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CIRCOR International (NYSE:CIR)
Q1 2021 Earnings Call
May 12, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to the CIRCOR International first-quarter 2021 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I will now turn the conference call over to Alex Maki, vice president, financial planning and analysis, investor relations. Thank you, sir.

You may begin.

Alex Maki -- Vice President, Financial Planning and Analysis, Investor Relations

Good morning, and welcome to CIRCOR's first-quarter 2021 earnings call. I'm joined today by Scott Buckhout, CIRCOR's president and CEO; and Abhi Khandelwal, the company's chief financial officer. Before we start, I'd like to remind you that today's presentation and press release are available on CIRCOR's website at investors.circor.com. Today's discussion contains forward-looking statements and only represent the company's views as of today.

These expectations are subject to known and unknown risks, uncertainties and other factors and actual results could differ materially from those anticipated or implied by today's remarks. While CIRCOR may choose to update these forward-looking statements at a later date, the company specifically disclaims any duty to do so. You can find a full discussion of these factors in CIRCOR's Form 10-K, 10-Qs and other SEC filings also located on our website. On today's call, management will refer to GAAP and non-GAAP financial measures.

The reconciliation of CIRCOR's non-GAAP measures to the comparable GAAP measures are available in our earnings press release and slides. With that, I'll turn the call over to Scott.

Scott Buckhout -- President and Chief Executive Officer

Thank you, Alex, and good morning, everyone. CIRCOR delivered solid first-quarter results as our portfolio of mission-critical products continues to perform. While our end markets are not fully back to pre-pandemic levels, strong orders performance in the quarter gives us the confidence to raise our 2021 earnings guidance. Starting with some financial highlights on Slide 2.

We booked orders of $227 million in the quarter, which were up 34% sequentially and 7% versus prior year on an organic basis. We saw strong sequential increases in demand in both businesses, with industrial up 25% and A&D up 55%. We ended the quarter with $421 million of backlog, up 11% versus prior quarter. Revenue in the quarter was $181 million, down 8% organically, driven by lower industrial backlog entering 2021, the timing of large defense order shipments and slowly recovering demand in commercial aerospace.

Adjusted operating income was $12 million, representing a margin of 6.9%, up 110 basis points from prior year. We expect strong margin expansion as we progress through 2021, driven by higher volume in virtually all regions and end markets, our continued actions on pricing, ongoing simplification across the company, and productivity. The company delivered $0.24 of adjusted earnings per share and generated free cash flow of negative $21 million, both in line with our expectations. Our cash performance in the quarter is consistent with typical seasonality due to the concentration of annual disbursements in the first quarter.

Now let me turn the call over to Abhi to discuss our first-quarter results in more detail.

Abhi Khandelwal -- Chief Financial Officer

Thank you, Scott, and good morning, everyone. Starting with industrial on Slide 3. Industrial organic orders were up 11% versus last year and 25% sequentially. We're seeing recovery in virtually all of our end markets.

Regionally, we saw particular strength in EMEA, China and rest of Asia. Notably, we booked two large international downstream orders in the quarter, which we will deliver over the next 12 months. We delivered a strong book-to-bill ratio of 1.3 in the quarter. Industrial revenue was $121 million, down 6% versus last year and 9% from prior quarter.

The year-over-year decline was a result of starting the year with a lower backlog and some COVID-related customer issues. The sequential decline was largely driven by normal seasonality. Adjusted operating margin was 8.1%, an improvement of 380 basis points versus last year. The margin improvement was driven by the non-repeat of the COVID-related write-off from Q1 2020, partially offset by lower sales volume.

Adjusting for the impact of this receivable write off, organic decrementals in the quarter were 32%. We expect industrial margins to expand through the year as volume increases and our price and productivity initiatives cut in. Turning to Slide 4. Our aerospace and defense segment booked orders of $73 million in the quarter, flat versus last year and up 55% sequentially.

Versus prior year, favorable defense orders offset the ongoing COVID-19 impact on our commercial business. The sequential improvement was driven by the timing of large defense program orders for the Joint Strike Fighter, as well as the CVN-80 and 81 aircraft carriers. Revenue in the quarter was $60 million, down 10% year over year and 23% from prior quarter. Versus prior year, sales were down due to lower commercial revenue.

