CIRCOR International (CIR) Q3 2020 Earnings Call Transcript

CIRCOR International (CIR)
Q3 2020 Earnings Call
Nov 05, 2020, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2020 CIRCOR International earnings conference call.[Operator instructions] I will now like to hand the conference over to your speaker today, Mr. David Calusdian. Thank you.

Please, go ahead.

David Calusdian -- Investor Relations

Thank you. And good morning, everyone. On the call, today, are Scott Buckhout, CIRCOR's president and CEO, and Abhishek Khandelwal, the company's chief financial officer. The slides we'll be referring to today are available on CIRCOR's website at www.circor.com on the Webcast and Presentation 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, 10-Qs, and other SEC filings.

The company's filings are available on its website at circor.com. Actual results could differ materially from those anticipated, or implied by today's remarks. Any forward-looking statements only represent the company's views as of today, November 5, 2020. 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 referred to adjusted operating income, adjusted operating margins, adjusted net income, adjusted EPS, free cash flow, net debt, and organic measures.

These non-GAAP metrics exclude certain special charges and recoveries. The reconciliation of CIRCOR's non-GAAP measures to the comparable GAAP measures is available in the financial tables of the earnings press release on CIRCOR's website. I'll now turn the call over to Scott. Please turn to Slide 3.

Scott Buckhout -- President and Chief Executive Officer

Thank you, David. And good morning, everyone. CIRCOR delivered a strong third-quarter despite unprecedented macro challenges. The work we've done to transform our portfolio during the last three years has paid off.

We now have a stronger more resilient portfolio of essential products. Our diversification across geographies, and markets, and products is mitigating the ongoing weakness of the pandemic. In addition, we've been able to raise prices through the downturn because our product portfolio has strong market positions and differentiated technology. We're executing well through the downturn.

Our continued focus on productivity and cost resulted in a companywide decremental of 19% in the quarter. The $45 million cost plan for 2020 that we communicated in May remains on track. Our pricing initiatives remain on the plan in both Aerospace & Defense and industrial. The CIRCOR operating system is delivering improved operating performance across most metrics, and we expanded the margin of our aerospace & Defense business by 360-basis-points in the quarter despite the lower volume.

Finally, we continue to take actions that best positioned CIRCOR to take advantage of a market recovery. With 13 new product launches in Q3, we remain on track to deliver on our commitment to launching 45 new products this year. We continue to invest in front-end resources and strategic growth initiatives. We're closely collaborating with suppliers and customers to ensure alignment as markets change.

And finally, we continue to focus on deleveraging the balance sheet. Now, I'd like to provide some highlights from the third quarter. Please turn to Page 4. We booked orders of $167 million, down 19% organically due to the impact of COVID-19 on our Industrial and Commercial Aerospace businesses.

Defense orders relatively low in the quarter due to the timing of large defense programs. The growth outlook for defense remains strong. Sales came in as expected at $187 million flat to the prior quarter and down 15% organically. We continue to believe Q3 is the bottom for sales and orders.

We expect sequential improvement across both businesses in Q4, which we'll talk about in more detail later in the call. Adjusted operating income was slightly more than $17 million, representing a margin of 9.3%, up 80-basis-points from the prior quarter, and down 130-basis-points from last year driven by lower sales volume in industrial. The Companywide decremental was 19% in the quarter, which is significantly lower than our contribution margin driven by productivity, aggressive cost actions, and price. Now let me turn the call over to Abhi, to discuss our third-quarter results in more detail.

Before I review the outlook for our end market.

Abhishek Khandelwal -- Chief Financial Officer

Thank you, Scott. And good morning, everyone. Let's begin by reviewing our segment results. All figures up from continuing operations and exclude divestitures.

Starting with industrial on Slide 5. In Q3, Industrial segment orders were down 23% organically due to the impact of COVID-19 on most end markets. Downstream orders were especially impacted in the quarter, due timing of capital projects and maintenance turnaround delays. Excluding our Downstream business, orders an industrial were down 15% organically.

The benefit of the industrial portfolios regional diversity was evident in the quarter. We saw sequential improvement in Germany, India, and China with orders increasing in the low double-digit range, partially offsetting pressure in North America. While oil and capital projects remain depressed, we experienced a sequential improvement in the aftermarket side of the business on a global basis. As expected, the industrial segment had sales of $124 million flat to the prior quarter, and down 18% organically.

