CIRCOR International, Inc.
Q2 2016 Earnings Call Transcript

Published: 31 Jul 2016

[Operator:]

Greetings. Welcome to the CIRCOR International 2016 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to David Calusdian of Sharon Merrill. Thank you, you may now begin.

[David C. Calusdian:]

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 will be referring to today will be available on CIRCOR's website at www.CIRCOR.com, on the webcast and presentation section of the Investors link. Please turn to slide two. 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-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. Any forward-looking statements only represent the company's views as of today, July 29, 2016. 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 margin, 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 measures to the comparable GAAP measures are available in the financial tables of the earnings press release on CIRCOR's website. I will now turn the call over to Mr. Buckhout.

[Scott A. Buckhout:]

Thank you, David and good morning, everyone. CIRCOR delivered solid second quarter financial results with revenue of $146 million and adjusted earnings per share of $0.53. We achieved strong year-over-year sales growth in our engineered valves business, and we are encouraged to see our upstream short cycle revenue stabilizing. The power market remains as bright spot globally and led to modest growth in the quarter for our control valves business. Instrumentation and sampling volume continues at recent levels. Sequentially, Energy's adjusted operating margins increased from the first quarter. The energy team continues to manage the margin pressure with aggressive productivity actions, restructuring, and sourcing savings that have helped mitigate the bottom line impact from the market headwinds. In our Aerospace and Defense segment, we reported lower sales year-over-year due to weak general industrial volume, and the timing of shipments for a major defense program which temporarily impacted our margins in the quarter as well. As you know, we've taken full advantage of the downturn to accelerate our simplification initiatives. You may recall that we started this effort in 2013 with 24 factories and a target of 15 by the end of 2018. We now expect to exit this year with 15 factories, achieving our target two years early. We completed the previously announced closure of our California machining facility which we expect to result in annualized savings of approximately $3 million. As we mentioned on last quarter's all, we suspended manufacturing operations in China and our Oklahoma City is now fulfilling North American-distributed valve demand. We expect this action to deliver annualized savings of approximately $2 million. On the supply chain front, we have reduced the number of suppliers by 14% so far this year, and expect to exit the year with 2,700 suppliers. This compares to over 5,000 suppliers in 2013. As part of this initiative we have increased the level of sourcing spend on long-term contracts with our suppliers and expect to be over 50% by year end, up from 8% in 2013. Our operational excellence initiatives remain on track and the CIRCOR operating system that we rolled out last year is showing results. Our working capital performance is improving. We averaged 91% on-time delivery in the quarter and reduced lead times across most of our businesses. After Rajeev discusses our Q2 financial results, I will provide more context on our expectations with a review on our end marks. Now I will turn the call over to Rajeev.

[Rajeev Bhalla:]

Thanks, Scott. Let us start with Energy on slide three. Energy sales of $111 million decreased 13% from the prior year. We delivered over 20% sales growth in our engineered valves business but that was more than offset by the 60% decline in our North American short-cycle distributed valves business. While the year-over-year decrease of distributed valves was significant, we are encouraged that revenue was down only slightly from Q1 and appears to have stabilized. Sales from our control valve business showed modest growth in the quarter. Instrumentation and sampling came in essentially flat year-over-year as expected. Energy's adjusted operating margin was 13%, a decrease of 40 basis points year-over-year primarily as a result of the lower volumes in our distributed valves business and pricing pressure across most of the portfolio.. Energy's adjusted operating margins increased 40 basis points from the last quarter due to aggressive cost actions and a significant acceleration of our simplification program. For Aerospace and Defense, please turn to slide four. Aerospace and Defense sales of $36 million were down 10% year-over-year, driven by lower general industrial sales. Also in the quarter a supplier quality issue led to lower shipments under a high-margin missile defense contract. We are working closely with the supplier as well as our customer to rectify the issue and we expect to recovery these shipments in the second half of the year. I should note that this particular supplier was a customer-directed source, as is often the case with large defense procurements. On the positive side, we delivered higher year-over-year sales in our commercial fluid controls business as a result of increasing O&M shipments to Boeing and Airbus. Aerospace and Defense adjusted operating margin was 8.4%, a decrease of 40 basis points versus last year. The supplier quality issue, combined with higher than anticipated operational costs, related to the closure of our factory in California impacted margins in the quarter. Not all of the costs related to the closure of the factory qualify as restructuring costs. Combined, these two issues lowered Aerospace and Defense margins by about 200 basis points. With the increase in orders supporting top line growth in the second half, as well as savings from the California factory closure, we continue to expect full year adjusted margins of approximately 11%. Turn to slide five for selected P&L items. We recorded special and restructuring charges of $6.6 million in total. These charges relate primarily to restructuring and facility exit costs of $4.7 million and a non-cash acquisition-related amortization expense of $1.9 million. Our adjusted tax rate for the second quarter was approximately 26%. We expect our third quarter adjusted tax rate to be in the range of 28% to 29%. As Scott mentioned, our adjusted earnings per diluted share were $0.53, above our outlook, primarily due to the acceleration of our simplification and operational excellence actions. Turn to our cash flow and debt position on slide six. During the second quarter we generated approximately $10 million in cash from operations and $8 million in free cash flow. I should note that the improved inventory performance in the quarter contributed about $5 million of cash. This brings us to our guidance. Please turn to slide seven. Overall, we expect the sales trend for energy to be in line with the second quarter, and Aerospace and Defense to be higher. As a result, we expect revenue in the range of $140 million to $150 million and adjusted EPS in the range of $0.45 to $0.55. For Q3 we anticipate special charges to be in the range of $6 million to $9 million or $0.25 to $0.40 per share. Included in this range is a non-cash accounting charge related to our closed pension plan of $0.15 to $0.27 per share. With that, let me turn it back over to Scott.

