CIRCOR International's (CIR) CEO Scott Buckhout on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Circor International, (CIR)

CIRCOR International (NYSE:CIR)

Q2 2014 Earnings Call

August 01, 2014 10:00 am ET

Executives

David C. Calusdian - Executive Vice President and Partner

Scott A. Buckhout - Chief Executive Officer, President and Director

Rajeev Bhalla - Chief Financial Officer and Executive Vice President

Analysts

Kevin R. Maczka - BB&T Capital Markets, Research Division

Nathan Jones - Stifel, Nicolaus & Company, Incorporated, Research Division

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Charles D. Brady - BMO Capital Markets U.S.

Christopher Mecray

Robert Crystal - Goldman Sachs Asset Management, L.P.

Operator

Good day, ladies and gentlemen. Welcome to CIRCOR International's Second Quarter 2014 Financial Results Conference Call. Today's call will be recorded. [Operator Instructions] I will now turn the conference over to Mr. David Calusdian from Sharon Merrill for opening remarks and introductions. Please go ahead, sir.

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'll be referring to today are available on CIRCOR's website at www.circor.com on the Webcasts & Presentations section of the Investors link.

Please turn to Slide 2. Today's discussion contains forward-looking statements that identify future expectations. These expectations are subject to known and unknown risks, uncertainties and other factors. For a full discussion of these factors, the company advises you to review CIRCOR's Form 10-K for 2013 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, August 1, 2014. While CIRCOR may choose to update these forward-looking statements at a later date, the company specifically disclaims any duty to do so. On today's call, management will often refer to adjusted operating income, adjusted operating margins, adjusted net income, adjusted EPS and free cash flow. These metrics exclude any pretax special charges and recoveries, restructuring inventory reserves and intangible impairments. The reconciliation of CIRCOR's non-GAAP metrics to the comparable GAAP measures are available in the financial tables of the earnings press release on CIRCOR's website.

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

Scott A. Buckhout

Thank you, David, and good morning, everyone. Our adjusted EPS in the quarter was strong at $0.91 per share, representing a 12% increase over last year. We increased operating margin by 70 basis points to 10.7%. This was primarily driven by restructuring, productivity and cost control initiatives, which more than offset the margin impact of lower sales year-over-year. Sales came in at $208 million, lower than our expectations, due to shipment delays in our upstream large project business and relatively low volumes out of our power businesses. As a result of our bottom line performance, we continue to generate strong free cash flow. During the first half of the year, we generated $22 million of free cash flow or 82% of net income.

With respect to restructuring, we now have completed the actions announced in 2013. In April, we announced that we are investing $7 million of savings from new restructuring actions into accelerating organic growth. We've completed approximately 50% of these restructuring actions, including the closure of 2 of the 3 facilities. As of today, we've opened 2 new international sales offices, one in Brazil and one in Malaysia. With respect to new products, we started receiving orders for our new zero-leak turbine bypass valve for the power market and will begin shipping later this year.

Finally, during the second quarter, we made the strategic decision to exit certain landing gear product lines. As part of this decision, we reached a mutual agreement with Sikorsky to exit the BLACK HAWK program. This will enable our Aerospace & Defense leadership team to focus on our profitable actuation in fluid controls businesses, where we have more intellectual property, higher margins and more growth opportunities.

Exiting these landing gear product lines will improve our margins and profitability going forward. Rajeev will provide more color on the impact of this decision in the quarter.

With that, I'll turn the call over to Rajeev. I'll come back later to provide more detail on recent order trends and our guidance for the third quarter.

Rajeev Bhalla

Thank you, Scott, and good morning, everyone. Let's move right to the segment results, starting with Energy on Slide 4. Energy sales of $161 million for the second quarter decreased 7% over the prior year. This was primarily driven by lower shipments of upstream large international projects. The decrease was partially offset by higher volumes in the upstream North American short cycle business and our downstream instrumentation and sampling business. Energy's adjusted operating margin was up 130 basis points to 14.6% as the savings from our restructuring actions, productivity and lower discretionary spend more than offset the impact on margins from lower volumes.

