CIRCOR International, Inc. (CIR) CEO Scott Buckhout on Q1 2020 Results - Earnings Call Transcript

CIRCOR International, Inc. (NYSE:CIR) Q1 2020 Earnings Conference Call May 29, 2020 9:00 AM ET

Company Participants

Scott Solomon - Senior Vice President, Sharon Merrill Associates

Scott Buckhout - President & Chief Executive Officer

Abhishek Khandelwal - Chief Financial Officer

Conference Call Participants

Jeffery Hammond - KeyBanc Capital Markets

Nathan Jones - Stifel Nicolaus

Brett Kearney - GAMCO Investors

Operator

Greetings. Welcome to CIRCOR International's First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]

I will now turn the conference over to your host, Scott Solomon, Senior Vice President for Sharon Merrill Associates. Thank you. You may begin.

Scott Solomon

Thank you, and good morning, everyone. On the call today is Scott Buckhout, CIRCOR's President and CEO; and Abhi 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 & 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 it's website at circor.com. Actual results could differ materially from those anticipated or implied by today's remarks. Any forward-looking statements represent the company's view only as of today, May 29, 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 will refer to adjusted operating income, adjusted operating margins, adjusted net income, adjusted EPS, free cash flow, 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 are 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

Thank you, Scott, and good morning, everyone. These are truly unprecedented times. And from everyone at CIRCOR, let me begin by offering our thoughts, prayers and well wishes to all those impacted by COVID-19. We also express our gratitude to those on the frontlines battling this virus, caring for others and saving lives.

At CIRCOR our top priority remains the health and safety of our employees, customers and suppliers. I want to thank the entire CIRCOR team for their service and unwavering dedication to our customers in this rapidly changing environment. They've been doing a remarkable job supporting one another and our customers while keeping themselves and those around them safe. Because of the end markets we serve, the vast majority of our facilities are deemed essential operations in the countries in which they operate.

All of our sites are fully operational except France and India, which are operating at less than normal capacity. Over the last several months, we've implemented significant measures to keep our factory employees around the world as safe as possible while supporting our customers with minimal disruption. We continue to monitor the situation and take the appropriate steps to maintain our financial flexibility and position CIRCOR to whether further volatility, if it comes. We remain focused on our long-term strategy, while we're positioning the company to exit the pandemic poised to outperform our peers.

Before we discuss our Q1 results, I want to welcome Abhi Khandelwal to CIRCOR as our new CFO. Abhi's nearly two decades of experience managing global finance operations, including for multinational industrial companies and manufacturers of highly engineered mission critical products, makes him a valuable addition to our team. Abhi has a proven track record of improving financial performance in complex global organizations, and we're already benefiting from his expertise.

Please turn to Slide 4. Let me recap our Q1 results at higher [ph] level. We received $208 million of orders in the quarter; orders were down about 10% organically compared to a year ago. Industrial segment orders were down 5% organically, primarily due to COVID-19's impact on most industrial end markets in March, coupled with continued manufacturing headwinds in Europe and United States. In our Aerospace and Defense segment, we had a solid quarter of orders at $72 million, down 18% due to a difficult compare, driven by the timing of large orders from the U.S. and UK Navy.

Defense orders were strong in the quarter and continue to show strong momentum. Just last week, we announced that the company was awarded six contracts totaling $18 million to provide valves for the Virginia Class submarine. However, commercial aerospace orders were down in the quarter, largely due to COVID-19. Overall, our book-to-bill this quarter was 111%.

We delivered $192 million of revenue and $0.20 of adjusted earnings per share. Adjusted operating margin in Q1 was 5.8%, down 400 basis points from last year, and 750 basis points from last quarter. The direct impact of COVID-19 was significant in the quarter, we saw $12 million of revenue pushed out of the quarter as suppliers and customers shutdown operations and delayed projects. In addition, we wrote-off a $6 million receivable due to customer financial issues exacerbated by COVID-19. These two unusual items reduced our earnings per share by approximately $0.45.

Due to the uncertain outlook caused by COVID-19, we've taken prudent steps to maintain our financial flexibility and position CIRCOR to capitalize on the inevitable recovery. Some of these steps include aggressive cost actions adding upto $45 million. Many of the structural actions taken represent an acceleration of our strategic plan. Focusing on cash including prioritization of CapEx spend that better reflects the current environment, and more aggressive working capital management, in particular, more focused accounts receivable collections and tighter controls around inventory management. And finally, we're preserving our growth resources and continuing to execute on our long-term growth initiatives. We expect to launch at least 45 new products this year, up from our previous commitment of 40 last summer, and 33 last year.