The EOM margin was 7.9% down 210-basis-points sequentially, and a decline of 460-basis-points versus last year. The margin decline versus the prior year was primarily driven by lower sales volume and the impact on productivity associated with the need to maintain social distancing. Among other safety protocols on the factory floor, which was partially offset by cost actions and price. In addition, one of our facilities in North America experienced a COVID-19 outbreak which forced us to idle the factory for most of August, and impacted our EOM by approximately $1.5 million in the quarter.

Adjusted for the $1.5 million of COVID impact, the industrial margin would have been 9.1%, and the decremental would be approximately 30%. Turning to Slide 6. In Q3, in our Aerospace & Defense segment, we delivered orders of $59 million, down 9% organically. Orders were impacted by the timing of large defense programs in the quarter and the continued impact of COVID-19 on Commercial Aerospace.

While the timing of large defense programs resulted in lower orders in the quarter, the business remains strong overall, and we remain confident in the segment's strong growth outlook going forward. Sales for the Aerospace & Defense were $62 million flat to the prior quarter, and down 9% organically. Strengthened defense platforms partially offset the impact of COVID-19 on Commercial Aerospace. The Aerospace & Defense operating margin was 23.7%, up 360-basis-points versus the prior year, and 260-basis-points sequentially.

With $6 million lower revenue, the Aerospace & Defense team delivered $1 million of incremental operating income, driven by price, productivity, and other aggressive cost actions. Turning to Slide 7. For Q3, the effective tax rate was approximately 13% lower than the 14.8% in the prior quarter, due to a change in the statutory tax rate where CIRCOR operates. For Q4, the tax rate is projected to be approximately 15%.

The Company took a non-cash charge of approximately $42 million to create a valuation allowance against its remaining U.S. deferred tax assets. This non-cash charge was acquired in the GAAP accounting rules, primarily due to recent U.S. tax law changes, and losses in the  U.S. from our divested businesses.

This charge does not impact our non-GAAP tax results for the quarter and is not expected to have an impact on our future non-GAAP tax results. Looking at special items and restructuring charges, we recorded a total pre-tax charge of $13 million in the quarter. The acquisition-related amortization and depreciation were a charge of $12 million with the remaining million dollars being associated with restructuring activities in the quarter. Interest expense for the quarter was $8 million, down $4 million, compared to last year.

This was a result of lower debt balances and a favorable interest rate of 25-basis-points. Other income was a million-dollar charge in the quarter, primarily due to foreign exchange losses, partially offset by pension income. Corporate costs in the quarter were $7.2 million, in line with previous guidance provided. Turning to Slide 8.

Our free cash flow from operations was flat in the third quarter. Right in line with what we guided in our Q1, and Q2 earnings call. At the end of the third quarter, our net debt was at $468 million. This represents a year-over-year debt reduction of $120 million dollars.

In Q3, we paid $52 million, and the revolver further reducing our debt balance and interest expense. We expect to generate strong free cash flow in the fourth quarter and intend to use that cash to continue to pay down debt. Now I will hand it back over to Scott, to provide some color on our end markets, and outlook.

Scott Buckhout -- President and Chief Executive Officer

Thank you, Abhi. Now, I'll provide an overview of what we're seeing in our end markets. Please turn to Page 9. Let's start with the industrial.

As Abhishek mentioned, the impact of COVID-19 continued through the third-quarter across most major industrial end markets. For Q3, orders were down 7% on a sequential basis with both for market and aftermarket orders coming in slightly lower than Q2. Large projects remain weak, due to ongoing delays in capital spending. Regionally, we saw weakness in North America and most of Europe, offset by strength in Germany, China, and India across most major sectors.

As we mentioned in last quarter's earnings call, we believe that Q3 marks the bottom and we expect industrial segment orders and revenue to improve sequentially in Q4. Both market and aftermarket orders are expected to increase double digits sequentially. From an end market perspective, we expect slight sequential improvement in many of our larger end markets. Power generation is showing early signs of improvement globally.