For the Aerospace & Defense segment, please turn to Slide 5. Aerospace & Defense revenues decreased 6% from the prior year to $47 million, primarily due to lower landing gear sales, partially offset by higher actuation product shipments in the U.S. Aerospace & Defense adjusted operating margin decreased to 7.1% compared with 11.4% in the second quarter of last year, primarily due to operational inefficiencies in our California business, offset in part by restructuring savings, as well as improved productivity in our U.S. Defense business. We mentioned on last quarter's call that we expected the operational issues to continue to put downward pressure on margins through the third quarter of this year.

Turn to Slide 6 for selected P&L items. Our all-in tax rate for Q2 was 22.2%. Excluding the impact of special and restructuring charges, the comparable tax rate was 25.9%. We expect our third quarter adjusted rate to be between 26% and 27%. Q2 2014 adjusted earnings per diluted share were $0.91. This is a 12% increase compared with $0.81 in the prior year.

Slide 7 shows a special adjustment that we recorded during the second quarter. These include special and restructuring charges of $1.3 million, primarily related to actions announced earlier in 2014. As a result of our decision to exit certain landing gear product lines, we recorded a backlog reduction of $28.6 million due in the quarter and a $5.1 million inventory restructuring charge, both primarily related to the BLACK HAWK program. We will complete the exit of these landing gear product lines by the end of this year. For Q3, we anticipate special charges relating to restructuring actions to be in the range of $1.6 million to $2 million.

Turning to our cash flow and debt position on Slide 8. We continued to generate strong cash flow and ended the first half of this year with $22 million of free cash flow, which is 82% of net income. And finally, today we're announcing our new $400 million revolving credit facility that will support our future growth initiatives. This new facility expands our current borrowing capacity and locks in the favorable terms that exist in the current credit markets.

With that, I'll turn it back over to Scott to provide an update on our orders and guidance for the third quarter of 2014.

Scott A. Buckhout

Thank you, Rajeev. Before I get into our guidance, let me start by providing an overview of our second quarter order intake, as well as current market trends. Let's start with Energy, where we compete in the up, mid and downstream oil and gas markets, as well as power generation. Most of our revenue is in the upstream market today. As a reminder, approximately 1/2 of our Energy revenue is project-related, which can lead to significant variation in order intake and revenue from one quarter to the next.

For Q2, Energy bookings were $160 million, down 2% versus last year. The inherent lumpiness in our upstream project businesses did have an effect in the quarter, with orders coming in below our previous 4-quarter average. However, overall quoting activity remained strong globally. Our win rate for orders decided in the quarter hasn't changed, and pricing remains positive.

Turning to our upstream short cycle businesses. As expected, we're seeing improving run rates in North America. This trend improves through the second quarter and has continued into July. We're also seeing good activity in downstream oil and gas, particularly petrochem, which resulted in a nice sequential increase in our instrumentation and sampling orders in Q2.

In our power business, quoting activity remained strong in emerging markets, but bookings are taking longer than anticipated. We remain bullish on this business in the medium term, but expect bookings to continue to be modest in the third quarter.

In Aerospace & Defense, orders were up 20% year-over-year to $44 million due to strong demand for actuation products in the U.S. and improving order intake in France for products sold into the A350 and KC-390 programs. This was partially offset by the closeout of the CH-47 landing gear program.

That brings us to our guidance. As you may recall, we've been anticipating improved revenue in the second half of this year. Built into this expectation was that upstream short cycle in North America was going to pick up, and that upstream large projects booked in Q4 last year would start shipping as scheduled in Q3 this year.

For our upstream short cycle business in North America, higher rig counts are driving the expected improvements in orders and revenue. In addition, downstream short cycle is expected to remain positive globally, driving solid growth in our instrumentation and sampling businesses.