[Scott A. Buckhout:]

Thank you, Rajeev. Let me provide you with an overview of tends in our end markets. First, Energy. Energy segment orders were lower overall in the second quarter versus the prior year due to continued weakness in our upstream North American short-cycle business as well as lower demand and project delays in our long-cycle engineered valves business. In our short cycle distributed valves business, as expected, we saw a small sequential decline in our order run rate from Q1. We believe that we are at or near the bottom of this market and distributor destocking is largely complete. Rig counts ended Q2 essentially flat to the end of Q1. While there has been a slight increase of rig count in July, current volume is largely coming from replacement valves and MROs supporting production in North America. We see few upstream project opportunities. We expect the North American upstream market to remain difficult through the second half of the year, continuing at current levels of demand. We are having some success in penetrating the midstream market as pipeline companies add us to their approved vendor list and we expand our fully-welded ball valve product portfolio. We were seeing ongoing market headwinds in our long-cycle engineered valves business due to the reduction of CapEx spend, project delays, and increasing price pressure. While orders were weak in the second quarter we still have a strong pipeline of outstanding quotes and opportunities, primarily in the Middle East. We see limited project opportunities in other geographies. We remain confident in our outlook for the year which calls for flat revenue to the prior year overall but a slight moderation in run rate in the back half of the year. Third quarter order intake in our engineered valves business will determine the strength of our revenue in the first half of next year. Our win rate has held steady but while our quoted pipeline is healthy, customers have been delaying project awards. In our control valves business, the power generation market trends are positive, especially in Asia and North America where we have a robust pipeline of opportunities. We are seeing good quoting activity in China for power and general industrial applications, supported by the introduction of our next generation smart electric actuator. Our Schroedahl brand continues to perform well especially in North America where it had limited presence before the acquisition. In our Instrumentation and Sampling business, replacement and MRO orders in to upstream applications have continued to hold steady through the second quarter as we expected. We are also seeing healthy activity from our downstream sampling systems in the US and China. With the exception of the Johan Sverdrup project in the North Sea, project activity is generally low. We believe that revenue in this business has stabilized and should remain at recent levels through the second half of the year. Turning to Aerospace and Defense, the overall market is healthy on both the Commercial and Defense sides of the business. Order intake was strong in the second quarter, especially on our major defense platforms such as the F-35, the SM-3 Missile and the Multi-Mission Maritime aircraft. We are seeing higher activity in Naval OEM programs, and the defense and commercial aftermarket businesses are growing. We continue to expect that strength in these markets will drive organic growth in the back half of this year. In summary, I would like to leave you with three concluding thoughts. First, looking at our primary end markets, we believe that we are at or near the bottom for both distributed valves and Instrumentation and Sampling. We see relatively stable order and revenue run rates that we expect to continue through 2016. We expect our engineered valve business to show a slight moderation in revenue in the back half of the year but to be essentially flat with prior year on a full year basis. Engineered valve orders were weak in the second quarter so given project lead times, near-term bookings will determine the sales strength in the first half of 2017. In control valves and Aerospace and Defense, we expect year-over-year order and revenue growth in the second half of this year. Second, we remain focused on what we control. We are accelerating our simplification programs and aggressively taking structural costs out of the business. We will continue to see this in our margins through the downturn and this will serve us very well when our end markets recover. Third, we are carefully investing in growth by increasing our investment in sales, marketing and engineering. In parallel, we are driving operational improvement through the CIRCOR operating system with a specific focus on delivery, lead times, and working capital. So in summary, we are aggressively reducing cost to improve margins, investing in growth, driving better cash flow, and exercising disciplined capital employment. With that, Rajeev and I are available to take your questions.

