AZZ incorporated F2Q09 (Qtr End 08/31/08) Earnings Call Transcript

Sep.26.08 | About: AZZ incorporated (AZZ)

AZZ incorporated (NYSE:AZZ)

F2Q09 Earnings Call

September 26, 2008 11:00 am ET

Executives

Joe Dorame – Investor Relations, Lytham Partners

David H. Dingus – President, Chief Executive Officer

Dana L. Perry – Chief Financial Officer, Senior Vice President - Finance

Analysts

Ned Borland – Next Generation Equity Research

Brent Thielman – D. A. Davidson & Company

John Franzreb – Sidoti & Company, LLC

Fred Buonocore – CJS Securities

James D. Padgett – The Boston Company

Noah Steinberg – Intrepid Capital

Operator

Welcome to the AZZ incorporated second quarter of fiscal year 2009 financial results conference call. (Operator Instructions) I would now like to turn the conference over to Joe Dorame.

Joe Dorame

I’m with Lytham Partners and we are the financial relations consulting firm for AZZ incorporated. With us today on the call representing the company are Mr. David Dingus, President and Chief Executive Officer, and Mr. Dana Perry, Chief Financial Officer.

At the conclusion of today’s prepared remarks we’ll open the call for a Q&A session. Before we begin I would like to remind everyone this conference call includes statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for statements of historical fact, this conference call may contain forward-looking statements that involve risks and uncertainties, some of which are detailed from time to time in documents filed by the company with the SEC. Those risks and uncertainties include, but are not limited to, changes in customer demand and response to products and services offered by the company, including demand by the electrical power generation markets, electrical transmission and distribution markets, the industrial markets, and hot dip galvanizing markets, prices in raw material costs, including zinc and natural gas, which are used in the hot dip galvanizing process, changes in the economic conditions of the various markets the company serves, foreign and domestic, customer requested delays of shipments, acquisition opportunities, adequate financing, and availability of experienced management employees to implement the company’s growth strategies.

The company can give no assurance that such forward-looking statements will prove to be correct. We undertake no obligation to affirm publicly, update, or revise any forward-looking statements whether as a result of information, future events, or otherwise.

With that having been said I’d like to turn the call over to David Dingus, President and Chief Executive Officer of AZZ.

David H. Dingus

Thanks to each of you for taking the time to join us for the conference call for the second quarter in the first six months of our fiscal year 2009. For the three-month period ended August 31 the company set a record for revenues, net income, earnings per share, and backlog. For the first six months ended August 31, 2008, when compared to the prior year revenues increased 30%, net income is up 75%, earnings per share increased 72%, and backlog is up 28%.

We continue to benefit from strong market conditions, expanded third markets, international opportunities continue to play an important role in our growth potential.

Total incoming orders for the quarter were a record-setting $139.1 million while shipments for the quarter totalled a record-setting $103.3 million resulting in a book-to-ship ratio of 135% for the second quarter.

There were two significant international orders received in the second quarter of fiscal 2009, as forecast, totalling approximately $23 million. This combined with the booking, the opening backlog of Blenkhorn and Sawle increased international backlog by more than 200%. Domestic orders remain strong with backlog increasing 19% when compared to the first quarter. Our total backlog was up 28% when compared to last year and 35% when compared to the 22908 backlog. Sixty percent of our backlog is expected to ship in the current fiscal year and of the backlog of $190.8 million 29% is to be delivered outside of the US.

The quotation activity and project opportunities continue at an excellent pace. The timing and release of these orders has and will continue to create quarter-to-quarter lumpy backlog results that may appear to be market corrections rather than timing of orders released. We have and will continue to express to you when we believe it is a timing issue and when it is a change in market conditions. Large international orders are often slower than desired.

We still anticipate that we will have the opportunity to secure additional large international orders, but the timing is not yet finalized as to whether it will be further positively impact the excellent current-year backlog or whether we’ll be in the beginning of fiscal year 2010. We anticipate that international revenues will continue to represent approximately 25% of our electrical and industrial product shipment.

Galvanizing demand remains strong and tonnage of steel processed increased 47% for the second quarter. On a same-store basis this is up 12%. This increase was partially offset by a 2% decrease in our average selling price during the second quarter.

