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Text: On the call, today, are 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-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.
These non-GAAP metrics exclude certain special charges and recoveries.
CIRCOR delivered a strong third-quarter despite unprecedented macro challenges.
The work we've done to transform our portfolio during the last three years has paid off.
We now have a stronger more resilient portfolio of essential products.
Our diversification across geographies, and markets, and products is mitigating the ongoing weakness of the pandemic.
In addition, we've been able to raise prices through the downturn because our product portfolio has strong market positions and differentiated technology.
We're executing well through the downturn.
Our continued focus on productivity and cost resulted in a companywide decremental of 19% in the quarter.
The $45 million cost plan for 2020 that we communicated in May remains on track.
Our pricing initiatives remain on the plan in both Aerospace & Defense and industrial.
The CIRCOR operating system is delivering improved operating performance across most metrics, and we expanded the margin of our aerospace & Defense business by 360-basis-points in the quarter despite the lower volume.
Finally, we continue to take actions that best positioned CIRCOR to take advantage of a market recovery.
With 13 new product launches in Q3, 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.
And finally, we continue to focus on deleveraging the balance sheet.
Now, I'd like to provide some highlights from the third quarter.
Please turn to Page 4.
We booked orders of $167 million, down 19% organically due to the impact of COVID-19 on our Industrial and Commercial Aerospace businesses.
Defense orders relatively low in the quarter due to the timing of large defense programs.
The growth outlook for defense remains strong.
Sales came in as expected at $187 million flat to the prior quarter and down 15% organically.
We continue to believe Q3 is the bottom for sales and orders.
We expect sequential improvement across both businesses in Q4, which we'll talk about in more detail later in the call.
Adjusted operating income was slightly more than $17 million, representing a margin of 9.3%, up 80-basis-points from the prior quarter, and down 130-basis-points from last year driven by lower sales volume in industrial.
The Companywide decremental was 19% in the quarter, which is significantly lower than our contribution margin driven by productivity, aggressive cost actions, and price.
Before I review the outlook for our end market.
Let's begin by reviewing our segment results.
All figures up from continuing operations and exclude divestitures.
Starting with industrial on Slide 5.
In Q3, Industrial segment orders were down 23% organically due to the impact of COVID-19 on most end markets.
Downstream orders were especially impacted in the quarter, due timing of capital projects and maintenance turnaround delays.
Excluding our Downstream business, orders an industrial were down 15% organically.
The benefit of the industrial portfolios regional diversity was evident in the quarter.
We saw sequential improvement in Germany, India, and China with orders increasing in the low double-digit range, partially offsetting pressure in North America.
While oil and capital projects remain depressed, we experienced a sequential improvement in the aftermarket side of the business on a global basis.
As expected, the industrial segment had sales of $124 million flat to the prior quarter, and down 18% organically.
The EOM margin was 7.9% down 210-basis-points sequentially, and a decline of 460-basis-points versus last year.
The margin decline versus the prior year was primarily driven by lower sales volume and the impact on productivity associated with the need to maintain social distancing.
Among other safety protocols on the factory floor, which was partially offset by cost actions and price.
In addition, one of our facilities in North America experienced a COVID-19 outbreak which forced us to idle the factory for most of August, and impacted our EOM by approximately $1.5 million in the quarter.
Adjusted for the $1.5 million of COVID impact, the industrial margin would have been 9.1%, and the decremental would be approximately 30%.
Turning to Slide 6.
In Q3, in our Aerospace & Defense segment, we delivered orders of $59 million, down 9% organically.
Orders were impacted by the timing of large defense programs in the quarter and the continued impact of COVID-19 on Commercial Aerospace.
While the timing of large defense programs resulted in lower orders in the quarter, the business remains strong overall, and we remain confident in the segment's strong growth outlook going forward.
Sales for the Aerospace & Defense were $62 million flat to the prior quarter, and down 9% organically.
Strengthened defense platforms partially offset the impact of COVID-19 on Commercial Aerospace.
The Aerospace & Defense operating margin was 23.7%, up 360-basis-points versus the prior year, and 260-basis-points sequentially.
With $6 million lower revenue, the Aerospace & Defense team delivered $1 million of incremental operating income, driven by price, productivity, and other aggressive cost actions.
Turning to Slide 7.
For Q3, the effective tax rate was approximately 13% lower than the 14.8% in the prior quarter, due to a change in the statutory tax rate where CIRCOR operates.
For Q4, the tax rate is projected to be approximately 15%.
The Company took a non-cash charge of approximately $42 million to create a valuation allowance against its remaining U.S. deferred tax assets.
This non-cash charge was acquired in the GAAP accounting rules, primarily due to recent U.S. tax law changes, and losses in the U.S. from our divested businesses.