And finally, we continue to execute on the strategic plan communicated last summer. An important part of that plan was portfolio rationalization. We intend to exit our distributed valves business in Q2. After this is complete, we'll have completed our shift away from upstream oil and gas, divested other commodity businesses, and sharpened our focus on our core mission critical flow control platforms. This portfolio transformation has helped position CIRCOR to better manage through this time of volatility and uncertainty.

Now, let me turn the call over to Abhi to discuss our first quarter results in more detail before I review the outlook of our end markets.

Abhishek Khandelwal

Thank you, Scott. And good morning, everyone. It's great to be here with you all today on my first earnings call with CIRCOR. I'm excited to work with you all in the coming quarters. Let's begin by reviewing our segment results.

All figures are from continuing operations and exclude divestitures. Starting with industrial on Slide 5; the industrial segment had sales of $127 million, organically down 16% versus Q1 '19. The industrial growth was impacted by COVID-19 in March, which was the primary reason for the organic sales declined for Q1. Within industrial, we saw $12 million of March revenue pushed out of the quarter due to COVID-19. $9 million of the $12 million was in refinery valves, where key suppliers closed factories in mid-March missing important milestones, and onset aftermarket refinery service teams were asked to suspend project operations.

The margin decline was driven by lower sales volume, and a write-off of [ph] $6 million receivable in our European business driven by the impact of COVID-19. Adjusting for the receivable impact, the AOI margin for the quarter would be at 9%, resulting in a drop through on lower sales of 19% which is significantly lower than our contribution margin, reflecting the cost actions that we have taken to mitigate the pressure caused by this pandemic.

Turning to Slide 6; aerospace and defense had sales of $65 million, up 8% organically, driven by the strong shipments for the Virginia Class submarine, and Joint Strike Fighter programs. Our defense business continues to be strong, as was evident in the quarter where the growth in top line. Aerospace and defense operating margin was 19.1%, up 380 basis point versus the prior year. This was driven by top line growth, pricing and manufacturing productivity.

Turning to Slide 7; for Q1, the adjusted tax rate was 14.1% driven by foreign tax rate differential and higher R&D tax credits. Looking at special items and restructuring charges, we recorded total pre-tax charge of $84 million in the quarter. The largest component of the pre-tax charge is the non-cash goodwill impairment of $116 million due to the impact of COVID-19 on our industrial segments outlook. The acquisition related amortization was a charge of $11 million. Finally, we recorded again $55 million associated with the sale of our instrumentation and sampling business.

Interest expense for the quarter was $9 million, down $4 million compared to the prior driven by lower debt balances. Other income of $3 million was primarily due to higher foreign exchange gains and pension income.

Turning to Slide 8; our free cash flow from operations was negative $27 million in Q1, which is consistent with the seasonality of our cash flow and in line with our historical trends. At the end of Q1, our net debt was at $431 million, which was $138 million lower than Q4 '19, and a year-over-year decrease of $249 million, primarily driven by debt pay down with proceeds from the sale of various non-core assets.

Turning to Slide 9; our bank leverage at the end of Q1 was 4.8 times EBITDA versus our covenant of 6.5 times. As Scott mentioned, our intent is to exit the BV [ph] business at the end of Q2. Pro forma [ph] bank leverage without distributed valves at the end of Q1 would be 3.3 times which is significantly below our debt covenant. Cash-on-hand at the end of Q1 was at $171 million with no near-term debt repayments. Our revolver is not due until December 2022, and our term loan matures in December 2024. From a liquidity standpoint, we feel very confident in our ability to operate in these times of uncertainty.

Finally, to wrap up; we will not provide the financial guidance for Q2 or 2020 due to the uncertainty caused by COVID-19.

Now, I will hand it over to Scott to give some color on our end markets and outlook.

Scott Buckhout

Thank you, Abhi. Now, I'll provide an overview of what we're seeing in our end markets, as well as some of the actions we're taking to manage through the pandemic.

As discussed on our last earnings call, we've eliminated our energy group; so going forward, we will report our results in two segments, industrial and aerospace and defense. Our refinery valves business is now reported in our industrial group. Our restated financials reflecting this new structure were released in an 8-K on May 22.