Downstream Oil & Gas orders are improving as high priority capital projects, and certain maintenance activity moves forward. Our shorter cycles of chemical processing in markets that are more closely linked to consumer demand are showing slow improvement. For industrial revenue in Q4, we expect a moderate improvement sequentially with growth ranging from flat to up 10%. While year-over-year revenue is expected to be down between 5% and 15%.

Most OEM and aftermarket end markets are expected to improve in Q4, compared to Q3. Downstream Oil & Gas revenue is expected to be up sequentially, due to the timing of project shipments and higher aftermarket activity in the quarter. Regionally, we're seeing pockets of economic improvement in China, India, and Germany, which we expect to continue. Commercial Marine and midstream Oil & Gas are expected to remain at low levels, due to depressed activity and shipbuilding, low ship utilization, and ongoing project delays in midstream Oil & Gas.

Please turn to Slides 10 and 11. Overall, we expect Aerospace & Defense orders in Q4 to be in line with Q3 sequentially, and down versus the prior year driven by the timing and defense program orders, and ongoing COVID related headwinds in the Commercial business. For Aerospace & Defense revenue in Q4, we expect a significant sequential improvement from Q3. Defense revenue should see sequential growth of 20% to 25%, and year-over-year growth of 15% to 20%.

Growth in the quarter is driven by strong shipments across our Submarine portfolio, our missile portfolio, and for the Joint Strike Fighter. Commercial revenue is expected to grow sequentially between 15% and 25%, but we'll be down year over year between 40% and 45%. The sequential improvement is driven by slightly improving shipments across a variety of business jet, regional jet, and other civil platforms, partially offset by lower shipments to Boeing and Airbus. The outlook for price remains strong with a net 4% increase for Defense and Commercial Aerospace, driven by improved price management.

To summarize, as the pandemic continues to significantly impact the global economy, CIRCOR remains committed to delivering long-term shareholder value. Our portfolio transformation is largely complete. We've completely exited upstream Oil & Gas, and the new CIRCOR is diversified across geographies, end markets, and product technologies. Our portfolio of products has differentiated technology and strong market positions in the niches where they compete.

As a result, we're able to raise prices across the portfolio despite the current market conditions. We remain focused on execution. The $45 million cost plan for 2020 is on track. Our focus on productivity and cost resulted in a companywide decremental of 19% in the quarter, and the CIRCOR operating system is delivering improved operating performance across most metrics.

Finally, we continue to take actions that best positioned CIRCOR to take advantage of a market recovery. We remain on track to deliver on our commitment to launching a record of 45 new products this year. We continue to invest in front-end resources and strategic growth initiatives. We're closely collaborating with suppliers and customers to ensure alignment as markets change, and we continue to focus on deleveraging the balance sheet.

In closing, I'd like to thank the entire CIRCOR team for their resilience and dedication during these unprecedented times. They've been doing an excellent job working every day to ensure that we continue our momentum and meet our customers' needs. Now, Abhi and I will be happy to take your questions.

Questions & Answers:

Operator

Thank you.[Operator instructions]. Our first question comes from Andy Kaplowitz with Citigroup. Your line is now open.

Andy Kaplowitz -- Citi -- Analyst

Good morning, guys.

Scott Buckhout -- President and Chief Executive Officer

Good morning, Andy.

Andy Kaplowitz -- Citi -- Analyst

Scott, you speak with customers regarding the overall industrial landscape. What are they thinking or telling you about the potential environment in 2021? I would say they've been putting off aftermarket at least to some extent and delaying bigger cutbacks. You mentioned that you expect refiners to move some projects forward in Q4. Have you seen customers -- Is there any evidence that they're starting to move those projects forward.

And is there any sense that a larger project can move forward at some point in '21?

Scott Buckhout -- President and Chief Executive Officer

Thanks, Andy. So, I'd say as an overarching statement there's optimism about 2021. You mentioned some in my prepared remarks around refiners, and that may be a little more bullish about 2021 than what we're hearing in other markets. But starting in Q4 here, we're expecting that capital project orders that have been delayed through the year are going to start to drop into Q4.

And we're already seeing that happening here in October. The aftermarket in downstream Oil & Gas is, they can only delay for so long. So for our products in general they can delay up to about 12 months, and then it starts to become pretty risky to go beyond that. So, we're already seeing here in Q4 projects that were delayed earlier in the year are starting to cut in.