[Operator:]

Thank you. [Operator Instructions] Thank you. Our first question is coming from the line of Nathan Jones of Stifel. Please proceed with your question.

[Nathan Jones:]

Good morning, guys.

[Scott A. Buckhout:]

Hey, good morning, Nathan.

[Nathan Jones:]

So starting on the Distributive Valve side, Scott in your prepared comments you said at or near bottom for distributed valves and Instrumentation and Sampling. We are seeing a little recovery in the rig count in the last month or so and I have heard several companies talking about, drilled and contemplated getting completed. But we have all seen a fairly precipitous decline in oil prices recently. Can you talk about, you know, your thoughts on that market and what you are hearing from customers now?

[Scott A. Buckhout:]

Yes, sure. So we have not seen any material impact only our order rate based on the recent increase in rigs. We have seen, we will say early signs of the mix of our valves suggesting that some of the drilled but uncompleted wells are now being completed. When wells get completed, we tend to sell small bore high pressure valves and we are starting to see some of those starting to get shipped. But it is very early, Nathan. I would hardly call it a trend at this stage. So if you just look at the last couple months of our order intake it is been pretty much flat and consistent month-to-month with no real movement based on oil prices and/or rig count. So we think we are going to kind of bounce around this level for a while. Our customers are not optimistic about a recovery here in the short term, certainly nothing meaningful. So our expectation and plan is for the rest of the year that we will be more or less running at the same rate we have been running at the last few months.

[Nathan Jones:]

Okay. So you call on at or near the bottom here, doesn't hinge on any improvement in the rig count or these uncompleted wells getting completed. It would just be -- this is as low as demand can go and we will bump along the bottom here until you see some recovery in rigs or DUCs?

[Scott A. Buckhout:]

That is correct. So when I say at or near the bottom, we are saying that this is about where we are going to bounce around for the rest of the year.

[Rajeev Bhalla:]

And Nathan, it is Rajeev, just to add a comment on that. What we are trying to do is also penetrate a little more into the midstream market here, and so we are at or near the bottom as Scott suggests. And if rig counts were to go up and drilling go up and the DUCs get completed, as well as some penetration in the midstream, then that should be upside; but we are not counting on it

[Scott A. Buckhout:]

We are having some success in midstream so if you look at the volume of projects that we have been quoting and the orders that we have been receiving, we are seeing off of a small base, good growth in our midstream business. So that could -- that will certainly help in back half of this year.

[Nathan Jones:]

And then just on the comment that the engineered valve orders will wait [ph] in Q2. Can you tell us how weak, what the decline there was year-over-year and whether or not, you think that's timing of orders getting placed or whether structurally stuff is getting pushed further to the right?

[Rajeev Bhalla:]

Yes, sure, Nathan. We were down probably close to 50% year-over-year. But let's us always recognize that it is lumpy and you can have an individual quarter that's way high or way low. So that was one point. The second point, as Scott noted in the prepared remarks, we did see a few orders push out. We had expected those decisions to be made in the second quarter. We now expect them to be made here in the third quarter. And they are significant. It is probably about three or four significant projects that will hopefully get decided in the third quarter here and we win that and that will really help us with respect to the first half next year.

[Scott A. Buckhout:]

A couple of qualitative points to add to this, Nathan is if you look at for this business, we track pretty closely the quotes outstanding and undecided and the volume both revenue and number of quotes and we have seen that line steadily increasing for the last three quarters. We also track our win rate fairly closely as well and our win rate is pretty much unchanged, over the last 12 months. So what's really happening here is that the projects are out there, they are just not getting -- they are not making decisions and they continually push them out. So that's essentially what happened to us here in the second quarter. It could happen again in the third quarter. We certainly don't know. But there is a lot of projects out there that we are waiting on decisions for and if they come in in the third quarter, could end up being very good quarter but we just do not know.

[Nathan Jones:]

Do you have any indication that those are closer to getting decided? I mean you said you thought they were coming in 2Q. Now you thought they were coming in 3Q. Is there any increased confidence that they are coming in 3Q, or you just do not know?

[Rajeev Bhalla:]

Well, there is some increased confidence but I was as confident in Q2. So things do change here and the competitive dynamics can also affect it. But I think there will be some decisions here in the second quarter.