Please turn to Page 10. Let me start by recapping our end market exposure. Approximately 52% of our revenue is general industrial; 16% is downstream oil and gas, which is reported in the industrial segment; and 32% is aerospace and defense, of which 70% is defense and 30% is commercial aerospace. At a high level, we expect our industrial group to be down approximately 20% to 30% in Q2, and most likely Q3. For aerospace and defense in aggregate, we expect to be down 5% to 10% driven by the commercial side of the business, which is expected to be down 20% to 30%. We expect defense to be up 5% to 10%.

Please turn to Slide 11. In the base industrial business in Q1, we saw stronger than expected orders performance in our full market business in North America and Europe. Early in Q1, we won several large projects in the U.S., Latin America and Germany. Despite a weak commercial marine market and lower orders in refinery valves, the industrial business delivered a strong book-to-bill ratio of 1.08. Since late Q1, we're seeing the impact of COVID-19 across virtually all end markets. We're seeing capital project delays and cancellations in machinery manufacturing, chemical processing, power generation and wastewater. We saw a decline in aftermarket quote activity linked to the reduction in industrial manufacturing, as well as lower capital equipment utilization.

Commercial Marine, as an example, is experiencing reduced activity in shipyards impacting the four-market [ph], and low levels of activity for cruise ships and offshore supply vessels, impacting the aftermarket. Refinery valve orders were down about 3% year-over-year in Q1. Refineries cut production at the end of Q1 at the onset of COVID-19 and we're seeing them slowly start to increase production from the lowest levels recent April. As a result, we expect aftermarket projects to resume slowly, and many capital projects to be delayed 3 to 12 months. Despite this trend, activity levels and proposals for capital projects continue to be high.

For industrial overall in Q2, we expect the global impact of the COVID-19 outbreak to drive a year-over-year decline in orders of between 20% and 30%. The primary driver across most OEM end markets is an overall reduction in CapEx and delayed capital projects. On the aftermarket side, lower orders are expected in the short-term driven by lower capacity utilization of customer assets and COVID-related disruption of operations. We expect a gradual improvement in aftermarket orders in Q3. Regionally, the general industrial market is expected to be down in the U.S., Europe and India; we expect to see a slow ramp up of activity in China.

Please turn to Slide 12. The backlog for the aerospace and defense segment continues to be strong, driven by ongoing strength in defense programs including the Joint Strike Fighter, the U.S. Navy Virginia Class submarine, the CVN-80 aircraft carrier, and the SM-3 Missile. This is driving backlog increases despite recent headwinds in commercial aerospace. Our aerospace and defense segment delivered another strong quarter of orders of $72 million driven by our defense business. The strength in defense in the quarter was primarily driven by a $16 million order for the Joint Strike Fighter program. Commercial aerospace orders were down from the previous quarter due to the impact of COVID-19 on production rates at Boeing and Airbus.

Overall, we expect Q2 orders to increase sequentially driven primarily by our U.S. Naval defense business, other defense programs and defense spares [ph]. Commercial aerospace is expected to be down, but will be offset by strength in defense orders in the quarter. As we look into Q3, we expect commercial orders to be down year-over-year. For defense, the timing of large program orders is not clear, but we expect to see single digit order growth in the back half of the year. It's important to note that we're increasing prices on both sides of the business, commercial aerospace and defense. With carryover pricing from 2019 and new increases this year, we expect a net of 3% price increase across the business in 2020. The majority of the increases on the defense side heavily weighted in the aftermarket.

Please turn to Slide 13. We've taken prudent steps to maintain our financial flexibility and position CIRCOR to withstand future volatility. Some of these steps include $45 million of cost actions initiated, of which $21 million are structural, prioritization of CapEx spend reflecting the current environment, and aggressive working capital management, in particular, accounts receivable collections and inventory management. Despite these actions, Q2 and Q3 cash flow will be depressed as we absorb restructuring expenses, and complete the disbursements associated with finalizing CIRCOR's strategic transformation out of upstream oil and gas.

Please turn to Slide 14. I wanted to make sure we point out that despite COVID-19 we're still very focused on driving the transformation we laid out last summer. While the pandemic has had a significant impact on our end markets, we've responded by accelerating and expanding many aspects of the plan, particularly with respect to reducing structural cost and leaning out the company. As noted in this previous slide, we're taking out $21 million of structural cost in 2020; this was significantly larger than our commitment last year.

