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Text: On the call today, Scott Buckhout, CIRCOR's president and CEO, and Abhishek Khandelwal, the company's chief financial officer.
The slides we'll be referring to today are available on CIRCOR's website at www.
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-Q, 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.
These non-GAAP metrics exclude certain special charges and recoveries.
The CIRCOR Team has gone above and beyond to deliver essential products to our customers, while keeping each other safe, and maintaining business continuity.
CIRCOR delivered a strong second quarter, despite unprecedented macro challenges.
I'm proud of the portfolio transformation that we've executed over the last couple of years.
With the recent divestiture of distributed valves, we completed our shift out of upstream Oil & Gas and other commodity businesses.
As a result of this transformation, we've sharpened our focus on our core Mission Critical flow control platforms, and we positioned CIRCOR for strong future growth.
Our current portfolio of Mission Critical business is more diversified and less cyclical mitigating the impact of the broader economic environment.
In addition, our portfolio of products has differentiated technology and a strong market position that has enabled us to raise prices through the current downturn.
All of our factories are operating in line with customer demand.
As of today, we're absorbing some inefficiencies associated with safety protocols we put in place to ensure our employee's safety.
We continue to manage some COVID-19 related challenges on the supply chain side.
Beyond this, we're experiencing a limited direct disruption in operations from COVID-19.
Despite these challenges, the CIRCOR operating system is delivering improved operating performance across most metrics.
And finally, we're positioning CIRCOR to take advantage of a market recovery.
We remain on track to deliver on our commitment to launching 45 new products this year.
We continue to invest in front-end resources and strategic growth initiatives.
We're closely collaborating with suppliers and customers to ensure alignment as markets change.
Lastly, we continue to focus on deleveraging the balance sheet.
Now, I'd like to provide some highlights from the second quarter.
Please turn to Page 4.
We booked orders of $193 million with the book-to-bill ratio slightly over 1.0, and a backlog build of $7 million.
Sales came in at $186 million, down 14% organically, largely driven by industrial.
Aerospace & Defense this top-line remained robust through the quarter.
The adjusted operating margin was 8.5% down 210-basis-points from last year.
The margin decline was primarily driven by lower volume in industrial.
Despite lower revenue, we managed companywide detrimental to 22%, due to the aggressive cost and price actions we implemented earlier this year.
Our cost actions remain in line with the targets we laid out in our first-quarter earnings call, and our price actions across the company are coming in as expected.
Let's begin by reviewing our segment results.
All figures up from continuing operations and exclude divestitures.
Starting with industrial in Slide 5.
In Q2, Industrial segment orders were down 16% organically, due to COVID-19 impact on most industrial-end markets.
The Industrial segment had sales of $124 million, down 19% organically.
The majority of our end markets within industrial were challenged, due to the COVID-19 pandemic.
We saw the capital projects and customer maintenance delays to the quarter.
Our EOM margin was 10% representing a decline of 350-basis-points versus the prior year.
This was primarily driven by lower sales volume, and inefficiencies associated the need to maintain social distancing on the factory floor, among other safety policies, due to COVID-19.
The cost actions they've initiated at the end of 2019, coupled with further action stated the pandemic resulted in a drop-through 27% which is significantly lower than our contribution margin.
In Q2 in the Aerospace & Defense segment, we delivered orders of $77 million, down 18% organically, due to a difficult comparison.
Last year, we received a large Joint Strike Fighter order for $17 million.
While this year, we had the impact of COVID-19 on commercial Aerospace, although partially offset by the Virginia Class Submarine order for $9 million.
Aerospace & Defense had sales of $62 million, down 3% organically, due to COVID-19 impact on commercial Aerospace, and ongoing 737MAX delays.
This was partially offset by strong defense shipments, especially for the Virginia Class Submarine, and the Joint Strike Fighter programs.
The Aerospace & Defense operating margin was 21.1% up 500-basis-points.