So our aftermarket is showing some significant sequential improvement from Q3 to Q4. And we would expect that to continue into early next year. Other markets are -- I'd say just, generally speaking, the other end markets that we're in are largely showing modest improvement into Q4 and with the exception of Commercial Marine which is still bouncing around the bottom, and we're still seeing very low levels of activity in midstream Oil & Gas. Those two I'd try to call out as areas that are not showing much improvement.

When we talk to customers about 2021, there's general optimism about 2021. Most people are expecting a vaccine. Most people are expecting the economy is going to recover. Everybody is looking at the PMIs that are now all moving up.

So I'd say, there's general optimism about ongoing sequential improvement as we go into Q1 and Q2 of next year. So, I think most of our customer base is feeling good about next year.

Andy Kaplowitz -- Citi -- Analyst

Thanks. That's helpful Scott. You beat your own decremental margin forecast for Q3 coming in at 19% as you said. So, how are you thinking about Q4.

Do you see A&D margin continuing to rise here, and then as we go into '21 decremental in a low 20% range that's still what you would guide us to and then assuming we do get to turn in your businesses? What kind of incremental margin do you think you could deliver.

Abhishek Khandelwal -- Chief Financial Officer

All right. So there are a couple of different pieces here. So as you think about our Q2 decremental you know at 19% you should expect Q4 in the mid-20s if you will. Right.

So as you look at where we are and the work we have done wrong cost out, you should feel pretty comfortable as we go into Q4 decremental being in the mid-20s. As you look for -- as you talk about the A&D business, and look at where we were in Q3, our margin going into Q4 should be close to what the margins were in Q3 in the A&D side of the word.

Andy Kaplowitz -- Citi -- Analyst

And Abhi, any thoughts on incremental when you do start to recover.

Abhishek Khandelwal -- Chief Financial Officer

Absolutely. So as you think about our standard margin, it's in the 30% to 35% range across. So of course, as we start to see the world turn. The best assumption I would make Andy is, it is incrementals in the 30% to 25% range.

Andy Kaplowitz -- Citi -- Analyst

Got it. And then one more question from me on free cash. Abhi, you talked about you still expecting stronger free cash flow in Q4. That's good to hear.

As you go on to '21 do you expect a relatively clean year in terms of limiting restructuring cost, improving working capital? Any initial thoughts about or extra thoughts about Q4. Initial thoughts about 21.

Abhishek Khandelwal -- Chief Financial Officer

Absolutely, Andy. So, look. First of all, you should expect a clean cash flow in Q4 and into 2021. We expect a strong free cash flow operationally in Q4.

As you think about 2021, the best way to think about free cash flow is to assumed between 90% to 95% of adjusted net income is what will convert for the year from a free cash flow standpoint.

Andy Kaplowitz -- Citi -- Analyst

Very helpful. Thanks, guys.

Scott Buckhout -- President and Chief Executive Officer

Thank you, Andy.

Operator

Thank you. Our next question comes from Nathan Jones with Stifel. Your line is now open.

Nathan Jones -- Stifel Financial Corp. -- Analyst

Good morning, everyone.

Scott Buckhout -- President and Chief Executive Officer

Good morning Nathan. How are you?

Nathan Jones -- Stifel Financial Corp. -- Analyst

I'm good, thanks. Just dig in a little bit more on the industrial side of it. I know you guys had said you weren't saying a lot of recovery in the aftermarket side of the business in 3Q. You're expecting that to start coming through maybe later in 3Q or into 4Q.

So if you could just comment on the progression on the aftermarket side which would obviously, assume would pick up first. How that progressed through the quarter, and how it's progressed that far into the fourth quarter.

Scott Buckhout -- President and Chief Executive Officer

Sure. So we are -- we agree in general. We expect to see aftermarket recovered sooner than for the market with some notable exceptions. But, yes.

So we did see aftermarket slightly improving in Q3 coming into Q4. We're expecting that trend to continue. So, aftermarket, we still expect will lead the OEM recovery. But we're also anticipating we're gonna see the OEM business improve as we go into Q4 as well.