With respect to our large project backlog, we've experienced unusual delays on 3 large North Sea projects. These delays are a direct result of customer-driven design changes. Longer term, as you know, design changes tend to result in higher revenue and margins. But of course, in the short term, design changes typically result in later delivery dates, which we're experiencing here in the third quarter. As a result of these changes, we expect our large project sales to be lower in the third quarter versus last year.

In Aerospace & Defense, we expect revenue to be more or less in line with last year, with lower landing gear sales offset by growth in our Defense businesses. Overall, we expect that third quarter revenue will be in the range of $200 million to $215 million.

Looking at the bottom line, we expect to report adjusted EPS in the range of $0.87 to $0.94. We expect energy margins to be flat sequentially, with savings from restructuring and productivity offsetting volume-related lower margins in our large project business. We expect to see slightly higher margins in Aerospace & Defense sequentially as we continue to work through operational issues in California.

Overall, I'm pleased with the traction we're getting on our margin expansion initiatives. I'm optimistic about the level of activity we're seeing in our end markets, and I'm excited about the investments we're putting in place to accelerate growth at CIRCOR. As we continue to change CIRCOR's organization and culture, we remain focused on our top priorities: growth, margin expansion and strong free cash flow.

With that, Rajeev and I are available to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today is coming from Kevin Maczka from BB&T Capital Markets.

Kevin R. Maczka - BB&T Capital Markets, Research Division

First question, just on the total sales in Q2, in the shortfall we had here relative to the guidance. You mentioned some of the shipment delays, 3 big projects in the North Sea. Maybe the landing gear exit played a role in that as well. Did those 2 items explain the delta here that we saw in Q2? Or was there something else that also surprised you negatively?

Scott A. Buckhout

I'll let Rajeev take that. Rajeev will take that.

Rajeev Bhalla

Yes. So Kevin, good morning. There's really 3 key pieces to the puzzle here with respect to the expectation shortfall. Three items: the landing gear program, the delays in our power gen globally and the reschedule of the large project. And it's about 1/3 each. So there's about $18 million difference from expectation, there's about 1/3, 1/3, 1/3. A rescheduled large project, the 3 main projects out in the North Sea and then delays in the power gen globally, in terms of locking down orders and delivering, and then the landing gear impact as well.

Kevin R. Maczka - BB&T Capital Markets, Research Division

And as we look forward, Rajeev, well, I guess, first of all, can you just kind of -- we're exiting the Chinook. We're exiting landing gear. The Chinook was -- we already knew, would be a $10 million or so headwind in the second half and have a hard comp in the first half of '15. But can you just kind of size where the landing gear and Chinook were in terms of total business and, again, the timing? Chinook is already going to 0 now and landing gear does by the end of the year?

Rajeev Bhalla

Yes. So when we talk about landing gear, Kevin, we're talking -- that includes the Chinook. And you're right, we had expected, or we've been delivering, historically about $20 million in sales on the Chinook, and that ended at the end of June. So think of that pro rata, there's about $10 million difference for the back half this year. And then there are the other landing gear programs, including Sikorsky BLACK HAWK, as well as some other smaller product lines that we have. So the total impact that you will see next year is in the $15 million to $20 million range year-over-year.

Kevin R. Maczka - BB&T Capital Markets, Research Division

Okay. So that -- so $15 million to $20 million, that's in 2015 relative to 2014.

Rajeev Bhalla

Correct, including the Chinook.

Kevin R. Maczka - BB&T Capital Markets, Research Division

Okay. And we still have about a $10 million headwind from the Chinook alone in the second half this year.

Rajeev Bhalla

Correct. Correct, that is right. Now I should mention that that's the revenue headwind. We would expect, obviously, margins to improve in '15 relative to '14 associated with these product lines.

Scott A. Buckhout

So we're going to have -- you should expect to see a pickup in AOI next year of roughly $3 million to $4 million associated with the exit of these programs.

Kevin R. Maczka - BB&T Capital Markets, Research Division

Okay. Great. And then as it relates to the issues in California, those -- can you kind of quantify how much of the margin impact was from that this quarter, and your expectation is still that, that bleeds over into Q3, and then, at that point, we'll get beyond these inefficiencies?