The $2 million of lower revenue in the Aerospace & Defense team delivered $3 million of incremental operating income, driven by pricing, productivity, and cost actions.
Turning to Slide 7.
For Q2, the adjusted tax rate was 14.8%, due to foreign tax-rate differential, and higher R&D tax credits.
Looking at special items and restructuring charges, we recorded a total pre-tax charge of $17 million in the quarter.
The acquisition-related amortization & depreciation was a charge of $12 million.
Wanting professional fees were a charge of $4.6 million, attributable to last year's unsolicited tender offer, corporate governance actions, and other proxy related matters.
Interest expense for the quarter was $8 million, down $5 million, compared to the prior year.
This was a result of lower-debt balances and a federal interest rate of 25-basis-points.
Other income was at $2 million charge in the quarter primarily, due to foreign exchange losses, partially offset by pension income.
Corporate costs in the quarter were $9.7 million, higher than normal, primarily driven by a write-off of $1.8 million against a written asset from a previously divested business.
For Q3 and Q4, we expect the corporate cost run rate to be approximately $7 million per quarter.
Turning to Slide 8.
Our free cash flow from operations was negative $28 million in the second quarter, which is in line with the guidance provided during our first-quarter earnings call.
During the quarter, we disposed of our Distributor Valves business for a negative $8.25 million in cash.
The company also incurred approximately $10 million of cash disbursements associated with, last year's unsolicited tender offer to acquire the company, support for corporate governance changes, restructuring, investment, banking fees, and other professional services.
At the end of the second quarter, our net debt was $467 million, which was $205 million dollars lower than Q2, 2019.
As we mentioned in our Q1 quarterly call, we expect our Q3 free cash flow to be approximately break-even to slightly negative.
As we complete the final disbursements related to the exit of Distributed Valves and other restructuring expenses.
Q4 is expected to be a strong positive cash flow quarter, largely clean of transition, and restructuring expenses.
Now, I will hand it back over to Scott, to provide some color on our end markets, and outlook.
Now, I'll provide an overview of what we're seeing in our end markets, as well as some of the actions we're taking to manage through the pandemic.
Please turn to Page 9.
Let me start by recapping ou in-market exposure.
First, we've completely exited upstream Oil & Gas.
Looking at today's portfolio, approximately 46% of our revenue is General Industrial, 27% is Aerospace & Defense with defense approximately twice the size of commercial, and 27% as aftermarket sales and support.
I'd like to point out a few aspects of our current portfolio.
Our Aftermarket business is largely driven by Industrial and defense.
Aftermarket margins are higher than OEM margins.
Orders driven by our large global installed base are mitigating the impact of the broader economic decline.
Aftermarket is a strategic growth area for CIRCOR, and aftermarket growth investments will continue through 2020 and beyond.
We expect the defense to remain robust.
Our Defense team is winning new programs in next year's U.S. defense budget appears to be coming in at 2020 levels or slightly better.
In addition, we're seeing strong support from many of our larger defense platforms.
Our Commercial business represents 8% of revenue, and less than half of it is driven by Boeing and Airbus commercial aircraft platforms.
The majority of the remaining commercial sales come from a long list of OEM platforms across business and regional aviation, Civil Helicopters, and Space programs.
Our Industrial business is very diversified by the end market.
Outside of downstream, Oil & Gas which represents 10% of revenue, no end-market represents more than 6% of revenue.
This offers significant diversification, reducing cyclicality, and our dependence on anyone end market.
Let's start with the industrial.
Orders overall in Q2 were down 16% organically.
During the second quarter of the Industrial business, we saw the impact of COVID-19 across most major end markets.
For market orders were down 23%, impacted by an overall slowdown in global manufacturing, as well as large project delays linked to the global reduction in capex.
We saw a capital project delays in Commercial Marine, Machinery Manufacturing, Chemical Processing, and Building & Construction end markets.
The impact on water and wastewater was relatively modest compared to other end markets.
consumer goods manufacturing sector.