So maybe a little bit more improvement in aftermarket versus OEM. But both are expected to improve in Q4 for both orders and revenue.

Nathan Jones -- Stifel Financial Corp. -- Analyst

And then maybe just specifically on the downstream business. Obviously, a critical flow can be very lumpy when it comes to orders, and pretty lumpy when it comes to revenue as well. I think you talked about a pretty low level of orders in the third quarter expectation for that to improve in the fourth quarter. Can you give us a little bit more color on what you're seeing out there in the market, maybe from a little more long term trends in that business when those fourth-quarter orders start to hit revenue? We will see that early in the New Year or just take a few more months before that turns into revenue.

Scott Buckhout -- President and Chief Executive Officer

Sure. So that's exactly, right. In the Downstream business, it can be very lumpy. Our orders can be 50% of the prior year or 100% up from the prior year in any given quarter.

So you have to be careful about extrapolating too much from one quarter in that business. So orders were significantly down versus the prior year. And our downstream business in Q3, but we're expecting a pretty strong snapback in Q4, and we're going to see order intake in Q4 on both capital projects and aftermarket jumped significantly from Q3. And as I mentioned in the prepared remarks, the aftermarket can only delay for so long.

I mean these are critical processes and they start taking a lot of risks if they delay any longer than about 12 months. So we're seeing the aftermarket projects start to pick up. We're actually seeing some unplanned maintenance activity as a result of too much delaying earlier in the year. And so obviously, we get to price for that.

So we're getting some aftermarket business there as well. When we look at the Project business, we've been actively working on a big project pipeline all year. And as you know these projects have not turned into orders yet. We're -- we think that in Q4, we're gonna see a number of these projects start to turn into orders, and we'll start executing them in Q4.

Your question on the timing of orders to revenue. In general, we start recognizing revenue about three to six months after we receive an order on these capital projects. And we can ship anywhere between six and 12 months. But the revenue recognition would start sooner, simply because of the way the accounting works.

And then the aftermarket, of course, the revenue recognition happens as we're executing the work.

Nathan Jones -- Stifel Financial Corp. -- Analyst

Got it. One more on defense. Obviously, some good solid growth there. I think you guys have pretty good visibility to that.

Is there any color you can give us somewhat? You're thinking about the defense market for 2021.

Scott Buckhout -- President and Chief Executive Officer

Sure. So, we -- this is also lumpy as you know. So we really have to look at about a 12-month rolling order intake for defense. We are -- we're very -- You're right, we have a lot of visibility.

We're very confident and strong double-digit growth from the defense side going into next year. We're on platforms that are bipartisan platforms going into next year where we know that production rates and investment and spend from the government is going to happen to go into next year. So we've got Submarine platforms that are launching or increasing production rates. We've got Missile platforms.

We've got the Joint Strike Fighter. So, we're very confident in strong growth on the defense side going into next year.

Nathan Jones -- Stifel Financial Corp. -- Analyst

Great. Thanks very much. I'll pass it on.

Scott Buckhout -- President and Chief Executive Officer

Thank you, Nathan.

Operator

Thank you. Our next question comes from John Franzreb with Sidoti and Company. Your line is now open.

John Franzreb -- Sidoti and Company -- Analyst

Good morning, gentlemen. Scott, I want to start with your ability to implement price increases. Can you talk about which businesses are having the most success in that, and which ones are finding the most challenging?

Scott Buckhout -- President and Chief Executive Officer

Sure. We'll start with -- we're getting the most price on the Aerospace & Defense side. As you know, we are getting about the same net price increase on both the Commercial, as well as the Defense side of the business which is around 4% of total revenue. The bias on the price increases is aftermarket orders and spot orders for many of the smaller platforms that are no longer on a long-term agreement.

So if you look at a distribution of the types of revenue that we have there's quite a bit on long-term agreements. We have some Defense business that's subject to [Inaudible]. Those are not areas where we're getting short term price increases. As contracts roll over, we typically can get a price increase where there's a long-term agreement we do that, but we're obviously, leveraging the aftermarket and the spot orders in on both the Commercial and the Defense side in Aerospace & Defense.

And we're doing a very nice job of pricing based on value. When a customer needs an order urgently, we charge for that. And so, we have a pretty detailed decision tree on how we do this, and we're getting better at it every quarter. On the Industrial side, we're getting about 1% of revenue on price.