[Nathan Jones:]

And then just one on aerospace orders and I will pass it on. Obviously very strong order quarter in 2Q. Is this a more sustainable trajectory on the order rates, or did you get several one-offs come in that are not likely to repeat? How do you think the order level is going to progress from here?

[Rajeev Bhalla:]

Yes, Nathan, if you recall in our first quarter call, I mentioned the fact that we were chasing, three large platforms, orders associated with that and we felt pretty good about signing those up. And we were -- our New York team did an excellent job at getting those orders signed here in the second quarter. These are lumpy. So it's not something that I would extrapolate from for the rest of the year. But it does help shore up the revenue that we have guided to with respect to the back half. So it is lumpy but we are starting to get some good traction in the marketplace with our Aerospace products.

[Nathan Jones:]

Are there further orders to come on those three large platforms or is that it for those platforms?

[Rajeev Bhalla:]

For those platforms, that is it. If you recall one of the platforms was a Joint Strike Fighter and it is the A-9 [ph], the low-rate initial production line that we signed up and the A-10 [ph] got pushed out. It's a remote possibility that something will pop on that, for example. So for those three major platforms, that's what we have for this year. But we are chasing other awards as well.

[Nathan Jones:]

Okay. Thank you. I will pass it on.

[Rajeev Bhalla:]

No problem, thanks.

[Operator:]

Our next question is from the line of Charley Brady with SunTrust Robinson Humphrey. Please proceed with your question.

[Charley Brady:]

Thanks. Good morning, guys.

[Scott A. Buckhout:]

Good morning, Charlie.

[Charley Brady:]

Just to follow up on that last question on that last question on the aerospace orders. Can you speak to the duration of that backlog as to timing of when those orders are going to flow out? Does it into 2017 or is it really all -- I am assuming some of it does, it's longer lead time but could you clarify that?

[Rajeev Bhalla:]

Sure, Charlie, this is Rajeev. The bulk of backlog will get shipped for those orders this year. There is probably maybe 20% or so that will fall into 2017 but a bulk of it will be in 2016.

[Charley Brady:]

Okay. That's great. Just on the commentary about the orders that have been pushed out and you feel better that they are going to get some decision made this quarter in the third quarter; just to clarify it, those are jobs that you have put bids in for and are waiting for decision, or are these jobs that we are waiting for the bid to be let?

[Rajeev Bhalla:]

The bids are in.

[Scott A. Buckhout:]

Yes, the bids are in. We are waiting for a decision. We assess our probability of winning these orders as very high. But the orders have been decided and the award has been placed. So the way these projects work is, after you submit a bid, it can be several months before you actually get a decision and we track that. If you are interested the amount of time that it takes from when we bid to when a decision is made has increased over the last year from 60 days to over 100 days. So we are seeing this perpetual slide in orders and some of these big ones can just keep getting pushed out.

[Charley Brady:]

Thanks. And can you speak to the margin pressure or the margin or pricing headwind in these larger projects? We are hearing in the neighborhood of 400, 600, 800 basis points sometimes what we consider a normalized margin. Is that kind of in the ballpark what you are seeing?

[Rajeev Bhalla:]

Yes, let me give you some color on that, Charlie. As you look at these large, international projects for our engineered valves, there is clearly a lot of competitive pricing pressure here. With respect to what we are booking into backlog there is probably about 200 basis points at the gross margin level, lower than what we were doing in the past. And another key point with respect to that is that we do work to offset that through cost reduction, productivity, and a lot of the actions there. But what we are booking today is probably about 200 basis points lower at a gross margin level than what we have done in the past.

[Scott A. Buckhout:]

Just to add to the commentary here. There are projects that come in with what we would consider just crazy prices and we walk away. So there is a decent number of projects that we look at and we say it just does not make sense for us and we will not bid at all. So that's happening and I am sure that is some of the examples that you are hearing about. We see that as well, but we walk away from that in general.

[Charley Brady:]

Got it, okay. That is helpful. And one more and I will get back in the line here. On that missile contract where there was a supplier issue, I think you mentioned it was the supplier chosen by the customer. So I am assuming there is no blowback to you guys in terms of penalty or liquidated damages or stuff like that, because it is really not your choice of supplier?

[Rajeev Bhalla:]

That was correct. The impact on us is the fact that we cannot ship the final product.

[Charley Brady:]

Right, okay, thank you.

[Scott A. Buckhout:]

Thanks.

[Operator:]

Our next question comes from the line of James Picariello with KeyBanc. Please go ahead with your question.

[James Picariello:]

Hey, good morning, guys. Just a clarification question. On aerospace, you said that one time related costs that were included in your adjusted results amounted to a 200 basis points headwind. Is that right?

