director of Flow Control and Engineering and Construction and Senior Industrials Analyst [4]

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Okay, great. And any comments or any surprises on the pricing side there for the distributed valves? Are you seeing -- I know people worry about that pricing gets worse as volumes come back potentially. Are you seeing that or are things plan out as you expected?

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [5]

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Actually, we're not seeing pricing get worse, and we're spending a lot of time on this. I think the right way to say it is that we're discounting less and that the margin in our backlog as we exited Q1 has started to increase rather than decrease. I think availability is playing a role here in the industry in general and in the market in general. The -- us and many of our competitors are trying to ramp up our supply chain as fast as possible and availability is playing a role. So we're discounting less. I wouldn't call it a price increase. Our list price hasn't changed, but we're discounting less and the margin and our backlog has started to come up.

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Ryan Curtis Cassil, Seaport Global Securities LLC, Research Division - Director of Flow Control and Engineering and Construction and Senior Industrials Analyst [6]

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Okay. And just to clarify, the startup cost for the new facilities, that was included in the adjusted number or was it excluded?

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [7]

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It was included. So the energy markets were impacted based on those startup costs, certainly.

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Ryan Curtis Cassil, Seaport Global Securities LLC, Research Division - Director of Flow Control and Engineering and Construction and Senior Industrials Analyst [8]

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Okay. And can we think of that as continuing at about that rate in the second quarter?

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [9]

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Yes, let me clarify. The $1.6 million I just talked about reflects 2 items, a portion of which is the startup cost. You'll see that start to get less as we progress through the year. But for Q2, it will be about the same as what we saw in Q1. It's about 1/3 of the total.

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Ryan Curtis Cassil, Seaport Global Securities LLC, Research Division - Director of Flow Control and Engineering and Construction and Senior Industrials Analyst [10]

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Okay. So x that, you guys are still at a valid double-digit 10% plus margin for..

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [11]

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That's right.

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Operator [12]

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Our next session comes from Nathan Jones of Stifel.

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Nathan Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [13]

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I'm also going to stick on Energy and the Distributed Valve business. Scott, last quarter, you actually were talking about, potentially, the opportunity to raise prices. With lead times, I assume, stretching out fairly considerably, demand improving fairly considerably, how are you looking at the potential to actually raise prices throughout the year?

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [14]

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Yes. So throughout the year -- well, let me back up, I'll start with what's happening right now, Nathan. So when you look at a little sweep of time here on pricing and distributed valves, you'd see our margin start to compress over the last 1.5, 2 years as volumes have come down and the market has turned down. If you look at Q1 and, to some degree, Q4, you'll see that we're discounting off our price list less and our price -- our margin has started to come back up. We're starting to approach the margins we had in 2014. So we haven't raised prices on our price list. We would look at doing that at an annual basis, probably not something we'd do in the middle of the year, but you'd see us dramatically cutting back on discounts off the price list as the rest of the year unfolds. And that's what we've already started to do. We simply don't have to give discounts right now.

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Nathan Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [15]

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And then could you talk a little bit about the supply-chain constraints, how confident you are that you can actually make this improve demand, if you're seeing any problems with your suppliers? Just any color you can give us there.

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [16]

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Yes, so -- yes, we were seeing some problems with our suppliers and we know that our competitors in the market are having some of the same issues. But just to clarify, there's 2 things happening. When you look at our backlog in distributed valves, it's increased in Q4 and it increased again here in Q1. A lot of that is driven by the nature of the orders being stocking orders that are meant to be delivered out in Q2, Q3 and/or beyond. So the stocking orders come with the lead time. But the other issue is, supply-chain constraints. So we have suppliers that are struggling to ramp up and meet demands. In this case, we're doing -- in these cases, we're doing 2 things. We have a couple of critical suppliers where we have full-time supply chain employees from CIRCOR working on site at our suppliers to make sure we're maximizing our share of their capacity. We're also in parallel qualifying new suppliers, duplicate suppliers, for those products. So we're doing everything we can to manage it, but it is one of the constraints as we try to ramp up to meet demand.

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Nathan Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [17]

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Given that the suppliers are experiencing higher demand, are you seeing any pricing pressure coming from them to you?

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [18]

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We haven't really had to -- we haven't had to deal with that yet, Nathan. We've actually had discussions around paying a small premium to jump forward in the line here from a capacity perspective, but we haven't had to do that yet. So we're not seeing a price increase from suppliers yet. They're scrambling, but they're not trying to raise prices on us yet.