For the first six months revenues increased 40% in total and 9% on a same-store basis. Operating margin for the electrical and industrial products were strong at 19%, reflecting our ability to continue to price to recover escalating costs. We had a very balanced product mix in the second quarter.

Operating margins for the galvanizing services segment was also very strong with margins of 30%. Margins for the quarter were favourably impacted by the insurance settlement related to a fire at one of our facilities. However, without this gain the margins were 28% and compare favourably to the 25% in the same period last year. For the first six months margins are 29% compared to 25% in the prior year period.

Customer demand remains strong, which facilitated minimal price concessions, and we benefitted from lower zinc costs included in our cost of sales. Where our zinc cost has decreased other operating materials and natural gas have increased, requiring us to continue to strive to maintain pricing in order to fully recover these costs.

As a company our accomplishments have continued and we’ve doubled and re-doubled our efforts to increase our upside potential by securing more profitable business and continue to efficiently and effectively execute on that business. The completion of an excellent record-setting quarter and first six months, our positive market outlook, excellent financial strength, strategic acquisitions, and a great group of employees results in a very optimistic outlook for our future. We’re keenly aware of the challenges brought about by the uncertain economic conditions, the volatility and the cost of raw material, and the very competitive nature of our business environment. We do believe that we can successfully navigate through these challenging conditions as we have effectively done so in the past.

Now, with that as an overview our strengths, Dana will now give us a review of the operating results for the second quarter in the first six months of fiscal 2009.

Dana L. Perry

Thank you, David. I would also like to welcome each of you to our second quarter conference call. At this time I will review our unaudited consolidated results for the period ending August 31, 2008.

For the second quarter financial results remain strong. AZZ recorded record revenues for the quarter of $103.2 million as compared to $81.6 million in the prior year. Net income for the quarter increased 39% to $11.3 million as compared to $8.1 million. Diluted earnings per share increased 39% to $0.92 as compared to last year at $0.66.

Revenues for the six-month period were $203.2 million, a 29.5% increase as compared to $157 million in the prior year same period. Net income for the six-month was $21.4 million, an increase of 74.6% which compared to $12.3 million in the prior year. Diluted earnings per share was $1.74 compared to $1.01.

We’re extremely pleased with our second quarter results. Our strong operating performance in both segments of our company combined with lower G&A expenses allowed us to record record-setting results. We continue to main strong quotation activity and project opportunities in our electrical and industrial segment achieving a book-to-ship ratio of 135% to one for the quarter and ending the quarter with a record-setting backlog of over $190 million. Blenkhorn and Sawle contributed approximately $13 million to our backlog.

In our galvanizing segment continued strong demand and good pricing utilization has allowed us to achieve record-setting results. Our interest expense, of course, has increased due to higher levels of debt resulting from our $100 million note placement on March 31. It was associated with the acquisitions of AAA Galvanizing and B&S in Canada.

Our electrical and industrial segment generated 51% of our revenues, while our galvanizing service segment generated 49%. We anticipate that 55% of our revenues for fiscal 2009 will be generated from our electrical and industrial products business and 45% will be generated from our galvanizing segment.

At this time David will give us an overview of the electrical and industrial product segment.

David H. Dingus

The industrial demand for our power distribution and motor control centres remains strong. The spending related to energy infrastructure, rebuilds, inspections, and upgrades continued. The power distribution centres delivered to the transmission and distribution market continued to increase. Opportunities for metal clad outdoor switchgear products is outstanding. Utility distribution sub-station order continue to improve and the growth in this market demand is most encouraging. Quotations and orders for our high-voltage transmission bussed up systems were again at excellent levels and reflect strong international demand.

We continue to operate at record-setting levels and increased US spending on the grid would provide additional opportunities.

Car generation market is encouraging. The announced bill schedule, some new domestic and international generation plants, domestic emphasis on renewable continues to positively impact our market and our orders and it’s anticipated to continue into future quarters.

Our specialty lining products have seen and should continue to see strong results in orders and shipments. The year-to-date results have been very positively impacted as a result of the continued strength in the oil and gas markets.