Sequential sales were lower due to seasonality and the timing of defense shipments for the Joint Strike Fighter, Dreadnought submarines and F-16 spares. Orders and revenue in our defense business will continue to be lumpy, but we have a strong backlog, and we are well-positioned on growing platforms. We're excited about the growth trajectory of the business. Finally, operating margin was 18% in the quarter, down 130 basis points year over year.

The margin decline was driven by lower sales volume and unfavorable mix. Organic decremental margins in the quarter were 29%. We remain confident in our ability to expand operating margins throughout the year with higher volume, ongoing price actions and productivity. Turning to Slide 5.

Our free cash flow was negative $21 million in the quarter. As Scott mentioned, this was in line with the typical seasonality of our cash flow and timing of annual disbursements. While capex was relatively flat, our cash flow from operations improved versus prior year as a result of our exit from upstream oil and gas. We ended the quarter with $461 million of net debt, up slightly, driven by our cash flow in the quarter.

In 2021, we will continue to use free cash flow generated from operations to further pay down debt. We expect to improve net debt to adjusted EBITDA leverage by greater than one turn by end of the year. Please turn to Slide 6. Now I'd like to share our expectations for second quarter and update our outlook for the full year.

In the second quarter, we expect revenue to be down 2% to 4% organically. Scott will cover this in more detail in the upcoming slides, but let me provide the key highlights. While we are seeing industrial demand recover across virtually all of our end markets, we expect deliveries to be heavily weighted to Q3 and Q4. Similarly, in aerospace and defense, we expect a large portion of our recent orders in backlog to ship in the second half of the year.

Commercial aerospace will continue to recover slowly, as aircraft production rates and fleet utilization improves throughout the year. We're expecting adjusted earnings per share of $0.30 to $0.35 in the second quarter, which implies approximately 75% of our full-year earnings that are expected in the second half. This earnings profile was directionally in line with last year and was driven by the natural seasonality in our businesses. Markets recovering from COVID-19 through the year and project shipment timing in aerospace and defense and industrial.

Finally, 2Q free cash flow is expected to be breakeven to slightly negative, driven by the timing of milestone payments on large projects. Based on our first-quarter performance and expectations for second quarter, we have high confidence in delivering our 2021 commitments. We now expect organic revenue growth at the high end of our original guidance and higher adjusted EPS of $2.10 to $2.30. The increase is mostly driven by industrial, which is now expected to grow low to mid-single digits and increase confidence in our aerospace and defense outlook.

Free cash flow generation remains a top priority. And we still expect to convert 85% to 95% of adjusted net income into free cash flow for the year. Now I'll hand it back to Scott.

Scott Buckhout -- President and Chief Executive Officer

Thanks, Abhi. Let's start with our industrial outlook on Slide 7. As Abhi mentioned, we saw recovery in the first quarter across virtually all industrial end markets with orders back to pre-COVID levels. Geographically, we saw sequential improvement in North America and EMEA, while orders growth in China, India and rest of Asia remains strong.

We saw strong sequential and year-over-year orders growth in our short-cycle end markets. In addition, we saw strength in our long-cycle businesses, with activity increasing overall and several large project orders across the portfolio. So far in Q2, we continue to see momentum in our end markets with quoting activities at high levels and strong orders so far in the quarter. For Q2 industrial revenue, we expect a moderate improvement year over year, with growth ranging between 1% and 4%.

We continue to see improvement across our short-cycle end markets as consumer demand increases. In addition, the aftermarket remains strong with a mid-single-digit increase expected in the second quarter. Our longer cycle end markets, including downstream, commercial marine and midstream oil and gas, are showing positive momentum, and we're encouraged by our deal pipeline and quoting activity. Finally, pricing is expected to be a benefit of roughly 1%, consistent with prior quarters.

Moving to aerospace and defense. Orders in Q1 were up sequentially and flat versus prior year, driven by timing of large defense program orders, which are inherently lumpy. For the aftermarket, we expect improvements in defense spares and MRO activity through the year. In our commercial aerospace business, we saw a modest improvement sequentially and expect a slow recovery to continue.

