Q4 2019 Earnings Call
Good day, ladies and gentlemen, welcome to CIRCOR International's fourth quarter fiscal year 2019 financial results Conference call. Today's call will be recorded at this time all participants have been placed in listen only mode there'll be an opportunity for questions and comments after.
The prepared remarks.
If anyone should require up or your assistance during the call. Please press star zero on your telephone keypad.
Now I'll turn the call over to Mr., Scott Solomon from Sharon Merrill Associates for opening remarks, an introduction. Please go ahead.
Thank you and good morning, everyone.
On the call today, Scott Couch, CIRCOR, as president and CEO and Shoddy show, the company's Chief Financial Officer.
Slides will be referring to today are available on <unk> website at www Dot CIRCOR dot com on the webcast presentation section of the investors like.
Please turn to slide two.
Today's discussion contains forward looking statements today five 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 its form 10-K, 10-Q's, and other FCC filing.
The company's filings are available on its website at CIRCOR Dot com.
Actual results could differ materially from that was anticipated or implied by today's remarks.
Any forward looking statements only represent the company's views as of today March 2nd Twentytwenty.
Well CIRCOR may choose to update these forward looking statements at a later date the company's specifically disclaims any duty to do so.
Today's call management will refer to adjusted operating income.
Hi, good operating margins adjusted net income adjusted he P.S. free cash flow inorganic measures.
These non-GAAP measures exclude certain special charges and recoveries. The reconciliation of CIRCOR as non-GAAP measures to comparable GAAP measures are available in the financial tables at the earnings press release on sort of course website.
Ill now turn the call over to Scott, Please turn to slide three.
Thank you Scott and good morning, everyone.
Before I get into the financials I'd like to comment on our Twelveb 25 filing this morning, explaining the delay to our 10-K filing.
We've identified material weaknesses in our internal control over financial reporting primarily associated with our finance teams ability to manage the large number of unique and transformative transactions in the second half of 2019 in a timely manner.
Within our discontinued operations, we're conducting an independent review of certain accounting and financial reporting matters in order to determine if there any matters that could have a material impact on our financial results for discontinued operations.
We're evaluating the impact of a recent cyber incident that affected three of our 25 manufacturing facilities, we're working with experts and the authorities and believe the matters under control.
Until these reviews are complete our audit firms do not completed audit of our financial statements and internal controls for 2019.
Based on the reviews and analyses to date, we do not expect adjustments to the preliminary financial results were discussing today.
As I hope you can appreciate we cannot discuss this further but rest assured this is our top priority, we're working diligently to finalize our financial reporting purposes and will follow form 10-K as soon as possible.
Now, let's get into our results and outlook for 2020.
Last June we communicated our detailed 18 months plan for delivering significant shareholder value.
I'm pleased to report that we delivered on or 2019 commitments and we're on track to deliver our goals for 2020.
Well talk more about the progress we made delivering on our strategic plan, but first let me recap our Q4 results at a high level.
We delivered another solid quarter with $243 million revenue at 82 cents of adjust the P. S.
Adjusted operating margin in Q4 was 13.3% up 170 basis points from last year, and 250 basis points from last quarter.
We received $237 million of orders in the quarter.
Orders were down about 2% organically after adjusting for divestitures and $3 million a foreign exchange headwind.
And our aerospace and defense segment, we had a solid quarter of orders at $68 million up from the previous quarter, driven by defense spares and new program wins.
In 2019 total orders for 80 were $314 million.
$37 million, we're about 15% versus prior year.
The book to Bill ratio was 115%.
Industrial segment orders were down about 8% from prior quarter, mainly due to push outs of large capital projects globally, partially offset by strong aftermarket orders.
Please turn to slide four.
Revenue in the quarter was up 2% organically with a Andy delivery, 26% organic growth offset by lower revenue and instrumentation and sampling and refinery valves.
Industrial revenue was down 1% organically.
The 200 basis points of margin expansion from continuing operations was driven by the transformation actions communicated an 18 month plan.