[Rajeev Bhalla:]

Correct. There is actually two components in that 200 basis points of headwind in the quarter. There was one associated with the supplier quality, and then the second piece was associated with the closure of our facility. Think of it as 100 basis points on each issue.

[James Picariello:]

Got it. Okay. And then just more broadly on the energy side, you do mention some; you did indicate some excitement over power project backlog in China, some Middle East downstream work I believe, that's on the horizon. How are you thinking about next year in terms of energy demand and, the possibility of a recovery here in your short-cycle business, how are you thinking about just generally next year for energy?

[Scott A. Buckhout:]

I can comment on that. Just Energy, broadly speaking, we are right now not anticipating any type of meaningful recovery until the second half of next year. So we are continuing to focus on cost, structural cost of managing through the downturn here for the long term. You asked about Power. Power is a bright spot for us. We are expecting growth here in the back half of the year in Power and we expect that to continue through 2017. We are investing in that segment probably more than any of the other segments from a new product development standpoint. We are also investing in sales and marketing particularly here in the U.S., in support of Schroedahl, but also in Asia. So Power we feel pretty good at all now until 2017. On the oil and gas side though, we are not optimistic and do not expect any kind of recovery until the second half of 2017.

[James Picariello:]

Got it. That is helpful. And just another one. You do mention some internal investment initiatives. With your improvement, visible improvement in free cash flow, how are you thinking about capital allocation with respect to internal growth initiatives versus M&A and maybe any commentary you are willing to provide on the M&A pipeline.

[Scott A. Buckhout:]

Sure. So just in terms of return on invested capital, as you probably know, we get a terrific return on internal investments, whether they are restructuring and productivity projects or whether they are growth-oriented projects. We are careful about it. We are disciplined about the projects and we in general execute well. But certainly the best return will be there and that is where the priority is. Having said that M&A is very interesting for us. We are looking at some interesting businesses right now. I would say we have got several irons in the fire that could turn into something later this year or early next year. But as you know, it's impossible to predict whether something is going to happen there. We have had several opportunities over the last 12 months that we just could not get to an agreement on price, including one proprietary opportunity where it was just us. We just could not come together on price. So it is hard for us to predict that but we are active. We are spending time on this. There is some interesting assets out there that would be a nice fit for CIRCOR. And if things work out the way we want, we will have something interesting to say within the next 12 months or so. But of course we can't exactly predict that.

[James Picariello:]

And is one segment better positioned for M&A at this point over the other?

[Scott A. Buckhout:]

Yes, I would say that we have active opportunities in Aerospace but our pipeline and relationships and activity is certainly more mature on the Energy side right now.

[James Picariello:]

Okay. Thanks, guys.

[Operator:]

Our next question is from the line of Ryan Cassil with Seaport Global. Please go ahead with your question.

[Ryan Cassil:]

Good morning, guys.

[Scott A. Buckhout:]

Good morning, Ryan.

[Ryan Cassil:]

I hear what you are saying on the outlook for Energy, but I am just trying to piece together your comments as it relates to next quarter. I think you said Energy revenue would be close to flat sequentially. And if I heard that right, I am looking at bookings and backlog that are down quite a bit sequentially again. And is it fair to say you are looking for a pickup in the distributed valve side here in the third quarter just to get the flat on a sequential basis?

[Rajeev Bhalla:]

Actually we are not. We are expecting as you recall some lift out of our control valves business, Ryan, but we are not expecting any meaningful lift out of distributed valves.

[Ryan Cassil:]

Okay.

[Scott A. Buckhout:]

I think the reason why you may be seeing a bit, it is really timing on orders versus revenue. A significant portion of the drop in our revenue -- or I am sorry in our orders in the second quarter is our engineered valve business which has at least a 25-week lead time. And so that is why you see a bit of a disconnect. Hopefully that helps.

[Ryan Cassil:]

Okay. Appreciate the color. And then just on the midstream side you mentioned the growth rate there. I know it is a small base but would you mind giving us what that is grown at in the quarter?

[Rajeev Bhalla:]

Yes, you know, we are taking in probably about 10% of the orders that we take in that segment that we booked is in the midstream arena at this point, Ryan.

[Scott A. Buckhout:]

And we are forecasting that to increase over time here. We started from a much lower base and based on our quoting activity, you should expect to hear that percentage or see that percentage increase through the remainder of this year.

[Ryan Cassil:]

Okay, great. And then you mentioned Schroedahl, is kind of on track and getting introduced in the U.S. What inning would you say you are with getting that introduced here and how has that been going initially?