Revenue in the second quarter is expected to be flat to down 5% versus prior year. Defense revenue is expected to be up 0% to 5% with strong volume on our top OEM programs. Revenue from our other OEM programs and defense spares is expected to be relatively flat in the quarter. Based on customer orders and timing of requirements, we expect stronger shipments in all major defense categories in the second half of the year.

Commercial revenue is expected to be down between 10% and 15%. Our market position with Boeing and Airbus remains strong, and we expect revenue to improve through the year, in line with aircraft production rates and fleet utilization. Finally, pricing is expected to be a benefit of 3% in the quarter with additional price increases coming in the second half. We expect full-year pricing to be in line with last year.

Before we get into Q&A, I'd like to close by providing an update on the strategic priorities that I've shared for 2021, investing in people, accelerating growth, expanding margins and allocating capital effectively. These strategic priorities guide what our team works on every day, and I wanted to take a moment to highlight some actions we've taken in the first quarter. We remain focused on investing in growth. In the first quarter, we launched eight new products, including a new canopy seal regulator for the U.S.

Air Force T-X trainer jet and a high-speed impact kinetic switch module for a next-generation missile system for the U.S. Navy. On the industrial side, we launched the CIRCORSmart app, our first mobile application and the start of a significant digital solution offering for our customers. The mobile app allows a customer to scan a QR code affixed to the product, pull up performance data, user guides and contact information for technical support and aftermarket orders.

Over time, we'll add more capabilities to the app. We expect more than 50% of industrial's product shipments to have a QR code attached by the end of the second quarter. This enhances the customer experience and provides an opportunity for incremental high-margin aftermarket growth. We're expecting to launch 45 new products in 2021, with revenue generated from new products launched in the last three years accounting for approximately 10% of our total 2021 revenue.

We're also expanding our aftermarket presence in aerospace and defense. We're in the process of opening a Waterfront Service Center in Virginia. This will improve customer support and increase our operational efficiency. Finally, the CIRCOR operating system is driving operational improvements across the company.

For example, I recently visited one of our aerospace and defense sites, which produces components for the Joint Strike Fighter. By implementing the CIRCOR operating system, the team has improved on-time delivery to 95%, improved product quality and cost and significantly lowered working capital as a percentage of sales. Over the last three years, the business has grown 55% and expanded operating margins by 670 basis points. This is just one example of the power of the CIRCOR operating system and our efforts to enhance operations.

Continued execution on our strategic priorities will deliver long-term value to our customers, employees, suppliers and shareholders. With that, Abhi and I will be happy to take your questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey, good morning, guys.

Scott Buckhout -- President and Chief Executive Officer

Good morning, Jeff.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Just on industrial. One, just help us kind of what surprised you negatively in the quarter versus kind of your 1Q framework? I think you just mentioned COVID issues. And then, just talk about what specifically you're doing on the pricing side in industrial, given kind of all the inflationary pressures we're hearing? Thanks.

Scott Buckhout -- President and Chief Executive Officer

OK, I'll start. So thanks, Jeff. I think on the industrial side, the quarter came in more or less where we expected. The top line was at the lower end of what we guided for the quarter.

We had a couple of points of impact, driven by some COVID issues with customers. We have certain orders that we complete, and our customers are required to come pick it up from our factory. And we had a couple of situations where the orders weren't picked up until after the quarter that we didn't expect. And so, that hits for a couple of points.

But the quarter came in for industrial largely as we had expected outside of that. Regarding the second part of your question on pricing, we are doing a lot of the things that we've talked about in the past on pricing in aerospace and defense. We're now doing on the industrial side. So we segment our orders based on aftermarket versus OEM and aftermarket orders based on level of urgency, and position with the customer, things like that, to determine if and when and how much we might be able to increase the price based on the value we're creating for the customer.

So we are being more surgical about pricing on the industrial side of the business than we have in the past, and we're seeing improved results as a result of that. So regarding inflation and pricing, right now, I think the easiest way to answer that is the pricing initiatives are independent of inflation. And we guided the price that we're expecting for the year. So you know what we are expecting here on price at this point.

So on the inflation side, we're reading what everybody else is reading about inflation and what's happening in the world with commodities. So far, we're not seeing an impact at CIRCOR on inflation. We typically generate net productivity, meaning we generate more savings than the inflation we absorb. And so far, that's what we're doing this year.