Rajeev Bhalla

Yes, you're correct. We do expect it to kind of filter into Q3 here and, hopefully, have it behind us before the end of this year. The impact in the quarter was around 200 basis points, Kevin.

Operator

Our next question today is coming from Nathan Jones from Stifel.

Nathan Jones - Stifel, Nicolaus & Company, Incorporated, Research Division

When you say you're exiting these product lines, is this just closing? Or are you able to sell this business?

Scott A. Buckhout

It means closing.

Nathan Jones - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. The corporate line was somewhat less than expected and certainly well less than where you've been running. Is that a onetime kind of deal? Or is this a new run rate that we're looking at here?

Rajeev Bhalla

We did see some favorability year-over-year on that. This is probably a little lower than the run rate you would expect, Nathan. So we've talked about 2.5% to 3% of sales as kind of being what we're looking at here. We ended this quarter, as you know, at 2.2%, so it's a little lower than the run rate you would expect.

Nathan Jones - Stifel, Nicolaus & Company, Incorporated, Research Division

So somewhere in that 2.5% to 3% is the run rate going forward.

Rajeev Bhalla

At the least, in the near term, obviously, we'll keep driving that. But in the near term, that's right.

Nathan Jones - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And you had somewhat of a build in working capital this quarter, particularly in accounts receivable. Are there any issues there getting paid? Is this seasonal?

Rajeev Bhalla

Yes. There's -- actually, there's really 2 customers here that caused this jump in receivables, one out of Venezuela, Herebesa [ph]; and one out of the UAE, where the receivables went overdue in the quarter. They've been -- we've been paid in the past, so this is not a question of writing it off. It's just that -- a lot slower than the normal slow paying customers that they are.

Scott A. Buckhout

This is $10 million to $15 million of receivables that went past due in the quarter.

Nathan Jones - Stifel, Nicolaus & Company, Incorporated, Research Division

When do you expect to get paid on that?

Rajeev Bhalla

We received a portion of it in July here. And hopefully, we'll have this thing behind us probably by the end of the third quarter.

Nathan Jones - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. Our checks also have indicated that folks are expecting the upstream U.S. oil and gas business to accelerate pretty significantly in the back half and again into 2015. Is that what you're seeing? And what's your outlook for that market?

Scott A. Buckhout

So we're -- yes, we are optimistic on the back half here on short cycle North America. So we're seeing high-single digits more or less in line with rig counts, which are up mid-single digits in the U.S. and double digits in Canada. And we have exposure to both of those markets. So we're seeing -- we expect high single-digit growth in this market in Q3 and maybe even getting into double digits in Q4.

Operator

Our next question today is coming from Matt Summerville from KeyBanc Capital Markets.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

A couple of questions. First, with respect to Energy, I want to make sure I understand the issues here. In terms of the shortfall, you had business that was slated for Q3 shipment that was booked in Q4 last year associated with the North Sea that has gone through some sort of redesign process. When do you now expect those projects to begin shipping? Other than next year, can you be a little more specific?

Scott A. Buckhout

So I think the way to think about this is that the shipping profile has slid out by about 3 months. So what we expected to start shipping here in June time frame, July time frame slid into October, November time frame. So it's not as if the revenue, the specific dollar we expected to get in June and July went into next year. It actually went into Q4, but the whole program is sliding. That's why we're saying the roughly $15 million here is actually coming out of the year, $15 million associated with these 3 projects.

Rajeev Bhalla

And in terms of when it gets shipped in '15, it's early part of '15. It's within the first quarter or so of '15.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Okay. And then it sounded like within, again, sticking with Energy, you had other delays non -- not related to this North Sea stuff. Can you walk us through that as well, quantify when do you expect that to be recaptured, if it hasn't been already?