[Scott A. Buckhout:]

So I would say we are in the probably the second inning. So we are staffed with application engineers and dedicated sales resources who fully understand the technology. We are in the process of converting distribution, some distributors from our competitors. But also distributors who have never carried the product as well. So we are still in the process of doing that. But we are also generating a lot of quoting activity here and we are starting to -- we are starting to take orders as well. So we are expecting this to ramp and our win rate in the U.S. is consistent with our win rate elsewhere in the world. We should see pretty good growth as we exit this year and going into next year.

[Rajeev Bhalla:]

Just to add to that, Ryan, one of the things that we have done over the last, you know, six months or so is spend a lot of time, the head of our Schroedahl business has spent a lot of time with individual customers and distributors here in the U.S., and introducing Schroedahl. So I think they are very excited about having this product and the competition that it brings. But with that said, the incumbent is pretty sticky as well so we need to manage through that.

[Ryan Cassil:]

Okay. All right, great. Thanks, guys.

[Rajeev Bhalla:]

No problem.

[Operator:]

Our next question is from the line of Jim Foung with Gabelli and Company. Please proceed with your question.

[Jim Foung:]

Good morning, Rajeev. Good quarter.

[Scott A. Buckhout:]

Good morning, Jim.

[Rajeev Bhalla:]

Thank you.

[Jim Foung:]

My first question is just for Scott, the metrics you outlined at the beginning, you are now going to be down to 15 plants by the end of this year, couple years earlier than expected and you've moved quickly on reducing suppliers. When we look at 2017, you know, I guess what kind of margin improvement can we expect from this further reduction in your overhead?

[Scott A. Buckhout:]

So I think we have actually announced the savings related to the factories that we have closed or will be done closing by the end of this year. So there is certainly a carryover effect that we can share with you, Jim. What I can't share yet is all of the things that are in work right now that we are in the process of executing on that we are not ready to announce. So we of course are not done by getting to 15 factories and we are not done with all the other simplification initiatives that we have been working on. We are not ready to announce yet, but certainly before the end of this year you will be hearing more about further simplification initiatives and other ways we are streamlining CIRCOR and getting more efficient. So more to come on that but 2017, you will see further simplification for sure. What I will also tell you is that it is getting -- the projects are getting bigger. They are getting more complicated and bigger, meaning the savings are bigger but also meaning that they take a little bit longer and they are a little more complicated to execute. So we are far from done. We have a long way to go here and more to come before we exit this year. You will certainly hear more from us on that.

[Jim Foung:]

Okay. So the $15 million of savings you expect this year includes some of the stuff that you [indiscernible].

[Rajeev Bhalla:]

Yes. So let me give you -- let me give you some color, Jim just to jump in with respect to the restructuring. So what we have announced and what is in progress and what has actually been completed for this full year, is about $15 million of lift from restructuring savings. The actions that we have completed here will drive an incremental $3 million in 2017 at this point. So that you can take and put in the bank. And then as Scott suggested, there are other actions that we are working on that are not mature enough to announce at this point but we will continue to drive those margins. Recall when we set targets in a very different top line environment, we were looking to drive, energy margins into the high teens, up to 19%; and Aerospace, to mid to high-teens as well. Granted that was in a higher top line environment. But let us put in this way, with a recovery in the end markets here, getting to those targets is clearly achievable.

[Jim Foung:]

Very good, okay. And then when we talked, you mentioned the three big Defense orders you got in the quarter. Could you kind of bracket, kind of size of those orders in total and what the potential is for follow-on the orders of those three defense contracts?

[Rajeev Bhalla:]

Jim, if you recall we did if you look at the numbers here, we did about $47 million in orders for aerospace and that's up about $17 million from what we did in the second quarter of last year. Most of that are those three orders.

[Jim Foung:]

Okay.

[Rajeev Bhalla:]

And so, it is about $10 million to $12 million is those three orders. There are -- there will be follow-on orders. We don't expect them in this calendar year but there will be follow-on orders.

[Scott A. Buckhout:]

These are programs, Jim, that we are on and so when they need product, they come to us. So it's just a matter of time.

[Jim Foung:]

Would the follow-on be the same order of magnitude as what you show today?

[Rajeev Bhalla:]

It is difficult to say but it would depend on the customer requirements here. But these orders are usually substantial.

[Jim Foung:]

Right, very good. And then that delay in the missile shipment due to the supplier, how big was that and do you expect to ship that out in Q3, is that correct?

[Rajeev Bhalla:]

The one related to supplier quality issue was between $1 million to $2 million and we would expect to ship it in the second half not necessarily all in the third quarter. There are some technical issues that the supplier needs to manage through, and so I am a little cautious on whether or not that will all ship in the third quarter.