Strong growth in a and b.
Nice increases.
Ongoing productivity and simplification initiatives and transitions to low cost manufacturing.
When we look at 2019 I'm proud of the progress we made in our business transformation.
We've largely completed our shift away from upstream oil and gas divested other commodity businesses and sharpened our focus on our core mission critical flow control platforms.
Since January 2019, we generated over $340 million of proceeds from noncore asset sales and use the net proceeds to reduce debt.
The actions taken include sold reliability services business were approximately $85 million in cash.
Completed the disposition of our loss, making engineered valve business.
Sold our Spencer Nicholson product lines for approximately $85 million in cash.
Announced our intent to sell the lossmaking distributed valves business.
Completed the sale of our instrumentation and sampling business for approximately $172 million in cash.
In addition, we delivered on our strategic priorities communicating our 18 month plan.
Please turn to slide five so I can highlight a few of the notable achievements since we published our plan in June last year.
Hey, Andy delivered an exceptional second half as noted on slide.
Organic growth of 21%.
Hey, a why up 57% representing 500 basis points of margin expansion.
We exited the majority of our Commoditized upstream oil and gas businesses and eliminated the energy group.
We executed for divestitures in 2019 and reduced our net leverage by approximately two turns.
We launched 35, new products last year and generated $73 million of revenue from new products.
We continue to invest in innovation and new products to drive growth.
And finally, we reduce corporate and group costs in line with the 18 month plant.
Please turn to slide six.
As noted on the slide we delivered our 2019 commitments and we're on track to deliver 2020.
It's important to note that our leverage is a full turn below our commitment as a result of our noncore divestitures.
Overall, we feel good about how we ended 2019 and our momentum as we enter 2020.
Finally, as you know this is Charlie his last earnings call as he plans to step down effective after the filing of the 10-K.
Sorry, it's been a valued member of our management team and on behalf of everyone at CIRCOR I want to thank shoddy for his leadership and his willingness to continue through the 2019 year and close to help ensure a seamless transition.
With that I'll turn the call over to Saudi to discuss the fourth quarter results in more detail before I review the outlook for our end markets.
Thank you Scott and good morning, everyone.
As my last earnings call. This is certainly a bit this suite moment for me.
I have a great confidence in sort of core passport ward.
Let's begin by reviewing our segment results starting with industrial on slide seven.
The industrial segment reported figures of hundred that $7 million organically, 1% down compared with Q4 2018.
It's worth noting that foreign currency headwinds did used industrial revenue by over 2% in the quarter as well.
The industrial segment delivered margin of 11% down 50 basis points from Q4 28 him.
And hundred 60 basis points sequentially from Q3 2019, excluding divestitures.
The margin decline was driven by volume and mix, partially offset by price increases simplification initiatives and productivity.
For Q1, Twentytwenty, we expect a seasonal dip in revenue in line with previous years and a slight margin expansion.
Turning to slide eight.
Aerospace and defense has seeds of $79 million.
Up 26% organically, our strengths across both our defense and commercial business segments.
Aerospace and defense operating margin was 22.9%.
280 basis points sequentially, and 490 basis points versus prior year.
Driven by volume price favorable makes and manufacturing productivity.
In Q1, we expect a seasonal dip in revenue from Q4, 2019, but moderate organic growth for the quarter, we expect strong margin expansion year over year.
Turning to slide nine.
Energy sales from continuing operation were $57 million flat versus prior quarter and down 14%, let's just prior to year driven by project timing at refinery boss.
Adjusted operating margin in the quarter was 12.9%.
340 basis points from prior quarter, largely driven by improved project mix and refinery buff.
Going forward, we have eliminated I would energy segment and that he finally valve business will be reported as part of the industrial segment.
Turning to slide 10 for Q4 selected BNL items.
Our adjusted tax rate for the quarter and full year was 15% driven by 14 tax differential and higher R&D tax credits.
Looking at special items and restructuring charges, we recorded a total pretax charge off $50 million.