Tubular products to the petroleum market is outstanding and operating at an excellent level and is up by prior periods.

The Blenkhorn and Sawle assimilation is progressing. We continue to believe that there are opportunities to jointly quote with US operations on projects, solidify our position in the Canadian utility market, and seek further opportunities for other AZZ products. Revenues for the first full year of operation should approximate $20 million as anticipated via accretive in the first fiscal year. Current year of fiscal revenues are estimated to approximate $12 million.

Dana will now cover the operating results of our electrical and industrial products segment.

Dana L. Perry

In this segment of our business we recorded revenues for the quarter of $52 million as compared to their prior year results of $45.1 million. The acquisition of B&S added $1.2 million to our revenues for the quarter.

Our increased revenues were generated at results of continuation of improved market demand, primarily from our high-voltage transmission power generation and utility distribution as well as energy infrastructure markets.

Operating income was $10 million as compared to $7.9 million the prior year as a result of favourable market conditions. Operating margins were 18.9% for the quarter compared to 17.6% in the prior year. We continue to emphasize our booking of business at specific targeted margin levels and pursuing price increases to recover increased cost of material. Our challenge continues to be to expand our markets while maintaining our strong operating performances.

At this time David will give us an overview of the galvanizing segment.

David H. Dingus

With overall demand remaining very strong we’ve been able to minimize the impact the decreased cost of zinc has had on pricing. The average cost of zinc in our kettles approximates the current cost of zinc at the end of the quarter.

Our strategy to provide a premium level of service and quality to our customers will continue and we will resist downward pricing pressures. Revenue dollars will potentially be impacted in future periods if market pricing is required to be adjusted as a result of reduced demand. Approximately 50% of our volume is reflective of the GDP while 50% is related to the infrastructure build out of electrical generation and transmission, telecommunication, oil and gas production, refining and delivery, and the overall petrochemical market. We continue to operate in very favourable market conditions and are maximizing market share growth without sacrificing price.

Our facilities have seen limited damage from the recent Gulf storms, but have been impacted more by power outages than extensive physical damage. Fortunately our employees are safe and many have been able to return to work. Due to the physical damage from the storm being less than was incurred in Katrina and Rita, we do not anticipate any significant increase in our business opportunities associated with the rebuild of the Gulf Coast infrastructure.

We’re pleased with the integration of AAA into our network of plants. Their performance for the first few months is consistent with what we have anticipated. There does remain concern over the impact economic conditions and the impact cost of steel and how this may impact our customers and their demand for our services. This issue, combined with the seasonal winter impact on our north-central US facilities, may result in lower fourth quarter demand and operating results for this segment.

Dana will now cover a review of the statistics for this segment and our key balance sheet items.

Dana L. Perry

Revenues in this segment of our business for the quarter were a record-setting $51.3 million, an increase of 40.7% compared to $36.5 million recorded in our second quarter in fiscal 2008. Our second quarter was favourably impacted by the acquisition of AAA Galvanizing, which represented $12.4 million in revenues or 34% of our 41% increase. Increased volumes of steel shipped as compared with the same quarter last year, as well as our favourable product mix, helped us maintain our strong pricing levels for the quarter.

Operating income increased 67.7% to $15.5 million compared to $9.2 million in the prior year. Our quarterly results were favourably impacted due to an increased settlement associated with a fire at one of our facilities. This resulted in a pre-tax gain of $1.3 million and is included in our operating income. This year’s increased operating income resulted from higher volumes primarily from the acquisition of AAA, the lower cost of zinc, and improved operating margins.

Operating margins increased to 30.2% compared to 25.3% in the prior year. Excluding the proceeds from the insurance settlement margins for this quarter would have been 28%. As David indicated earlier, a slowing in the industrial sector, of the general economy, or the increased cost of steel could have an adverse impact on future revenues and earnings.

At this time I will cover some of our key cash flow and balance sheet items on a comparative basis. For the six-month period cash provided by operations was $12.5 million compared to $15 million in the prior year. Our working capital needs have increased to $102 million at the end of our second quarter as compared to $60 million at the end of February due to our increased business levels.