The COVID-19 environment coupled with some customers shifting consumer goods manufacturing from China to the U.S. created a moderate increase in orders in this sector.
Aftermarket orders were down 8% organically in Q2.
Our global installed base combined with our dedicated Aftermarket Commercial team is mitigating the impact of steeper declines and for market capital projects.
The aftermarket weakness was most significant in Commercial Marine, due to lower utilization of Cruise ships, and offshore service vessels.
We're seeing pockets of growth in some areas like nuclear power in Asia and midstream Oil & Gas in Latin America.
Downstream order intake in the quarter was relatively low, due to delayed capital projects and maintenance turnarounds.
Refiners are minimizing short-term spending and reducing the scope of activities planned for the fall turnaround season.
Aftermarket backlog is expected to grow as we exit the year in preparation for the delayed maintenance activities from 2020, and layering on top of the already planned repair and maintenance work slated for 2021.
Boating activity remains strong for long cycle capital projects in growth markets.
For Industrial overall in Q3, the end-market outlook is similar to market levels in Q2.
We expect the impact of COVID-19 to drive a year-over-year decline in revenue of 18% to 28%.
We expect most OEM end markets in Q3 to remain at Q2 levels, due to ongoing capital expenditure reductions, and capital project delays.
On the aftermarket side, we're starting to see some improvements sequentially in Europe and Asia, as those markets recover from the COVID related downturn.
In North America, we expect Q3 revenue to be in line with Q2.
Regionally, the general industrial market is expected to decrease in Q3 versus the prior year in North America, Europe, and India.
However, we expect to see growth in China.
Our Aerospace & Defense segment delivered orders of $77 million in the quarter, driven by ongoing strength in Defense programs like the Joint Strike Fighter.
the US Naval Virginia Class Submarine, the CVN-80 aircraft carrier, and various missile programs.
Strengthened Defense orders offset weakness in commercial Aerospace orders which were down from the previous quarter, due to the impact of COVID-19 on production rates at Boeing and Airbus, and 737MAX.
Overall, we expect Q3 orders to decrease sequentially driven by the timing of Defense Program orders, and COVID related headwinds in the Commercial business.
For Aerospace & Defense and aggregate, we expect revenue to be up sequentially in Q3, but down 3% to 5% versus last year.
Commercial revenue is expected to be down approximately 30% to 40% versus last year, while the defense should be up 12% to 17%.
It's important to note that we're increasing prices on both sides of the business, Defense and Commercial Aerospace.
With carryover pricing from 2019, and new increases this year, we expect to net a 4% price increase in Q3.
The price increases are heavily weighted in the aftermarket.
Before I wrap up, I want to read [audio gap] out last summer and have continued to make strong progress.
While the pandemic has had a significant impact on our end markets, we've responded accordingly by accelerating, and expanding many aspects of the plan, particularly with respect to reducing structural cost, and leaning out the company.
[Audio gap] and the growth capacity of the company, despite the expanded reduction of structural cost.
Notably, we've increased our commitment to new products launched in 2020 to 45, up from 40 in the original plan.
And finally, the price remains an important part of our playbook, due to the mission-critical nature of our products, we've been able to raise prices this year in line with the original plan we committed to last year, despite the recent market disruption.
To summarize, we're taking the appropriate steps to navigate the current environment while continuing to execute on our strategic plan.
As the market continues to change, we'll continue to adapt to ensure we're positioned to succeed.
I'd like to close by once again [audio gap] the unwavering dedication to our customers.
They've been doing a remarkable job.
We remain committed to positioning CIRCOR for long-term growth, expanding margins, generating strong free cash flow, and deleveraging the company.
Now, Abhi and I would be happy to take your question.

user
q2 revenue $186 million versus refinitiv ibes estimate of $168.3 million.
qtrly orders of $193 million produced a book-to-bill ratio of 1.04 and backlog increase of $7 million.
remain on track to achieve $45 million 2020 cost reduction plan.

assistant