This again is much more biased toward the aftermarket part of an industrial. It's the same kind of thinking if you will around where we can price based on value. So when we're getting orders for screws, for screw pumps, and they're urgent, we will price based on the level of urgency required. And so that's largely where the price is coming from right now as aftermarket on the industrial side.

Again where we can raise prices on the OEM side, we will. But the majority of our price increases are in the aftermarket.

John Franzreb -- Sidoti and Company -- Analyst

Ok. And I guess just to stick on the Defense side a little bit. I think in the commentary you said that the order outlook for the fourth quarter is supposed to be largely flat. But you've also commented that the revenue profile seems to be looking better in Q4 and looking for improvements versus your prior expectations in your top programs, the Joint Strike Fighter, the Virginia dread now.

Could you just talk a little bit about the improved revenue profile which program specifically is coming from? And why does that change occur for the previous quarter?

Scott Buckhout -- President and Chief Executive Officer

Sure. So, we -- if you look at our backlog, I'm not sure if we disclose our backlog by defense or commercial. But we were right at a record backlog on our Defense business right now going into Q4 and into next year. So if you -- and what we're doing here and when we guide the quarter here is we're looking very much at the backlog and shipments expected in the quarte.

And those things can move around a little bit based on when our customers ask for delivery. So the improved outlook is based on the expectations our customers have for shipments in Q4 versus what we thought they were going to ask for. Last time we talked about this in Q3. So, yes.

The top programs were expecting better shipments in Q4,as well as many of the other OEM platforms that we're on defense.

John Franzreb -- Sidoti and Company -- Analyst

Ok. But there's no bias like Virginia the subs if you will versus the JSF.

Scott Buckhout -- President and Chief Executive Officer

No. They're all higher than we thought coming their way than we thought three months. All of them are running higher.

John Franzreb -- Sidoti and Company -- Analyst

Fine. Thank God. And then on the new product launches you touched on earlier, 32 in (ph) and 13 industrial. Could you talk about how much incremental revenue contributing to Q3 and maybe what your expectations of incremental revenue contribute in 2021?

Scott Buckhout -- President and Chief Executive Officer

So, the -- we measured, John we measured vitality for CIRCOR, and because of the amount of time it takes for revenue to ramp up, a product launched in Q2 this year is not going to generate a tremendous amount of revenue in this year. And so the way we measure vitality is we look at revenue in the current year from products launched within the last three years. And that's a number that's been growing consistently for the last four or five years at CIRCOR, and that's one that we measure. So, looking at it year over year from New products, the way we look at it is products launched within the last three years.

So, the direct answer to your question is anything launched this year, the red incremental revenue is going to be relatively small. It's not really moving the needle yet. It takes a year or two for the revenue to ramp up.

John Franzreb -- Sidoti and Company -- Analyst

Ok. That's helpful. Thanks, Scott. I'll get back in the queue.

Scott Buckhout -- President and Chief Executive Officer

Ok. Thank you.

Operator

Thank you. Our next question comes from Jeff Hammond with KeyBanc Capital Markets. Your line is now open

Unknown speaker

Hey guys. This is Brad on for Jeff.

Scott Buckhout -- President and Chief Executive Officer

Hey, Brad.

Abhishek Khandelwal -- Chief Financial Officer

Good morning, Brad.

Unknown speaker

Hey, Good morning. Just one on Aero. And I missed that. but I think it was a little bit weaker than you're expecting in the third quarter-end.

And I'm seeing a pretty big downshift in the Aftermarket business at least in the fourth quarter. Was that the driver may be a little bit of weakness in 3Q versus your expectation coming out of 2Q. And then when you forecast that Aftermarket business within Defence going forward. Is it something that might be more of a near-term dynamic and could snap back pretty quickly or is it one of those local longer situations there?

Scott Buckhout -- President and Chief Executive Officer

Jeff, I think you broke up in the very beginning you said, you asked about orders in Q3. Was it revenue in Q3 for Aerospace & Defense?

Unknown speaker

Revenue. And just the impact that the aftermarket business may have may surprise you in the third quarter.