This charge does not impact our non-GAAP tax results for the quarter and is not expected to have an impact on our future non-GAAP tax results.
Looking at special items and restructuring charges, we recorded a total pre-tax charge of $13 million in the quarter.
The acquisition-related amortization and depreciation were a charge of $12 million with the remaining million dollars being associated with restructuring activities in the quarter.
Interest expense for the quarter was $8 million, down $4 million, compared to last year.
This was a result of lower debt balances and a favorable interest rate of 25-basis-points.
Other income was a million-dollar charge in the quarter, primarily due to foreign exchange losses, partially offset by pension income.
Corporate costs in the quarter were $7.2 million, in line with previous guidance provided.
Turning to Slide 8.
Our free cash flow from operations was flat in the third quarter.
Right in line with what we guided in our Q1, and Q2 earnings call.
At the end of the third quarter, our net debt was at $468 million.
This represents a year-over-year debt reduction of $120 million dollars.
In Q3, we paid $52 million, and the revolver further reducing our debt balance and interest expense.
We expect to generate strong free cash flow in the fourth quarter and intend to use that cash to continue to pay down debt.
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.
Please turn to Page 9.
Let's start with the industrial.
As Abhishek mentioned, the impact of COVID-19 continued through the third-quarter across most major industrial end markets.
For Q3, orders were down 7% on a sequential basis with both for market and aftermarket orders coming in slightly lower than Q2.
Large projects remain weak, due to ongoing delays in capital spending.
Regionally, we saw weakness in North America and most of Europe, offset by strength in Germany, China, and India across most major sectors.
As we mentioned in last quarter's earnings call, we believe that Q3 marks the bottom and we expect industrial segment orders and revenue to improve sequentially in Q4.
Both market and aftermarket orders are expected to increase double digits sequentially.
From an end market perspective, we expect slight sequential improvement in many of our larger end markets.
Power generation is showing early signs of improvement globally.
Downstream Oil & Gas orders are improving as high priority capital projects, and certain maintenance activity moves forward.
Our shorter cycles of chemical processing in markets that are more closely linked to consumer demand are showing slow improvement.
For industrial revenue in Q4, we expect a moderate improvement sequentially with growth ranging from flat to up 10%.
While year-over-year revenue is expected to be down between 5% and 15%.
Most OEM and aftermarket end markets are expected to improve in Q4, compared to Q3.
Downstream Oil & Gas revenue is expected to be up sequentially, due to the timing of project shipments and higher aftermarket activity in the quarter.
Regionally, we're seeing pockets of economic improvement in China, India, and Germany, which we expect to continue.
Commercial Marine and midstream Oil & Gas are expected to remain at low levels, due to depressed activity and shipbuilding, low ship utilization, and ongoing project delays in midstream Oil & Gas.
Overall, we expect Aerospace & Defense orders in Q4 to be in line with Q3 sequentially, and down versus the prior year driven by the timing and defense program orders, and ongoing COVID related headwinds in the Commercial business.
For Aerospace & Defense revenue in Q4, we expect a significant sequential improvement from Q3.
Defense revenue should see sequential growth of 20% to 25%, and year-over-year growth of 15% to 20%.
Growth in the quarter is driven by strong shipments across our Submarine portfolio, our missile portfolio, and for the Joint Strike Fighter.
Commercial revenue is expected to grow sequentially between 15% and 25%, but we'll be down year over year between 40% and 45%.
The sequential improvement is driven by slightly improving shipments across a variety of business jet, regional jet, and other civil platforms, partially offset by lower shipments to Boeing and Airbus.
The outlook for price remains strong with a net 4% increase for Defense and Commercial Aerospace, driven by improved price management.
To summarize, as the pandemic continues to significantly impact the global economy, CIRCOR remains committed to delivering long-term shareholder value.
Our portfolio transformation is largely complete.
We've completely exited upstream Oil & Gas, and the new CIRCOR is diversified across geographies, end markets, and product technologies.
Our portfolio of products has differentiated technology and strong market positions in the niches where they compete.
As a result, we're able to raise prices across the portfolio despite the current market conditions.
We remain focused on execution.
The $45 million cost plan for 2020 is on track.
Our focus on productivity and cost resulted in a companywide decremental of 19% in the quarter, and the CIRCOR operating system is delivering improved operating performance across most metrics.
Finally, we continue to take actions that best positioned CIRCOR to take advantage of a market recovery.
We remain on track to deliver on our commitment to launching a record of 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, and we continue to focus on deleveraging the balance sheet.
They've been doing an excellent job working every day to ensure that we continue our momentum and meet our customers' needs.

user
q3 revenue $187 million versus refinitiv ibes estimate of $186.9 million.
remain on track to achieve $45 million 2020 cost reduction plan.

assistant