Scott A. Buckhout

Right. So the delays that we experienced here in the third quarter were also in large -- second quarter, sorry, were also in large projects, were primarily in our Brazil business associated with Petrobras. I think we've mentioned in the past some of the challenges we have with inspections from EPCs, inspections from Petrobras both in process and before we're allowed to ship. So we ran into more of that than expected. You should know that we do anticipate delays there, but this was extraordinary. So we anticipate we'll continue to have ongoing delays through the rest of the year. The revenue that we did not ship here in Q2 will -- we expect most of that will ship in Q3. But that's built in -- the delays we expect are built into the guidance that we've given.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Okay. And then as I think about sort of the power side of the business, just -- first, how big is power for CIRCOR today, and talk through what you're experiencing why your sort of quote-to-order is expanding rather than contracting?

Rajeev Bhalla

Okay. The -- our power business is less than 10% today, Matt. And I'll turn it over to Scott to talk a little bit about the market and what we're seeing there because the quote activity is actually pretty healthy and strong.

Scott A. Buckhout

So I think that we remain bullish on power. We have 2 types of power business. We have a more of a book-and-ship power business that we get orders in the quarter, and we ship in the quarter, fast-turn business. And then we have a large project business. Both were down more than expected in the second quarter. But quoting activity remains very good, particularly on projects in emerging markets. So if I look at how many projects we have outstanding that we've quoted, the backlog there is far in excess of anything we've seen in the past in our power business. So we're still very excited about it. But turning these quotes into orders is taking longer than we would -- any of us would like to see.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

And then Scott, I want to talk about the $7 million current restructuring. It sounds like you're about halfway done with that. Similarly, where are you with the reinvestment you're making with that $7 million? I know you said you opened sales offices. Maybe you've done some other things. But how should we think about that cadence of investment?

Scott A. Buckhout

No. That's a good question. We -- I'd say we're a little ahead of our -- of the -- I'd say that cost savings are a little bit ahead of the investment. As you can imagine, it takes a little more time to find the right people to put on the ground and get offices open. It takes a little more time to do that than it does to shut some of these facilities and to reduce some of the headcount that we have in this program. But more or less, you should expect them to more or less offset. But the reality is right now, we're a little behind on the investment just because of the amount of time it takes to do that well.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

And then as far as kind of beyond this $7 million, can you talk about what you're contemplating in terms of maybe the next round of restructuring and then also update on where you're at with your global sourcing and procurement initiatives?

Scott A. Buckhout

So yes, I can talk about that. So I think there's -- I guess I have to be careful on the restructuring question. There's still plenty of duplication of facilities and capacity in our business across all of CIRCOR. I'd say, particularly in our Aerospace & Defense business, we have more complexity and more facilities than we probably need. So you should expect to hear more about what we're thinking and doing on the Aerospace & Defense side next. That was the first question. Could you repeat the second question?

Rajeev Bhalla

Global sourcing.

Scott A. Buckhout

Global sourcing. So global sourcing is -- I'd say we're starting to get traction on global sourcing. We've had our leader in place for coming up on a year now. We've got -- this sounds kind of basic, but we're up and running on our global commodity data warehouse, which allows us to actually track what we've been spending by SKU and measure year-over-year productivity, which we haven't had in the past. We're also up and running on a new e-sourcing tool. So we have a solution in place now where we can put to work, out to bid online and run auctions. We started doing that about 4 months ago, and we're seeing tremendous savings from those programs. So I think I feel good about where we're going. We will more -- be more than offsetting inflation, and we can actually track that. Before, I couldn't even tell you that 6 months ago. So on September 10, I think we'll be able to sit down and show you more concrete numbers about what we expect this to mean to the bottom line as we go forward into '15 and beyond.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Then I just want to be clear, and then I'll hop off. You are closing the Castle facility. Is that correct, that's done now?

Scott A. Buckhout

That's done.

Rajeev Bhalla

That's done. That has been done, and we finished that earlier this year.

Operator

Our next question today is coming from Charley Brady from BMO Capital Markets.

Charles D. Brady - BMO Capital Markets U.S.

Expect on the corporate expense question, I mean, what exactly were the favorable items that aren't going to repeat in the second half?

Rajeev Bhalla

Yes. We have some onetime recruiting-related, comp-related, as well as health care-related costs in the second quarter of the prior year that kind of helped the year-over-year compare.