Scott Buckhout -- President and Chief Executive Officer

Yes. Yes. OK So, I'd say for Aerospace & Defense revenue in the third quarter was not too far. It was in line more or less maybe a little light from what we expected in the third quarter.

To answer your question about the aftermarket. Aftermarket came in more or less as expected as well. In the third quarter, you'll notice the growth rate of aftermarket on defense going into the fourth quarter is lower than what we saw in the third quarter. And that's simply timing.

It's the timing of project orders and shipments for the aftermarket on defense programs. So we would expect that to snapback as you said quickly, so we'll see that Q1, Q2 next year. You'll see that snapback to 2 tipping to being more of a normalized rate if you will. I think it was stronger than normal in Q3 with above 20% growth, and it's a little weaker than normal now in Q4 with no real single-digit growth.

The right number is somewhere between the two.

Unknown speaker

Ok. That makes sense. And then maybe on the cost side. You guys seem pretty confident about the $45 million savings target.

Could you just remind us what temporary versus structural split out of that savings is? And maybe not shift to 2021. How should we think about the carryover of some of these permanent savings versus the potential and maybe add back some stuff on the temporary site?

Abhishek Khandelwal -- Chief Financial Officer

Absolutely, Brett. This is Abhi and I'll answer that for you. First and foremost, we are line as we talked about earlier in the previous earnings calls, we're in line to deliver the $45 million of cost and then be laid out. Right.

Out of the $45 million, five of that is cost avoidance. So if you take a look at what's leftover, you're left with what $40 million. Out of the $40 million, $20 million in structural costs, and that's obviously incurred that's already happened. And that will carry forward into 2021.

But that cost that we took out of the business. The remaining $20 million was a temporary cost. And quite frankly, a very small portion of that is coming back to come back into business, which is stage of the fallen game match for example. But the majority of that cost is going to depend upon when the world turns, and then the volume comes back.

So a great example would be a big chunk of that temporary cost out was for us. So we obviously, are not going to bring people back if you will, unless the volume comes back. So that's how I would think about to the $20 million structural cost. Obviously, out there will stand or be a part of our run rate next year, and the remaining $20 million of temporary a small portion is committed to.

But the majority of the cost that we took out is going to depend upon when the world turns in the volume comes back.

Unknown speaker

Ok. That makes sense. And what did you realize in the third quarter relative to that target, or maybe what is the savings target for the fourth quarter specifically.

Abhishek Khandelwal -- Chief Financial Officer

Yes. So, in the third quarter, we realized $13 million, and I assume the same number for Q4.

Unknown speaker

And then maybe just focusing on the fourth quarter from a higher level. It sounds like things are going pretty well far in October. And have you seen any retrenchment given the escalation in COVID, or have you bake that into your guidance at all for any step back and a lot of two months of the year?

Scott Buckhout -- President and Chief Executive Officer

So, we have a range for industrials growth of zero to 10$in the fourth quarter. I think one thing I don't know if I've mentioned this publicly before, but as we enter a quarter in industrial roughly 70% of the revenue is in the backlog. So we're really dependent on orders for 30% of the revenue in the quarter. 30% of the revenue we get the order in the quarter and ship it in the quarter.

So that would be the part that might have some uncertainty. October so far is in line with the way we're guiding. Obviously, so October, no indication of changes related to COVID in Europe or the U.S. is going to change anything about what we're saying here.

So we did use a range for that reason. There's obviously, uncertainty as we exit the year here, and we're seeing what's happening in all the major companies in major countries in Europe right now. But we are not seeing an impact on the order intake and on our expectation and with shipments for Q4 at this point. So still some unknowns and some uncertainty, but so far what we're seeing and what we're hearing from customers is in line with the way we're guiding Q4 on the top line.

Unknown speaker

Ok. Very helpful. Thanks for the time.

Operator

[Operator Signoff]

Duration: 40 minutes

Call participants:

David Calusdian -- Investor Relations

Scott Buckhout -- President and Chief Executive Officer

Abhishek Khandelwal -- Chief Financial Officer

Andy Kaplowitz -- Citi -- Analyst

Nathan Jones -- Stifel Financial Corp. -- Analyst

John Franzreb -- Sidoti and Company -- Analyst

Unknown speaker

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