Our receivable days and inventory turns remain good. Outstanding accounts receivable days outstanding were 50 days as compared at the end of the second quarter as compared to 49 days at our year end.

Year-to-date capital improvements were made in the amount of $9.4 million of which $3 million was associated with a fire at one of our galvanizing facilities.

Depreciation and amortization for the first six months was $6.9 million. Our total outstanding bank debt remains at $100 million.

At this time I will turn the conference call over to David for closing comments and then we will open to our question-and-answer session.

David H. Dingus

We’re extremely pleased with the results of our second quarter and the first six months of fiscal 2009. The aggressive steps we’ve been taking in seeking out marketing opportunities, improving our distribution channels, maintaining or improving our operating margins, are reflected in our improved operating results setting another record in quarterly sales and earnings.

AZZ is pleased to have made the most recent Forbes magazine list of 100 fastest growing companies. AZZ’s overall rate based on a three-year average annual growth rate was number 28. Individual rankings were 25th in earnings per share, 79th in revenue growth, and 8th in total return to our shareholders. It also noted that we have achieved 21 consecutive years of profitability.

Our products and services are well positioned to continue to expand and benefit from the strong infrastructure rebuild and replacement market, which includes the upgrades to the aging distribution substations, the transmission grid, the much-needed expansionatory spending in the petrochemical market, and the replacement of power generation facilities all enhancing our growth potential. While we anticipate the current market demand will continue, the timing of the projects and the release of orders will always have an impact on the quarter recognition of bookings, backlogs, revenues and earnings, and will result in quarter-to-quarter fluctuations which may be greater than true changes in market demand or our competitive position and successes.

Based upon the evaluation of information currently available to management, we are pleased to project another increase in our revenue and earnings guidance for fiscal 2009. We are now projecting that FY 2009 revenues will be between $420 million and $430 million and earnings per share to be between $3.25 and $3.35. We continue to build upon the success we have been able to achieve and continually strive to enhance the performance of the company.

Our estimates assume that we will not have any significant delays in the delivery of our electrical and industrial products, or that there will not be a significant change in galvanizing demand, pricing, or any further adverse weather conditions prior to the fourth quarter of fiscal 2009.

Again, thank you for your participation today. At this time we’ll open it up for any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Franzreb – Sidoti and Company.

John Franzreb – Sidoti & Company, LLC

Regarding those two international contracts, could you, (a) provide a little bit of colour behind the contracts for proxy shipping and where you’re shipping them to?

David H. Dingus

Yes. The two of them that totalled about $23 million, John, they were made up of a large contract into Canada and a large contract into Saudi Arabia.

John Franzreb – Sidoti & Company, LLC

And to what end markets are these?

David H. Dingus

High voltage buzz cut systems. Transmission.

John Franzreb – Sidoti & Company, LLC

And you referenced that there’s two other potential ones, but the timing of that is kind of uncertain at this point. Did I hear you correctly there, David?

David H. Dingus

I said there’s additional ones, John, but I don’t know the timing well enough to say whether they’ll favourably impact this year or we’ll see them again in the first part of next year.

John Franzreb – Sidoti & Company, LLC

With the tightening of credit standards, does that impact your business in any way? Do you have any sense of what the potential impact on your demand profile with tightening credit?

David H. Dingus

Direct demand on AZZ would be limited to how it would impact projects that are three to four years out. John, what we’re hopeful for is that this current crunch is beyond. In other words, the projects we’re working on right now and hoping are already funded. It would be some of those that are on the drawing board that may have issues related to this credit crunch. It’s too early to tell. But we believe that would be a two-year out impact.

John Franzreb – Sidoti & Company, LLC

Buying into galvanizing was up 12% year over year. (a) Was that all organic; (b) if it wasn’t, what’s the driver of the organic portion of that and is there any kind of geographic concentration in the organic volume growth? Can you just kind of walk us through those numbers?

David H. Dingus

Yeah, the organic growth is being driven the most by electrical generation, transmission, and petro-chem. All infrastructure related. It’s reflected the same things as driving some of our electrical is that the build out of power generation plants over here in our area, the transmission grid work that is going on, but the heaviest would have been the strong spending in the petro-chem market.