But we are being very careful as we look forward on inflation. We are monitoring it closely. The revised guidance that we gave for the full year contemplates a situation where -- contemplates the risk that inflation gets a lot worse as the year progresses. But right now, we are not seeing that.

We've been effectively managing the supply chain such that we're still delivering net productivity on the material side.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

OK, great. And then, 2Q, I kind of get aerospace, but the industrial side had, I mean, had really a lot of -- it was kind of the peak of COVID in 2Q 20. So I'm just -- it looks like the organic is kind of flat to down. And it seems like you're getting some momentum in the short cycle.

So just help me understand the timing dynamics in the cadence of recovery in industrial because it seems a little bit, at least out of the gate, a little more subdued.

Scott Buckhout -- President and Chief Executive Officer

Right. So we -- yeah, you're right, the shorter-cycle is certainly leading on the recovery. The shorter-cycle parts of our business are certainly leading. But we're seeing a lot of activity on the longer cycle.

And if you actually look underneath the service on the strong orders, we had quite a few large project orders in the first quarter. And we had a number of blanket orders that extend beyond the short-cycle book and shipped. And so, when you look at the profile of revenue and when the strong orders cut in, you're gonna see the jump in revenue really start to cut in Q3 and in Q4. So still modest revenue through the second quarter.

Then you'll see the strong orders that we saw in the first quarter cutting in, in Q3 and Q4. And I think it's worth noting that through the quarter in Q1, February was better than January, March was better than February. And even into Q2, April was very strong. And so, we're seeing our orders growth accelerate.

And the timing of revenue is largely driven by the mix of orders we've received year to date. And so, that's why you see the back-end loading on the revenue. But we are, obviously, highly confident about the revenue. It's in the backlog.

You saw that we raised our expectations on EPS, and we put the top-line growth for industrial, and we raised that up a little bit as well based on what's gonna happen in the second half.

Abhi Khandelwal -- Chief Financial Officer

And the only thing I'll add to that to what Scott said, even if you compare our earnings profile to last year based on what Scott just said, last year, we did the same thing. It was about 28% earnings in the first half, with the balance in the back half. And if you look at the profile this year, it's in the same order of magnitude. So we feel pretty confident about the earnings profile and the way the year is laid out.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

OK. And then, just last one. I think, Scott, in the past, you've given some color on kind of how you think the orders shape sequentially. And obviously, you've got almost half the quarter and like how should we think about industrial orders and air orders sequentially as you look at it today?

Scott Buckhout -- President and Chief Executive Officer

OK, sure. So looking at Q2 for orders in -- well, let's talk about industrial first. We are anticipating that industrial orders will continue to grow sequentially as we go into Q2. One of the things to note on the order side in Q2 is that we do get lumpy orders, particularly in downstream.

So it's not always exactly easy for us to give you exact guidance from one quarter to the next because of big $10 million, $15 million order in downstream can skew that. But we're seeing markets are improving globally, really in every region sequentially into Q1, and that's still happening as we cut into April. So sequentially, orders are gonna continue to grow. On the aerospace and defense side, it's lumpy.

And so, you should -- you saw a nice sequential growth in orders in Q1. That's really largely driven by lumpiness. We had some large orders that came in, one for the Joint Strike Fighter. We had a couple of CVN orders come in as well.

So the orders in Q1, the strength in Q1 is -- really needs to be looked at in the context of a full year as opposed to just one quarter to the next. So as you look at the next quarter, on orders in aerospace and defense, I would expect it to dip from Q1 into Q2. That could change. There are some big orders that might fall into Q2.

But right now, we're expecting lower orders in Q2 for aerospace and defense.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

OK, thanks, guys.

Operator

Thank you. Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.

Nathan Jones -- Stifel Financial Corp -- Analyst

Good morning, everyone.

Scott Buckhout -- President and Chief Executive Officer

Good morning, Nathan.

Nathan Jones -- Stifel Financial Corp -- Analyst

I want to follow up on Jeff's question on industrial orders. Can you quantify the impact of the downstream in blanket orders in the first quarter? And then, just talk about the pipeline for downstream motors. I know they can be lumpy, but I know you've been pretty bullish on the outlook for that. So just any color you can give us on those things.