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [19]

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And then just to add to that, Nathan. Don't forget, these key suppliers are on long-term contracts with us. So that's obviously a starting point here. And as Scott mentioned, they're not trying to renegotiate these long-term contracts. We're just looking at ways that we can avail ourselves of an unfair share of their capacity.

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Nathan Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [20]

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Right. Got it. I guess, you had 185-ish million of orders and the revenue guidance is -- are fairly below that for the second quarter. Can you just talk about how those orders sequence through the year and how we should think about those rolling out and revenue progression as we go through the year?

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [21]

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Yes, happy to do that, Nathan. So let's look at it in 2 pieces. If we look at the energy side, there is a good portion, as Scott just mentioned, of those orders that are stocking orders with the customer-requested delivery dates that are midyear and into the third quarter as well. So that's a good portion of the growth that you saw there. On the AFS side, if you look at the growth, the year-over-year growth in orders there, about half of that growth related to these 2 large programs that we mentioned in the opening remarks, the Joint Strike Fighter and the Multimission Maritime Aircraft, and those have deliveries later this year, but do also go into the -- into next year. So the -- a good portion of the backlog will deliver this year, but there will be a portion that carries over into the subsequent year.

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [22]

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Nathan, as the year unfolds, we expect revenue to continue to increase. It's fairly (inaudible) through the year. So Q1 should be the low point on revenue for 2017.

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Operator [23]

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Our next question comes from Charley Brady of SunTrust Robinson Humphrey.

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Charles Damien Brady, SunTrust Robinson Humphrey, Inc., Research Division - MD [24]

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Just on the Energy business, as we look at the engineered valve, the large-project business, I'm just trying to square up, make sure I understand, you're seeing an increase in the CapEx, but it sounds like -- but given the length of time of those projects, are you looking for bookings to start picking up second half '17, which would then help the 2018 revenue picture? Or are you -- you think the orders are not going to pick up until '18, and maybe that revenue pickup is certainly part of '18, but maybe beyond '18?

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [25]

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So here's what we're hearing from customers and what we're starting to see. We're starting to see more budgetary quotes come in. We're starting to see more projects start to move forward here in 2017. And our customers -- I was just in the Middle East for a couple weeks, our customers are telling us that '16 was the low point for them, and that activity will start to increase through '17 and into '18. So we're expecting that more activity, more orders in late '17, early '18 with revenue increases probably starting in Q2, Q3 2018. So that's kind of the current outlook. This could obviously change, but moderate increase and activity through the year and a better '18 and '17.

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [26]

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Just to add to that, Charley. We are going to -- we are expecting to continue to get MRO-related orders this year as well. So that's the other piece of the equation that we want to keep in mind.

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [27]

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So when you look at '17, nothing's changed from what we guided in the last quarter. So we're still expecting revenue in line with what we said, down about 50% versus prior year. And when we look at Q2, we're expecting revenue more or less in line with what we did in Q1.

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Charles Damien Brady, SunTrust Robinson Humphrey, Inc., Research Division - MD [28]

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Okay, that's helpful. And would you guys want to clarify the commentary on the Q2 restructuring and the plant startup costs. So of the $1.6 million, 1/3 of that was plant startup. And in Q2, there's still a little bit of that, but not as much, maybe it was $500,000 or $530,000, if I do the math. Less than that in Q2, but still a little bit of plant startup. Is that right?

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [29]

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That's right. You have that right.

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Charles Damien Brady, SunTrust Robinson Humphrey, Inc., Research Division - MD [30]

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And is Q2 -- after Q2, the plant startup, that cost goes away?

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [31]

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We'll have some in Q3 and then it should dwindle to something much smaller as we ramp up production in the back half of this year.

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Operator [32]

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Our next quarter comes from James Picariello of KeyBanc Capital Markets.

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James Picariello, KeyBanc Capital Markets Inc., Research Division - Associate [33]

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Just a housekeeping item to start out here. Can you provide what the organic backlog number was within Energy, if we exclude CFS?

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [34]

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The organic backlog, let's see, the -- so we -- the backlog, $146 million. Let me just take a moment to look up -- it's up about 19%, but I think CFS was a little under $40 million of that. So think of it about $106 million is organic and about $40 million was CFS.