[Jim Foung:]

Okay. Actually I missed the number. How big was that?

[Rajeev Bhalla:]

It was between $1 million to $2 million.

[Jim Foung:]

$1 to $2 million. Okay, got it. And so and then just last on the M&A, you mentioned a whole bunch of pipelines, very active and stuff. On the Energy side, would they kind of look like more like the Schroedahl-type acquisitions you made? Are these the types of candidates you are looking at?

[Scott A. Buckhout:]

We have, let us see we have both opportunities like Schroedahl, very interesting technology, high margins, relatively niche-oriented types of companies. But there are also several larger more scale-oriented types of companies that we are talking to as well that have a more diverse product line but also complementary to what we do. So we have, I would say, a pretty broad spectrum in terms of revenue. In general, they are not upstream, Jim.

[Jim Foung:]

Okay.

[Scott A. Buckhout:]

We are looking at outside of upstream I think is good in general from a diversification standpoint. We are not afraid of upstream of course, but we are finding that the opportunities in upstream are the good companies that we are interested in are willing and more interested in waiting for the downturn to turn. And so we are having more success in finding opportunities in other parts of Energy.

[Jim Foung:]

Okay. And then in terms of size-wise, could you just comment on the size of these acquisitions?

[Scott A. Buckhout:]

We have companies we are looking at anywhere from $20 million in revenue to $150 million in revenue.

[Rajeev Bhalla:]

That is right.

[Jim Foung:]

A big range, okay. Good luck, okay.

[Scott A. Buckhout:]

Thank you, Jim.

[Operator:]

Our next question is from the line of John Franzreb with Sidoti. Please go ahead with your questions.

[John Franzreb:]

Good morning, guys. If I recall correctly there was a delay of shipments in the first quarter in Aerospace. Is that the same delay that you are suffering in the missile program or is it something different; and was it realized in the second quarter or was it still not shipped?

[Rajeev Bhalla:]

It is the same item, John. And it was realized in the second quarter and not shipped and it hasn't been shipped at this point but we do expect to start making shipments shortly.

[John Franzreb:]

So it is all related to this missile program in the first and second quarter that you are going to catch up in the second half of the year?

[Rajeev Bhalla:]

I am sorry, John. The supply quality issue is just isolated to the second quarter.

[John Franzreb:]

Okay. Fine. All right. And in regards to Power Gen, Scott, seems like you are pretty optimistic about this being a long-tail opportunity. Can you kind of remind us which are the drivers there for you in particular that you are so confident that you are so confident that you are investing in, or investing disproportionately in that business going forward?

[Scott A. Buckhout:]

Sure. We -- so we have interesting technology in power generation. And we, as you probably know, we have recently launched a new turbine bypass valve with steam conditioning that we are excited about. We have signed up some very large customers recently that are testing our product and could turn into -- they are large but they are not large for us. They could turn into very large customers for us. So we are kind of on probation with a couple large customers here. And we have now added Schroedahl to the portfolio and Power Generation as well which increases our presence in the market. And opens up new channels for us that we did not have before we had Schroedahl. So Schroedahl has a stronger presence in Asia and we have -- they have a reputation. They have distributors, and they have customers that we now have access to and can sell our existing Leslie technology and then it goes both ways. We are bringing them into the U.S. So there is a lot happening in our control valve business to synthesize the product line and have a more, we will say coherent offering and consistent offering across all CIRCOR into these customers. But we feel pretty bullish because the market trends are good, growth in the market is good, and our technology is good, and we have got some good channel opportunities here as well.

[John Franzreb:]

And how much is Power Gen revenues right now?

[Rajeev Bhalla:]

It is between 5% to 10% of total Energy at this point, John.

[John Franzreb:]

Got it. Okay. And you might have touched on this earlier, Scott. When you were talking about other opportunities as far as cost savings. The ERP consolidation program, how is that progressing, where do you stand on that front?

[Scott A. Buckhout:]

I am going to let Rajeev take that one.

[John Franzreb:]

Okay.

[Rajeev Bhalla:]

Absolutely, John. Two key points to recognize there. One, as you know we are making investments in new ERP systems here, but only conditioned on the return of invested capital equation. If that equation balances, we will make that change. We are using a really new platform, at least for us that is cloud-based and really helps in how we implement it and that is working very well. The platform is called IFF and we just actually went live with one of our largest sites with that platform. Secondly, with respect to your question in terms of the consolidation, if you recall, we had 24 or maybe 25 different ERP instances in 2013, and that has come down. So we should be when we close it year, closer to 17, maybe even 16. So we continue to work that side of the equation down as well.