Scott Buckhout -- President and Chief Executive Officer

Sure. So I think we haven't segmented the orders in such a way that I can give you exact numbers on how much are large projects that have a certain flow in terms of revenue and blanket orders, but it was significant. I'd say the mix of orders that came in, in the first quarter was more biased toward the longer lead time types of orders than we would normally get, which is encouraging given the longer cycle nature of those orders. So -- but I don't have an exact breakdown for you, Nathan, on that.

What was the second -- could you repeat the second part of your question?

Nathan Jones -- Stifel Financial Corp -- Analyst

Yeah.. Just the -- I guess, the front load, the order pipeline on the downstream business, I know you guys have been pretty confident on getting some larger orders. Did we get all of those in the first quarter? Are there more of those in the pipeline that you think you can generate throughout the next couple of quarters?

Scott Buckhout -- President and Chief Executive Officer

So we did not get all of them and far from getting all of them in the first quarter. We did have strong orders in downstream in the first quarter. They're all international orders. We had strengthened in India, as well as in Russia.

So we're seeing good, strong project orders. We're expecting -- right now, basing on the timing of the pipeline, we are expecting a dip in orders in downstream in Q2, and we expect the back half to be much stronger. So I think the activity level has ramped up quite a bit. And we're still -- I'd say we're increasingly bullish on what's happening in the downstream business right now.

But probably, you'll see the bulk of those orders start to cut in, in Q3 and Q4, probably a dip in Q2.

Nathan Jones -- Stifel Financial Corp -- Analyst

OK. And then, I wanted to ask one or two about free cash flow. The free cash flow was $5 million, $6 million better in the first quarter, primarily the lack of distributed valves being in there. You did have a $10 million headwind year over year to free cash flow on this prepaid and other assets line.

Can you talk about, if that's just timing, we should get some of that back through the rest of the year? And then, what are the specific pieces of cash flow that you expect to step up in the second half of the year, given we are gonna be negative in the first half to get to that 85%, 95% conversion?

Abhi Khandelwal -- Chief Financial Officer

Perfect. Thanks, Nathan. So first of all, the free cash flow in Q1 was in line with what we expected. You're right, it got better year over year, driven by the exit of the upstream oil and gas business.

When you think about the prepaid and other asset line, it's driven by the project business and the timing of payments and how they come through throughout the year. So as you think about the back half of the year and the free cash flow conversion that we've laid out, first of all, if you think about the back half, the earnings significantly ramped up. Our trade working capital has improved sequentially, and we have a plan in place by site to drive that sequential improvement throughout the year. If you take that, coupled with the milestone payments tied to big large projects that you mentioned tied to the prepaid, that's how we get to the 85% to 95% conversion.

Nathan Jones -- Stifel Financial Corp -- Analyst

Great. Thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Andy Kaplowitz with Citigroup. Please proceed with your question.

Andy Kaplowitz -- Citi -- Analyst

Good morning, guys.

Scott Buckhout -- President and Chief Executive Officer

Good morning, Andy.

Andy Kaplowitz -- Citi -- Analyst

Scott, I just want to follow up on the sort of larger long-cycle project orders that you're getting in industrials. You did mention that you raised your guide for industrial, which is interesting. I mean, you started out kind of slow, as you talked about. So maybe just talk about the confidence level to convert these orders.

Is it more about converting these large downstream orders that you had? Is it more sort of broad-based recovery that gives you this confidence to raise your revenue forecast there?

Scott Buckhout -- President and Chief Executive Officer

So it's the latter, Andy, It's broad-based. We're seeing a global recovery in industrial. And every region that we sell into in the first quarter saw sequential increases in orders, and that's continuing into April. And even if you look by short cycle versus long cycle, same thing.

Both businesses showed increased order activity going into Q1, and that's continuing. And so, even aftermarket -- if you break out aftermarket, aftermarket continues to grow sequentially. So it's very broad-based. And so, we're pretty bullish that we've got a robust recovery happening here in industrial, And that gives us a lot of confidence for the full year.

Andy Kaplowitz -- Citi -- Analyst

Scott, that's helpful. And to be clear, you're not seeing -- there are, obviously, some COVID hotspots out there, still you're not seeing any sort of interruption in places like India and such?