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James Picariello, KeyBanc Capital Markets Inc., Research Division - Associate [35]

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Got it. Appreciate that. Yes, so I guess staying on CFS. Revenue was pretty solid in the quarter, and orders and visibility seem to be improving. What is the outlook for this business in 2017? It seems as though there is some longer-term projects that the timing is still uncertain. Just wondering what the outlook is in terms of maybe sales contribution for this year.

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [36]

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So I'd just change a little bit about what you said here, James. The first quarter on revenue in CFS is the lowest quarter on revenue that we'll have this year. So we expect revenue to increase in Q2 and then again in Q3 and then again in Q4. And so we're -- in 3 of the 4 pieces of CFS, we're seeing strong orders and strong quoting activity, the 3 being TapcoEnpro aftermarket, and capital projects and then DeltaValve aftermarket. The DeltaValve capital project piece, we saw low orders in Q1. We're expecting relatively low orders in Q2. There's some things that could happen that can change that, but relatively low in Q2. With the majority of the orders we expect this year, we expect to close in the second half of this year. So you should see an increase in orders from Q1 to Q2 for CFS for sure, but the back half should be quite good on order intake for CFS.

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [37]

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And just add to that, James. That's consistent with what our expectations were when we spoke in February. So really, no change relative to that profile.

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James Picariello, KeyBanc Capital Markets Inc., Research Division - Associate [38]

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Are refinery maintenance schedules improving?

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [39]

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Well, if you recall, when we talked in February, we talked about the fact that relative to our products. We were seeing a bias towards the Fall turnaround versus the Spring turnaround, and that's still remains the case. So we are expecting to have a much stronger Fall turnaround season for our products than the Spring.

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James Picariello, KeyBanc Capital Markets Inc., Research Division - Associate [40]

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Okay. And then just one more, sticking on the energy piece. It seems as though you guys continue to gain stronger traction within midstream. Can you just talk about what the backdrop is there? Are you gaining share? And what's the growth outlook for the year?

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [41]

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So we do believe we're still gaining share in midstream while we continue to take customers from our top competitor in the market here in North America. We are qualified on -- about more than 11 different midstream players that we weren't qualified to sell to before. We're on their approved vendor list now, and we're also taking distributors. So this is driven by 2 things, broadly. One is the focus we put on midstream and the expanded product line that was part of that. So we expanded our welded body product line to address a broader part of that market. But two is the struggling competitor, just to be very honest. We have a competitor that has -- really struggling with both lead time and service in general. And so we have a lot of customers knocking on our door, trying to get us in and qualify and asking us to quote. So we're benefiting from that, and we're seeing order intake come from that. But we have good momentum. I think you'll see that build as the year unfolds.

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [42]

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In fact, just to add to what Scott mentioned, James, the -- we're skewing some of these orders toward the midstream side as I look at what's happened in Q2 -- I'm sorry, in Q1 and as I look ahead. So it's a good new story.

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Operator [43]

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(Operator Instructions) Our next question comes from Jim Foung of Gabelli & Company.

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James K. Foung, G. Research, LLC - Research Analyst [44]

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Good orders, guys. So maybe we can just talk about the cost-reduction actions. This chart on the restructuring actions for 2017, you have savings of $11 million. But how much of that is going to flow through the bottom line? And I guess, what did you see in Q1?

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [45]

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Jim, this is Rajeev. The $11 million is the full benefit for the full year for all of those restructuring actions that we show on that chart. Recognize that we will continue to take maybe smaller actions as opposed to a large program. The $11 million reflects the large programs. And you can look at that essentially co-rata through the quarters for this year in terms of the benefit to the bottom line. And what we don't disclose on there, as I just mentioned, are some of the other smaller actions that we will continue to take as we manage the portfolio of the business.

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James K. Foung, G. Research, LLC - Research Analyst [46]

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And if you took the small actions together, how much do you think they can result in terms of cost savings?

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [47]

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Well, if you think about it from a margin standpoint, Jim, we've had a significant headwind. If you look at Energy margins for the first quarter, with the volume drop in engineered valves as well as the warranty and startup costs, offset in part by the CFS contribution, we -- in large part, we offset a majority of that headwind with productivity and restructuring. So think about it this way. You did 11.1% margin in Q1 of 2016 for Energy, and we just reported to you 8.6%. So that's down 250 basis points. About 200 basis points relates to that warranty and startup cost. So think about the rest as being about 50 basis points. And so we are able to mitigate a substantial portion of the headwind from the volume drop and its impact on margins through restructuring and productivity.