John Franzreb – Sidoti & Company, LLC

Okay. So that would mean most of the work is Gulf Coast work?

David H. Dingus

Yes, it does.

Operator

Your next question comes from Ned Borland – Next Generation Equity Research.

Ned Borland – Next Generation Equity Research

There was in the release discussion of a timing issue on some quarters that slipped into the third quarter. Can you break that out for us?

David H. Dingus

Yeah, Ned, essentially with the improvement we’ve had in the electrical industrial business, actually that’s lifted the whole utilization levels of our industry. Some of our key suppliers have had some issues adjusting to that, which has then come downstream to us and has delayed some of our orders from the second into the third. That combined with some of the issues of late releases of orders from customers as a result of engineering backlog had caused about $5 million of volume to shift from the second quarter to the third quarter.

Ned Borland – Next Generation Equity Research

Okay. So it’s fair to assume that you’ll get a $5 million improvement in sales next year, or I mean, I’m sorry, next quarter?

David H. Dingus

If they have improved their deliveries as promised, Ned. We believe that is the case. Yes, we do believe that. There’s always a chance that we can hit another bubble, but we believe the worst of it is over with.

Ned Borland – Next Generation Equity Research

Okay. Fair enough. And then on the capacity front, $190 million backlog, I mean, are you guys kind of getting tight on the capacity front now? Are you thinking about maybe expanding your capacity at some point?

David H. Dingus

Well, we believe that the opportunities are well within our reaction time of expansion if required, but overall we would be at about that 74% to 75% level. Some of the opportunities say we may have to consider some expansion 18 months out, but I do still believe it’s within our reaction time, Ned.

Ned Borland – Next Generation Equity Research

Okay. And then finally on the hurricane front. You remarked about galvanizing that you’re probably not going to see the level of business that you saw in the wake of Katrina, but I was wondering on the electrical and industrial products side, I mean, is there some, you know, I guess, quick turn business or some kind of refurbishment action that would happen for you there?

David H. Dingus

There’s always that potential. To date we haven’t seen any significant requests for that, Ned. But they can have, great areas are still without power, so we can still hear from them. What we’ve seen now has not been that significant.

Ned Borland – Next Generation Equity Research

Okay. Fair enough. Thank you.

Operator

Your next question is from Fred Buonocore – CJS Securities.

Fred Buonocore – CJS Securities

Yes, good morning. Great quarter. Just along the hurricane lines just to make sure I’m clear. It sounds like you had some minimal damage to your galvanizing facilities there on the Texas Gulf Coast, but fortunately your employees are safe. I just wanted to be clear, you had disruption to some business due to electrical power outages. Are you still experiencing disruptions even as of today?

David H. Dingus

We had three facilities that were impacted by power outages. One was the Houston galvanizing, one was Beaumont galvanizing, the other was our lighting company in Houston. The two galvanizing operations have restored full power and are back to full operation, about 70% to 80% of operation level. Our lighting company still does not have power back to it. Hopefully we’ll have it on Monday. We did have three facilities. We are operating with backup generation at the lighting company and able to ship some product, but not able to produce additional product. But on the galvanizing side the Houston galvanizing was the first to come back up. Beaumont came back up this week. And hopefully the lighting will come back up next week. So as we say, the fiscal damage to our facilities was very limited, but we lost more production and more disruption as a result of power outages.

Fred Buonocore – CJS Securities

Got it. And in that case are you able to typically shift production to a different facility? I realize that geographic proximity is key to that business, but was this a case where you would be able to do some of the work at a different facility and then ship it from there? Or is that not really possible?

David H. Dingus

Well, you actually can, but the issue was all of our customers were without power also. But as they come back, yes, if we have an overload position we still have that option. But unfortunately our customers are without power also.

Fred Buonocore – CJS Securities

Understood. So to your best estimation with these disruptions, I’m assuming that’s factored into your guidance at this point.

David H. Dingus

Yes, it is. It’s fully factored in.

Fred Buonocore – CJS Securities

Great. And then just in terms of the component pricing as that impacts your electrical products business, what have you been seeing lately on component pricing?