Scott Buckhout -- President and Chief Executive Officer

So India for us, right now, we are still operating both our factories in India at the levels of demand. So obviously, there's an impact in the market in India right now, and we're gonna -- we expect to see lower orders going forward as a result of that. But so far, we are able to keep our employees safe. We have a lot of discipline around social distancing and PPE and all the things that we've talked about in the past to keep everybody safe.

And so, far our factories, our employees are safe, and we're still operating at levels of demand. So we've been able to keep that going. So right now, I would say that the impact from COVID in India is largely just gonna be on the top-line orders in India itself.

Andy Kaplowitz -- Citi -- Analyst

Helpful. And then, we already talked about price versus cost. Any other commentary around sort of temporary costs coming back, puts and takes in margin as you go through the rest of the year? Any other commentary that would be helpful for us on that front?

Abhi Khandelwal -- Chief Financial Officer

Yeah. Yeah, I can jump in. This is Abhi. So let me start by recapping last year.

So we talked about $45 million of cost out last year. $20 million of that was structural, $20 million was temporary and $5 million was cost avoidance, right? So the structural cost, that's already a part of the run rate. And in Q1, we saw about $2 million of cost carryover from the structural piece. On the temporary side, the $20 million, I'd say half of that is back in 2021.

And that half is tied to employee-related benefits that we cut in 2020. And the impact of that is about $2.5 million a quarter for the rest of the year. Now that said, as you think about the CIRCOR operating system and the continuous improvement that we drive through productivity through sourcing savings that will continue to come into the business on a quarterly basis and a yearly basis. But from a structural standpoint, half of the structural cost has come back and the other half will come back as the volume starts to ramp up throughout the year.

Scott Buckhout -- President and Chief Executive Officer

I think I would add to that -- Andy, I would add to that on the puts and takes as we go through the year. The margin expansion, as you well know, there's a big volume component to this. So as the revenue starts to cut in, in the back half, you'll see a good contribution margin as the revenue cuts in. We're also raising price.

If you look at the profile of price that we've communicated through the first half versus the second half, you'll see that we're expecting more price in the second half than in the first half. And as Abhi said, we're driving productivity every day. So we are -- as of now, we're still generating material productivity. And so, inflation hasn't hit us in a material way yet.

And we're always generating productivity in the factories as well.

Abhi Khandelwal -- Chief Financial Officer

Yes. So last thing I'd add to that, actually, now that Scott mentioned that is the leverage component of it. As the volume starts to ramp back up, you will start to see industrial margins get better because it's just the leverage component of the top line.

Andy Kaplowitz -- Citi -- Analyst

Scott, those price increases that you talked about in the second half, have you already pushed those through? Is that something you're expecting to do? Just any color there.

Scott Buckhout -- President and Chief Executive Officer

So yes, we've pushed some through and more cutting in now as we speak. But there's also a mix component to price. So we're expecting higher volume in aftermarket in aerospace and defense in the back half of the year versus what we've seen in the first half of the year. So aftermarket volume is where we get a lot of the price in aerospace and defense.

There's also a mix component for the smaller programs in aerospace and defense, where we have where we don't have long-term contracts. And so, based on the mix of revenue through the year, you'll see a heavier weight in the back half on price in aerospace and defense. And on the industrial side, it's largely driven by volume.

Andy Kaplowitz -- Citi -- Analyst

Helpful, guys. Thanks.

Scott Buckhout -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of John Franzreb with Sidoti and Company. Please proceed with your question.

John Franzreb -- Sidoti & Company -- Analyst

Good morning, guys. I'd like to start with the commercial aerospace. Can you talk a little bit about how much inventory you think is still out there in the channel that needs to be bled through? And maybe a little bit about your current capacity utilization and staffing, how does that look? And how it'll look for the balance of the year?

Scott Buckhout -- President and Chief Executive Officer

Sure. OK. So I can start on that. So in commercial -- in our commercial business, we're still down on orders.

So as we mentioned, orders were down around 15% in the first quarter. But we are seeing sequential improvement in orders. And then, of course, that turns into revenue. So we are still expecting a similar profile to what we've communicated in the past, which is a slow recovery sequentially each quarter.

And that's largely what we saw in the first quarter, and that's what we're forecasting for the second quarter. It's difficult for us to know exactly how much inventory is in the channel, so to speak. But on the OEM side, it's usually not a lot. The 737 would be an example of an exception where they're still shipping planes that were built a while ago.