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James K. Foung, G. Research, LLC - Research Analyst [48]

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Okay, okay. And then can you just guys talk about you're just discounting less on distributed valves. How -- I guess, in terms of percentage-wise, how much less do you discount? I mean, the lesser discount just flows through the bottom line for you, right?

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [49]

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Yes, it does flow through the bottom line. Yes, I don't know how to give the -- I don't know that I...

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [50]

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Yes, it will be hard for us to give you a percentage there, Jim, because, obviously, it's competitively sensitive to start talking about giving less discounts to a particular area versus not.

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [51]

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On a specific product line like that.

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [52]

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Yes. But think about it this way, we're seeing good incremental drop-through in the distributed valves business, and it'll get better as the year progress, especially as volumes ramp up and we get some of the startup costs behind us.

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [53]

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Jim, the other way to think about it is our margins are pretty close to where they were in 2014 when this was a much, much bigger business, right? When -- this was a lot bigger business, so we've taken a lot of cost out for sure, but a lot of that is improving price here over the last couple quarters as well.

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James K. Foung, G. Research, LLC - Research Analyst [54]

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Right. So just on lower volume compared to 2014, getting better margin on the...

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [55]

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That's right.

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James K. Foung, G. Research, LLC - Research Analyst [56]

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So the direction is very positive.

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [57]

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Yes.

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James K. Foung, G. Research, LLC - Research Analyst [58]

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And then just the last question. Maybe just talk a little bit about the instrumentation business because that's been weak for a while. Is that just the power OE that that's weak for you? I mean, I guess, what's -- I mean, how do you see that market unfolding for you for the rest of the year?

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [59]

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So on the instrumentation and sampling, we saw a bit of a drop-off in the middle of last year and Q3 was the low point, and we've seen fairly steady improvement order intake since then. And that continued here in Q1, and we're expecting that to continue in Q2 and beyond the year. We're expecting gradual improvement in order intake on instrumentation and sampling. So you'll see revenue sequentially be around flat in Q2 versus Q1, but then you should see some moderate growth through the rest of the year. On -- what we're seeing in the market here is this business is probably one of our more balanced businesses across upstream, midstream and downstream. What's happening on the downstream side is petrochemical is looking pretty good for us right now, especially on the sampling side. So we're selling and quoting a lot of sampling product in petrochem right now. Refining is still a little slower, and we're seeing some delays in the refining side. Upstream, we're seeing early signs of improvement. I mentioned that we were quoting an offshore platform with Statoil in the first quarter. That's obviously upstream. We are the incumbent there. We have the installed base there. So we have a very high probability of winning that project, but that won't turn into revenue until 2, 3 quarters down the road here. So I'm optimistic here. I don't think we're going to see a V-shaped recovery in instrumentation and sampling, but I think we're going to see moderate growth through the remainder of the year, starting here in Q2.

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [60]

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And just to add to that, Jim. Q2 of 2016 was a very good and strong quarter for that business. So it's little bit of a tough compare for this quarter. And consistent with what Scott just said, it will improve as the year unfolds.

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Operator [61]

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Our next question is a follow-up from Charley Brady of SunTrust Robinson Humphrey.

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Charles Damien Brady, SunTrust Robinson Humphrey, Inc., Research Division - MD [62]

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Just a quick one to clarify on the Q2 energy revenues. Did I hear you correctly that you expect Q2 Energy to be flat with Q1 Energy revenues?

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [63]

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No.

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Scott A. Buckhout, CIRCOR International, Inc. - CEO, President and Director [64]

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No. You -- maybe you heard me talking about engineered valves, that will be flat to Q1. But energy revenue in -- overall, will increase from Q1 to Q2.

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Rajeev Bhalla, CIRCOR International, Inc. - CFO and EVP [65]

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Yes. So just recognize if you look at it sequentially versus year-over-year, you're going to have a different answer. But year-over-year, we would expect energy revenues to be up, but maybe down slightly organically. Don't forget we have CFS in there. And then sequentially, we'd expect it to be up nicely.

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Operator [66]

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That concludes today's call. Thank you for joining us today. You may now disconnect your lines, and have a wonderful day.