Charles D. Brady - BMO Capital Markets U.S.

Okay. And then so at tax rate, I mean, last quarter, you guys had guided to a 26%, 27% tax rate in Q2. Obviously, you came in well below that. What were the -- were there discreet items in that, that drove it down because it's obviously popping back up in Q3?

Rajeev Bhalla

That is correct. If you look at our adjusted tax rate, as I mentioned in the script, it was consistent with our guidance. But the 22.2% all-in is because we've taken these charges -- these special charges and the restructuring-related charges.

Charles D. Brady - BMO Capital Markets U.S.

Okay. So it's all related to the restructuring stuff.

Rajeev Bhalla

That is correct.

Operator

Our next question today is coming from Chris Mecray from BlackRock.

Christopher Mecray

I'm just wondering about Corona. If you're closing these landing gear product lines, is there an under-absorption issue there? And is the restructuring really taking care of that, because -- I mean, I guess this is a big chunk of business. So I'm just wondering if that leaves a viable entity in its place. Can you just describe the natures of the business that will remain and what the outlook is for profitability?

Scott A. Buckhout

Yes. So you're right, this is going to free up floor space and capacity out of our California facility. I'd rather not get into details of future restructuring plans. But as I mentioned a few minutes ago, Aerospace & Defense will be a part of ongoing restructuring and consolidation as we simplify the footprint there and simplify the business.

Rajeev Bhalla

And let me just add to that then, Chris. Obviously, we have been doing restructuring. We just talked about the fact that we closed a facility, the Castle facility and then the space shutdown. We knew that Chinook was going away a little while ago, so we've been taking appropriate actions there, including some of the restructuring actions that we started earlier this year, and we'll continue down that path. In terms of what's left there, we still have a good, healthy fluid controls business, as well as some actuation business. So obviously, we want to make sure that, that stays competitive going forward.

Christopher Mecray

No. I've been aware that the ship rate -- the on-time shipments has been an issue in landing gear. Is the remainder of the business performing to schedule and profit rates that you would hope for?

Scott A. Buckhout

Well, look, I -- there's -- I guess there's a couple of ways to answer this. We're exiting landing gear because it's not an attractive business. The reason that we're going to see tailwind and improvement -- and an improvement in AOI next year is because we lose money in this sector in total. That doesn't mean every individual program is negative at the AOI level. But in general, this is not attractive business for us. We spend more than we make, and we'd rather focus on other parts of our business where we have much higher margins and a lot more growth opportunities.

Operator

[Operator Instructions] Our next question is coming from Rob Cyrstal from Goldman Sachs.

Robert Crystal - Goldman Sachs Asset Management, L.P.

Can you remind us on the capital fund, do you have a share repurchase program in place? Do you have any thoughts on that front?

Scott A. Buckhout

So, we do not have a share repurchase program in place. But we -- let me back up and start from the beginning here. So the short answer to the question is no, we don't have a share repurchase program in place. The longer answer is that M&A is a higher priority for us in terms of spend of capital than share repurchases at this particular point in time. We are investing quite a bit in the business, as you know. We get a terrific return on invested capital on the things that we're doing internally. So the growth initiatives, the restructuring initiatives, productivity initiatives, we get a fantastic return on those investments. And so we'll do as much of that as we can do, and as we can do well. M&A, we're starting to spend more time externally. We're starting to spend more time building relationships with potential companies that might be targets in the future. We still spend the majority of our time fixing problems at CIRCOR, driving productivity, adding talent to the team, putting growth initiatives in place. That's the majority of our time. But we are starting to turn more external and starting to build that pipeline of M&A targets, starting to build those relationships. So over time, we do expect to be acquisitive. It's not the highest priority right now, but it is a higher priority than buying our shares back.

Robert Crystal - Goldman Sachs Asset Management, L.P.

And do we think, Scott, that the organization will be ready to handle M&A in calendar '15? Is that sort of a reasonable expectation?