David H. Dingus

I assume we’re talking about copper and steel and so forth. We’re seeing a little bit of easing on the copper and of course we’re seeing easing on the cost of zinc and everything else. The unknown is still out there is what is going to be the longer term impact of steel. Some of the forecasts that you read are quite frightening. We had a very modest month of change, but compared to a year ago it’s quite staggering. The forecast that we see in some of the quotes we see are of concern. I would say our largest concern and our largest level of unpredictability is the cost of steel.

Fred Buonocore – CJS Securities

Understood. And then finally just from my, a macro standpoint. Are there any of your end markets on either side of your business where you’re starting to see softness in orders or accelerating weakness in orders and that’s just kind of being overrun or compensated for by the strong demand in petro-chem and generation, transmission, and distribution?

David H. Dingus

On a macro basis that is correct. Of course, with 20 facilities on the galvanizing side there are pockets where you do see the easing of the GDP adversely impacting us. Our slowing of the rate of growth that we’ve been having. But we haven’t had a real adverse impact yet. But our customers in certain segments, in certain occasions, are expressing some concern to us. But overall we’re very fortunate how much is being driven by the infrastructure.

Fred Buonocore – CJS Securities

Very good. Thank you very much.

Operator

(Operator Instructions). Your next question comes from Brent Thielman – D. A. Davidson & Company.

Brent Thielman – D. A. Davidson & Company

Good morning and congratulations. Just curious on the galvanizing side. Between AAA and the rest of your business are you seeing any difference in pressures on pricing for those two businesses? Or for the two separate sort of businesses?

David H. Dingus

Are you talking about our traditional galvanizing versus AAA?

Brent Thielman – D. A. Davidson & Company

That’s right.

David H. Dingus

No, we’ve been [forsted]. We’re, yes, I mean, you’re seeing pressures, but we’re resisting at the same level. So we’re trying to assimilate them into our philosophy of doing business. They’re doing a great job at that. They’re really coming on board. But there’s one facility that we have that did have a larger customer who was in the automotive industry, so that area is a little bit. But in general I would say that it’s not greater than it is here.

Brent Thielman – D. A. Davidson & Company

Okay. And then I guess just, certainly a great quarter in terms of margins and the electrical and industrial products business. Is there anything else abnormal that sort of contributed to any project or announcer or anything of that nature in the quarter?

David H. Dingus

No. We talked in the first quarter about our electrical and industrial markets were a little bit below our guidance. In the second quarter they were a little bit above our guidance. But we’re comfortable with that 17% that we’re now projecting for the full year for there. And we’re comfortable with the 26.5% that we’re projecting for galvanizing for the full year. We did not have any surprises.

Brent Thielman – D. A. Davidson & Company

Thanks a lot, guys. Congratulations again.

Operator

Your next question comes from J. D. Padgett – The Boston Company.

James D. Padgett – The Boston Company

Hi. Nice results. One question just on the hurricane topic. Is it fair to think if you didn’t have the hurricane obviously revenues would be higher as those plants weren’t impacted and the guidance would have probably gone up more?

David H. Dingus

No. I think the opportunity we get will probably offset the missed days of production.

James D. Padgett – The Boston Company

The opportunity what? In just some of the rebuild effort?

David H. Dingus

Yes. In other words, our involvement in the rebuild of the damage that was done, we believe that it will pretty much offset the lost days of production.

James D. Padgett – The Boston Company

Okay. Then I guess as we look at the November quarter maybe some of that revenue has to then just slip out because of those facilities being down.

David H. Dingus

No. Okay. We lost production days because of the hurricane. We have some incremental business because of the hurricane. We believe those are equal.

James D. Padgett – The Boston Company

Okay.

David H. Dingus

So if we hadn’t of had the hurricane I believe we would be almost identical to the result of having the hurricane.

James D. Padgett – The Boston Company

So even in a November quarter where the month of September was probably largely lost because of power and evacuation and all that stuff, you make it up in October and November, I guess.

David H. Dingus

Right. We only lost five days of production at one plant and five days at another. So I mean, out of 20 plants and the total operating it’s not that big of a number.