But for the rest, on the OEM side, we don't see a huge impact from inventory. So we are seeing steady improvement as production rates start to improve. Regarding your second part of your question, capacity utilization at CIRCOR, we've got two primary factories that support our commercial business. Neither one of them is operating at 2019 levels of capacity.

So our European factory is running right now at three days a week, and that's consistent with the whole supply chain, customers, as well as suppliers. Our U.S. factory that supports commercial is also below capacity, but also has defense work. So we've been able to manage through furloughs and reallocation of resources into the growing defense side of the business.

That factory is still running five days a week, but at lower capacity levels than it was in 2019.

John Franzreb -- Sidoti & Company -- Analyst

Got it. And just back to the industrial side of the business. Other than downstream, can you just talk a little bit or give us some examples of other large projects that are coming back that you are seeing, say, three months ago? And are all those projects expected to be completed in 2021?

Scott Buckhout -- President and Chief Executive Officer

So the industrial business, we get projects in downstream, as you mentioned. But if I set that aside, we get projects in other parts of industrial as well. So it's not uncommon for us to get midstream oil and gas projects in the $4 million to $5 million to $7 million range. Commercial marine, we can get projects as well depending on the type of business and then, of course, downstream.

We do have a little bit of Navy business that is sitting inside of industrial. We'll occasionally get projects linked to Navy business as well. So there's quite a mix. With regard to Q1 orders, we did get projects in midstream oil and gas.

We saw some recovery in commercial marine. And as we mentioned, we saw a lot of projects fall into place in the first quarter in downstream. So it's really across the board that we're seeing project orders. And then, I mentioned earlier, we get blanket orders on occasion with some of our OEM customers in industrial.

So we have some manufacturing customers that we supply pumps to, they'll give us an order, and the order will be good for shipments for the next 12 months. And so, we got a few of those in the first quarter as well. And that would be in -- that's largely in machinery manufacturing. So a shorter-cycle type of business but blanket orders.

John Franzreb -- Sidoti & Company -- Analyst

Got it. Got it. And the Navy orders, is that deliverable this year? Or is that gonna next year also?

Scott Buckhout -- President and Chief Executive Officer

That will be deliverable this year. But it won't start -- those deliveries will start in the back half.

John Franzreb -- Sidoti & Company -- Analyst

Got it. OK, thanks, Scott, for taking my questions.

Operator

Thank you. Our final question comes from the line of Brett Kearney with Gabelli Funds. Please proceed with your question.

Brett Kearney -- Gabelli Funds -- Analyst

Hi, guys, good morning. Thanks for taking my question.

Scott Buckhout -- President and Chief Executive Officer

Good morning, Brett.

Abhi Khandelwal -- Chief Financial Officer

Good morning, Brett. How are you doing?

Brett Kearney -- Gabelli Funds -- Analyst

Just had one question. I guess, maybe for Abhi. Can you help me -- just thinking through the fixed floating breakdown of debt structure right now, I believe you all have a swap that runs through Q1 of next year, covers the majority of the term loan amount. Just want to make sure I have that right and then how you're thinking about that looking forward, whether there's plans to roll that forward or your view on that portion of the capital structure?

Abhi Khandelwal -- Chief Financial Officer

Yeah. So Brett, you're right. That covers about $400 million of debt. Interestingly enough, we are in the process of evaluating that as we speak and plan to make a decision in the back half of the year.

So we're still work in progress, but you're absolutely right, it covers about $400 million of debt.

Brett Kearney -- Gabelli Funds -- Analyst

OK, great. Thank you very much.

Operator

[Operator signoff]

Scott Buckhout -- President and Chief Executive Officer

Thank you.

Duration: -4 minutes

Call participants:

Alex Maki -- Vice President, Financial Planning and Analysis, Investor Relations

Scott Buckhout -- President and Chief Executive Officer

Abhi Khandelwal -- Chief Financial Officer

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Nathan Jones -- Stifel Financial Corp -- Analyst

Andy Kaplowitz -- Citi -- Analyst

John Franzreb -- Sidoti & Company -- Analyst

Brett Kearney -- Gabelli Funds -- Analyst

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