The largest component of this charge continued to be the noncash acquisition related amortization expense totaling $12 million.
The remainder what's made up of approximately $40 million related to restructuring and fees associated with business disposition and takeover defense.
Approximately $2 million game on the feed off of facility.
Net interest expense for the quarter was $11 million down nearly two and a half million dollars compared with prior to year.
Driven by lower debt balance.
Other expense of $2 million is by many of the realized and unrealized FX losses, partially offset by pension related income.
The change in other income is nine cents adjusted bps headwinds year on year.
Turning to our debt position on slide 11.
Our operating cash flow was $17 million into Ford up from $9 million in Q3 free cash flow was $18 million as we had net proceeds from the seeds of ppm.
We have reduced net debt by hundred $70 billion since year end, including over $150 million of debt pay down.
Also during 2019, we reduced our leverage by approximately two choices on pro forma basis.
3.6 times.
I'll now hand, the call just caught up to discuss our market outlook.
Thank you shoddy.
Now I'll provide an overview of our end markets and the drivers that we believe will give us momentum as we move through 2020.
As discussed before we've exited our energy segment. So going forward. We report our results in two segments industrial and a Andy.
Please turn to slide 12.
Let's start with industrial.
Orders in Q4 were down about 8% sequentially from Q3, mainly due to the push out of some large project orders in commercial marine and power generation.
The poor market order intake was weaker than anticipated in the Americas in China, while we saw a modest increase in Europe and rest of world.
The weakness in project orders was partially offset by strength in our aftermarket business globally.
We're seeing an acceleration in aftermarket growth in Q4 as a result for the dedicated aftermarket commercial team that we created in the middle of last year.
As a reminder, beginning in Q1 2020, we consolidated our refinery valves business into industrial.
Refinery valve orders were up 49% year over year in Q4.
Pipeline of project activity remains healthy and outlook for this business remains strong.
We expect ongoing strength in orders in the first half of 2020.
As we've mentioned in the past project orders in this business can be lumpy with specific order timing difficult to predict.
For industrial overall in Q1, we expect global end markets to remain sluggish with four market activity levels in line with Q4.
Capital project order should improve as we finalize projects pushed out of last year.
We expect the strong momentum in our aftermarket business to continue.
Orders in Q1 are expected to be in line with Q4 last year.
Our aerospace and defense group generated another strong quarter wars that $68 million driven by both our defense and commercial businesses.
The strength in defense was primarily driven by U.S. defense spares and new products for missile and engine applications.
Commercial aerospace orders continued their upward trend in the quarter driven by the increase in build rates for major platforms like the Airbus Athree 20, and new program wins.
The backlog for the aerospace and defense segment continues to be strong driven by ongoing strength in commercial aerospace and large defense orders in prior quarters related to multiple programs, including the joint strike fighter. The U.S. Navy, Virginia class submarine the DDG 51 class destroyer and the CVN 80 aircraft.
Carrier.
Overall, we expect Q1 orders to increase sequentially driven by defense programs like the joint strike fighter in the Virginia class submarine as well as defense spares.
Commercial wars are expected to remain strong in line with Q4.
With respect to the possible impacted the Corona virus, we're closely monitoring the situation to assess implications for our colleagues sales and supply chain.
The impact on our overall business in China has been limited that said in our industrial segment. The Corona virus is proving to be a factor in the markets weakness and a headwind for our growth initiatives in China and Asia Pacific.
Looking ahead, we anticipate that there could be an impact on our supply chain in 2020 based on complications with logistics and border control measures.
If the situation worsens, particularly in Europe or other large end markets, we may start to see a more meaningful impact.
At this stage, it's too early to predict the size of the impact going forward. We'll keep you informed of any changes that could materially influence our business.
At this time, we factored only a modest potential impact into our 2020 guides.
Now I'll turn the call back over to Saudi to discuss guidance.
Thank you is called turn to slide 13.