James D. Padgett – The Boston Company

Okay. It’s only five days?

David H. Dingus

Five days, two different locations, yes.

James D. Padgett – The Boston Company

Oh. Okay. It doesn’t sound like they’re even yet operating at full production, though, and we’re what? Fifteen or 10 days after?

David H. Dingus

Right. Again, it’s at about 80% level. We still believe we’ve got it factored into our guidance.

James D. Padgett – The Boston Company

Okay. Another question on SG&A. It looks like it stepped up pretty good sequentially. Anything behind that?

David H. Dingus

It’s just a reflection of the higher earnings. So higher profit sharing to all of our employees.

James D. Padgett – The Boston Company

And the insurance gain. I know in the script you talked about that being $1.3 million. Then if I look at the P&L it looks like it was $1.148 million.

David H. Dingus

All right. If you notice in the press release that the word insurance is done indented at the same level. It should read the insurance claim net of all other. So there was an offset in that. So that $1.148 million that you’re looking at there is if we didn’t have that alignment there it would read net of other of about $200,000 going the other direction.

James D. Padgett – The Boston Company

Okay.

David H. Dingus

Sorry about that.

James D. Padgett – The Boston Company

Oh, that’s okay. That explains that. And then the E&I operation margin you kind of answered this a little bit, that you thought maybe an average of the first two quarters here is kind of what we’d see through the rest of the year.

David H. Dingus

Yes.

James D. Padgett – The Boston Company

And that’s, I think, somewhat higher than kind of what your long-term targets have been prior.

David H. Dingus

That is correct.

James D. Padgett – The Boston Company

Okay. What accounts for that?

David H. Dingus

I think just a little more price realization.

James D. Padgett – The Boston Company

Okay.

David H. Dingus

I think our constant emphasis on that, I think we’re just realizing about a 1% more price realization than probably the last time that we did a presentation.

James D. Padgett – The Boston Company

Okay. And the strong quarter this last quarter wasn’t necessarily due to a bunch of turnaround or anything. It was just good pricing and good execution.

David H. Dingus

There was some quick turn jobs in there, but not an abnormal level. We had the amount that we would normally see in the quarter. So I think it was execution and great product mix across it, and I think there was probably a percent more price realization in the quarter than we’d previously seen.

James D. Padgett – The Boston Company

Okay. And tax rate going forward? What should we be thinking there? It was, what, 37.7% in this quarter.

David H. Dingus

About 37% to 37.5% will be correct.

James D. Padgett – The Boston Company

For the year?

David H. Dingus

Yes.

James D. Padgett – The Boston Company

Is that for the year overall or for the next couple quarters?

David H. Dingus

Year overall. The total year.

James D. Padgett – The Boston Company

Okay.

David H. Dingus

The blended rate for the year should be right at 37%.

James D. Padgett – The Boston Company

Okay. That’s all I got. Thank you.

Operator

Your next question is from Noah Steinberg – Intrepid Capital.

Noah Steinberg – Intrepid Capital

Hey, guys. Nice quarter. Just a quick question. I may have missed this earlier. David, I was just wondering if you could give us some commentary about the month of September in terms of order activity. It seems like a lot of people are worried about a big slowdown in industrial businesses right now.

David H. Dingus

Yeah, we do not comment on months within a quarter, Noah. We only comment on the total quarter activity. So I don’t, I really don’t want to get into a discussion about this September.

Noah Steinberg – Intrepid Capital

Okay. And of these two bigger contracts, how much of those contracts are going to be recognized this year versus next year?

David H. Dingus

Most of it’s next year. There is some of Saudi Arabia that will be this year, but most of the Canadian one will be next year. I apologize for not having that number, but I would say probably two-thirds next year and one-third this year.

Noah Steinberg – Intrepid Capital

Okay. So it gives you some nice visibility into next year as well.

David H. Dingus

Yes.

Noah Steinberg – Intrepid Capital

Okay. Great. Thanks again.

Operator

There are no further questions at this time.

David H. Dingus

Again, we appreciate your participation today and look forward to speaking with you again at the end of the next quarter. We appreciate your support and consistency during this difficult time. Thank you and have a great day.

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