Scott A. Buckhout

I think it's a reasonable expectation, yes. And I want to add to that a little bit. I think there are certain parts of our business that are more ready than others. So I doubt you'll see us doing any kind of M&A on the Aerospace & Defense side in '15, but there are other parts on the Energy side that I think will definitely be ready in 2015 to effectively integrate an acquisition.

Operator

Our next question is coming from Nathan Jones from Stifel.

Nathan Jones - Stifel, Nicolaus & Company, Incorporated, Research Division

Just back on the M&A question there. What are the most attractive areas for you to invest in? And what kind of companies are you looking at?

Scott A. Buckhout

So that's a good question. We have a bias towards companies with intellectual property and technology that allows us to get, we'll say access to some of these high-growth niches that we've identified as part of our strategic planning. So I'd say there's a bias towards technology. We have another bias towards expanding our footprint globally, particularly in some of the higher growth markets for oil and gas and power generation. So those would be, I'd say, the 2 biases that we have. We're not looking at companies that are outside of markets that we understand or with technology that we don't understand. We're looking more at bolt-on types of acquisitions that get us access to geographies or technologies that we don't have today.

Nathan Jones - Stifel, Nicolaus & Company, Incorporated, Research Division

Would you be looking purely at valves in M&A or other kinds of flow control products or -- what kind of product lines would you be looking at?

Scott A. Buckhout

So yes. We do participate outside of just valves. But as you know very well, we are mostly valves. So we're interested in valve actuation, or valve acquisitions. We also might be interested in getting more into instrumentation. We like our instrumentation business today. There are other technologies in instrumentation that are similar to ours and adjacent to ours that would work out very nicely for us, but you won't see us going much farther than that in terms of bolting on new types of technology.

Nathan Jones - Stifel, Nicolaus & Company, Incorporated, Research Division

On the organic growth investments that you've made, are you beginning to see any revenue from that? Or when would you expect to begin to see any revenue from that?

Scott A. Buckhout

So the opening of the offices in Southeast Asia and in Brazil have been in work for some time. We announced it 3 months ago, but we've had feet on the street there for probably, I'd say, close to 9 months in Southeast Asia and close to 6 months in Brazil. So the formal opening of the office just happened, but we've had feet on the street there already. So we're actually doing quite well in Southeast Asia. The reason we're putting the office there is because there's a lot of activity happening right now. And we're -- I'd say we're ahead of track on order intake year-to-date in Southeast Asia, and we might have a very big order on the horizon that we're working on as well. So we're pretty excited about that. In Rio, I'd say less traction so far, but we're building a pipeline. We are building the relationships we need to have with Petrobras. And so we're bullish on that just simply because of the amount of spend there and the relationships we already have, but Southeast Asia is where we've really got traction so far.

Operator

[Operator Instructions] Our next question is coming from Matt Summerville from KeyBanc Capital Markets.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

I know you guys prefer to just guide one quarter out, but with -- there's a lot of moving parts here. I -- would you offer any sort of prognostication in terms of how Q4 will or will not compare to Q3 at this point? Again, not locking anything in, I understand you don't really want to go down that path. But any color you could provide would be extremely helpful.

Rajeev Bhalla

Sure, Matt. We had talked about in the beginning of the year the fact that we felt pretty good about the back half being up versus the first half. We still feel that way. Scott talked about what we see in the short cycle business. And also as you look at the large project business, in terms of what has happened here, the shift of the schedule of these 3 large projects kind of domino-ed through the year, but it didn't adversely impact or substantially impact the fourth quarter here. So we still feel good about the second half being up versus the first half. And the markets are helping us with that position here. So hopefully that can give you a sense of what we think about the fourth quarter.

Operator

There are no further questions at this time. I would now like turn the floor back over to Mr. Scott Buckhout for closing comments.

Scott A. Buckhout

Okay. Well, I'd like to thank everyone for joining us this morning. We're looking forward to seeing many of you at our Investor Day on September 10 in New York, where we'll discuss longer-term targets for CIRCOR. Thank you.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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