Overall, we expect first quarter Twentytwenty revenue in the range of hundred and 90 million to $205 million and adjusted EPS in the range of 50 cents to 60 cents.
The guidance exclude the result of instrumentation and sampling which was divested in January twentytwenty.
In the quarter, we expect strong year on year expansion.
We expect free cash flow to be negative in Q1 due to seasonal disbursements in the quarter.
An increase wild twentytwenty similar to prior years.
Regarding special and restructuring charges for the first quarter of Twentytwenty, we anticipate charges for the following items.
Acquisition related amortization expense of 48 cents per share.
And restructuring and special charges totaling 17 cents to 27 cents per share.
We expect the Twentytwenty adjusted tax rate to be approximately 18% to 20%.
With that let me turn it back over to Scott.
Thank you Johnny.
To summarize we're right on track to deliver the 18 month plan published in June of last year, we largely completed our shift away from upstream oil and gas divested other commodity businesses sharpened our focus on our core mission critical flow control platforms and significantly de leverage the company.
As we enter 2020, we expect to realize continued benefits from our improved business portfolio, our business simplification initiatives new product launches.
Facing actions and manufacturing and low cost facilities.
We remain committed to driving long term growth expanding margins generating strong free cash flow and further deleveraging. The company now go Saudi and I'll be happy to take your questions.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question Q.
You May press star to if you'd like to remove your question from the Q for participants you think speaker equipment, and maybe necessary to pick up your handset before pressing the star Keith.
Our first question comes from the line of Andrew Kaplowitz with Citi. Please proceed with your question.
The Bonnie let the future on behalf of Andy Thanks for taking my question.
Sure good morning.
I'm Industrials you mentioned you good growth in large projects on the weakness in OEM, maybe elaborate more on the geographic dynamics that you have seen today you have mentioned weakness in Europe in the Boston HM now expected to be solved.
Only a function of grown our wireless off is there any other drivers that we should be aware off.
So so the yes, I'll take that so the.
The the weakness that we're seeing in capital projects that we saw in capital projects. In Q4 was was global so it was a north America across Europe, as well as Asia Pacific the.
The.
The difference between well what we expected was we did expect more strengthen in for market in the Americas. So it came in weaker than expected on the positive. The aftermarket also globally grew significantly better than we thought it would in Q4, so we're seeing our customers.
Basically extending the life of existing installations and spending more on aftermarket.
The impact of the Corona virus. So far is really hard to see we're definitely seeing a a weakness in Asia and in China, but we're not sure how much of it is attributable to the Corona virus. So if I step back to talk about the Corona virus in general for CIRCOR is largely in industrial impact issue.
As opposed to aerospace and defense, where we don't expect an impact.
We don't do a lot of sales in China, roughly 30 million of sales in aggregate, that's inside of China, including what we export into China. So that's the impact inside of China wouldn't wouldn't be relatively modest for us so not a from a revenue standpoint on the supply chain side, we do have supply.
Hours in China for both our industrial business and.
And our energy business largely in disc ops.
And so far we havent seen any any disruption from that and I will say that it's a relatively small percentage of our total supply base. So as of now we factored into our guidance and expectations for 2020, a relatively modest impact from the Corona virus and and you know things change of course, and we start seeing.
An impact in Europe are in North America, then obviously that could have a bigger impact on CIRCOR, but at this stage, we're not seeing huge impact.
Got it.
Continuing on industrial machine by club the organic growth rate.
While down low single digit venue, but even more that to flattish given the current and why would you have seen and cutting went up quite there.
So so you're right we have a we have an X we expected it's roughly flat sales for our industrial business in 2020 versus 2019.
We are planning around a scenario, where they are actually down year over year and we would.
We expect to continue to deliver our 2020 commitments, even if they are down year over year now obviously the magnitude matters a lot, but a we've built contingency plans around industrials markets getting more difficult, but as of now we're still expecting them to be.
Down very little or flat versus prior year.
Alright lots and three gospel continues to remain weak any any color on how we should think about free cash flow of luck on when you.