[John Franzreb:]

Perfect. Thank you very much.

[Rajeev Bhalla:]

You are welcome.

[Operator:]

The next question is follow-up from the line of Nathan Jones at Stifel. Please proceed with you remember question.

[Nathan Jones:]

Hi, guys. Just a little bit more on the Power business. Power in China is pretty horrible at the moment. Can you talk about geographically where the strength that you are seeing in Power comes from, how much of it is, you know, expansion of Schroedahl? Start there.

[Scott A. Buckhout:]

Sure. So let's talk about Asia first. So we see stable demand in China. So we are not seeing any kind of fall off in China. But the real growth that we are seeing is in India and Southeast Asia. So Thailand is a good market for us. Indonesia is a good market for us, and India. Those are probably the three bigger growth engines for us. But China is not a problem for us. We are not seeing a decline, but it could be that we are just relatively small in that market so we are maybe -- we are less impacted by the macro trend there. We are seeing good demand in North America as well for combined cycle power. So North America is a good market for us and we are seeing growth in our core legacy business in the U.S. and we are trying to drive Schroedahl on top of that.

[Rajeev Bhalla:]

Let me just add to that, Nathan. With respect to China specifically, you may not think of this suspect when you think of the power market there but if you have industrial facilities that have dirty boilers and are looking to convert that to some thermal oil and move it into a different direction, our control valves really come into play there as well. So our RTK brand out of Germany is starting to pick up and doing well, especially with our new control valve that Scott spoke about in the opening remarks with the new actuator. So those industrial applications for powering those industrial facilities is an opportunity for us in China.

[Nathan Jones:]

Okay. And do you have any idea of how much of the strength in power for you is market-driven versus share?

[Rajeev Bhalla:]

That's hard to say. I think, you know, we are a starting off a low base so both are benefiting here. I have not done the split honestly, Nathan.

[Nathan Jones:]

Okay. You have seen some nice improvement in cash flow. I was looking at the accrued expenses and payables line which has been a pretty big drag on cash flow in the first half. Are the accrued expense, the cash out flows primarily related to restructuring, and are the payables primarily related to lower demand, or is there something else going on there?

[Rajeev Bhalla:]

You hit the nail on the head. The payables is lower purchasing and the accrued expenses is a good portion of that is restructuring as we pay, you know, for those actions that we are taking. So you are correct.

[Nathan Jones:]

Do you think that drag continues into the second half, are those largely washed through?

[Rajeev Bhalla:]

It should not. I think you should not see the same level of magnitude.

[Nathan Jones:]

Okay. Thanks very much.

[Rajeev Bhalla:]

No problem.

[Operator:]

The next question is a follow-up from the line of Charley Brady with SunTrust Robinson Humphrey. Please proceed with your question.

[Charley Brady:]

Thanks. I guess on Aerospace again, are you expecting for the full year of 2016, would you expect that to be up over 2015 now given that you have got these projects coming?

[Rajeev Bhalla:]

That is correct.

[Charley Brady:]

And I guess on the margin, if I look at second half margin you are looking to -- I guess my comment is are you looking to exit the year at 11% or have the year at 11% EBIT margin?

[Rajeev Bhalla:]

We will definitely exit the year at 11% but our target and our goal is to get approximately 11% for the full year. So that would require, pretty strong growth here, not only in Q3 but especially in Q4 and that is what we are aiming on. But you should pencil in or put in pen that we will exit at 11%.

[Scott A. Buckhout:]

We have got three drivers that make us feel good about feel good about margins in the back half improving significantly. Certainly the supplier quality issue and the shipments of this missile program will flow out in the second half. We are expecting good growth in the second half and we also completed the closure of our California machining facility at the end of June, early July and so those savings cut in at run rate for the second half as well. So we have got some tailwinds as we go into the back half on Aerospace and Defense that make us feel pretty good.

[Charley Brady:]

It is about a 400 basis point bump second half to first half. You just outlined the reasons why. The reason I am asking, is that seems like a pretty significant bump even factoring in the California closure and some better profitability on the aerospace jobs.

[Rajeev Bhalla:]

Yes, I think Charlie the hard thing in your model is probably to factor in what the drop-through is and the incremental revenue and these are good programs.

[Charley Brady:]

Got you. Okay. Fair enough, thanks.

[Scott A. Buckhout:]

Charlie, we are not saying there is no risk but we feel good about the things that we can do here to have a better back half.

[Charley Brady:]

Thanks Scott, I appreciate that.

[Scott A. Buckhout:]

Okay.

[Operator:]

Thank you. This will conclude today's teleconference. Thank you for your participation. You may now disconnect your lines.