Libraries that you want to highlight that you think that can support catch going forward.
Good Hello appears this is Chad so the primary driver of our.
We cash flow in 29 team is.
Contribution of our to discontinued operation one of it was sold in July the engineered valves and the other one DB.
Continued to be a slight drag on our to our cash in totality for 29 pm.
These two businesses had a negative cash flow off $30 million.
We expect.
In Twentytwenty.
Reported this 30 million to.
Mostly go away, we've reduced our activity in.
Discontinued operation, that's still with Us TV.
That aboard as I looked at twin to while we've we've exited nicely the cash flow for.
Q4 at $18 million.
As I look at Twentytwenty, we expect as we said in my prepared remarks it did.
In Q1, but then.
You know a growth over the rest of the it when I look like in totality I would say you know when we look that we've achieved $9 million total free cash flow on a total yet for 2019 I would.
Look at that down.
$50 million in Twentytwenty.
Hi, Thank you guys I'll get back into.
Thank you. Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.
Good morning, everyone.
Good morning Nathan.
Hi, John Hi, Scott, maybe we could start.
We some of the puts and takes in getting to the 139 million and looks to me like a little bit was in.
In the industrial businesses, maybe a little bit washing the energy businesses, and then not being offset by better activity and better margins quite frankly, then I think we were expecting a in the aerospace and defense business is that the way you say 2020, playing out relative to kind of the plan you put out in July last year. So.
So let me let me comment on that I think the.
The industrial being worse than expected is yes, we agree industrial will be weaker on the topline than what we thought.
Aerospace and defense will be significantly stronger than we thought on the topline and the bottom line. So that I agree with that as well energy is playing about playing out about as expected Nathan or not you know there's what's left of energy is playing out with what we thought in the middle of last year and then the last piece is the cost actions that we committed.
Two are on track as well, maybe we're being a little bit more aggressive actually on the on the cost side. So if you net it all out we're we're still feeling good about our 2020 commitment.
Okay, then maybe you could talk a little bit more about the margins here in aerospace and defense you've been at or above 20% here the last couple of quarters.
Yeah, clearly had some strong shipments here in the fourth quarter, if I am margins at kind of that 20% level something that can be maintained in 2020 and he is that oh, we kind of setting a new baseline here I think we were looking at mid teens as your target in aerospace and defense not all that long ago sets pretty proud.
Safe to say that was that at and above 20% in the back half we set kind of in you target here.
So so our.
Believe we've been saying that our medium to long term target is is high teens low twentys and so we are we're there obviously you should expect that you'll continue to see growth through 2020 annual fixed continued to see margin expansion year over year each quarter in 2020. So.
Were the what you're seeing is sustainable as you know there's seasonality in both revenue and margin. So you'll see you won't see the same exact margin in Q1 that you saw in Q4, but year over year, you'll continue to see solid margin expansion through 2020.
And our enough.
Nathan.
I tried to what Scott said I think Oh, we have agreed momentum in and the when we look at what.
What we've done in 2019, we focused our effort on pricing and aftermarket and spot orders and that is.
You know gaining a lot of food and good good.
Carry over into into Twentytwenty. So when we look at the bridge that we've put in front of view and.
And 18 months plan a lot of this pricing that that we put that $10 million, we're seeing a lot of it coming from Andy. So that's why when we look at our margin and the sustainability of our margin, we feel very very comfortable with that.
Okay I just wanted to slip one more in here on the leverage level and plans for that.
Three fix pro forma Danny you think your slide say three hour by the end of 2020.
What kind of number does that need to get down to before you would start looking at capital deployment other than just paying down debt.
So so we are long term comfort level as Britain between the two and two and a half range.
So we're still very focus through 2020 on the de leveraging process.
Okay that helps thanks, very much I'll pass it on.
Thank you.
Thank you. Thank you. Thank you ladies and gentlemen, we have reached the end of our question and answer session and with that the conclusion of today's call. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.