It is also important to know that we're preserving the growth capacity of the company despite the larger reduction of structural cost. We've increased our commitment of new products launched in 2020 to 45, up from 40 in the original plan, and 33 last year.

And finally, price remains an important part of our playbook. Due to the mission critical nature of our products, we've been able to raise prices this year in line with the original plan commitment, despite the market disruption caused by COVID-19.

I'd like to close by once again thanking the entire CIRCOR team for their service and unwavering dedication to our customers. They've been doing a remarkable job.

To summarize, we're taking the appropriate steps to navigate the current environment while continuing to make progress on our strategic plan. As the market continues to change, we'll continue to adapt and respond accordingly. We remain committed to positioning the company for long-term growth, expanding margins, generating strong free cash flow and deleveraging the company.

Now, Abhi and I will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Andy Kaplowitz with Citi. Please proceed.

Unidentified Analyst

Good morning, guys. This is Piyush [ph] on behalf of Andy. Thanks for taking the questions.

Scott Buckhout

Yes, hello, Piyush. Good morning. How are you?

Unidentified Analyst

I'm good. Welcome, Abhi.

Abhishek Khandelwal

Good morning, Piyush. How are you? Thank you.

Unidentified Analyst

So, you guys provided some good color on the Q2, Q3 revenue outlook. Maybe elaborate on how we should think about margins or decrementals in the two segments over the next few quarters as your cost savings kick in?

Scott Buckhout

So, I think the way to think about the decrementals are; historically and normally, for CIRCOR you would see decrementals at/or certainly very close to our gross margin. I don't think that really changes here, the decrementals would be about the same, offset by the cost take out that we've announced. So, I think that's probably the right way to think about it. So when you think about the aggregate drop in revenue, I'd take that at 35%, then offset it with the cost takeout that we've announced.

Unidentified Analyst

Got you. And we are already two months into the quarter, maybe talk about the trends you have seen in April versus May across both your segments? And if you could provide some color on aftermarket and OE [ph] components in these two months as well? This would be helpful.

Scott Buckhout

Sure. So, let's start with -- we'll start with industrial. So, April and May are both aftermarket and OE are down at roughly similar levels, consistent with what we laid out in -- on Page 12 of the prepared remarks. I'm sorry, Page 11 of the prepared remarks. The -- in terms of magnitude, so far in Q2 we're on the better end of this range; so for industrial, we're coming in around 20% down in the first two months of the quarter. But as you know, there is still a lot of uncertainty coming into the last month of the quarter, which is our -- which is a five-week quarter. So, it's probably too early to say we'll be at the higher end of the range but that's certainly what it looks like so far through April and May.

With respect to aerospace and defense; orders are quite strong, largely driven by defense, you probably saw the press release and heard us talk about the $18 million order that we got a couple of weeks ago in defense. So that's going to pump up the orders pretty significantly in the second quarter on the aerospace and defense side. In terms of revenue, we were coming in, as expected. I mentioned, in aggregate, we're looking to be down in revenue between 5% and 10%. I think that's a pretty good number in terms of expectation for us, for aerospace and defense in Q2; so it's down between 5% and 10% versus prior year.

As far as aftermarket and OE, it's coming in consistent with what we have on Page 12; aftermarket's down significantly in commercial aerospace, but as you can see, that's a relatively small piece of our business; Boeing and Airbus are down in line with what we're showing here on the page in over 30%, as well as other platforms being down as well.

On the defense side, we're seeing good growth on the top programs that we list here; depending on lumpy shipments, you may see more or less growth in any given quarter, but we expect to see single digit growth on these platforms through the remainder of the year. And aftermarket is running quite strong right now on the defense side of the business; so in aggregate, I'd say we're in line for revenue in Q2 in the range that we stated on the call, between 5% and 10% down.

Unidentified Analyst

Got you. And lastly, maybe talk about the different geographies like how they have played out so far? Europe was particularly weak pre-COVID. And you guys mentioned about investments in China and India benefiting the industrial segment; maybe talk about what you're seeing there now and how these investments play out in the longer run? Thanks.

Scott Buckhout

Sure. So, I'd say that in the last two months we've seen the U.S. and Europe behaving very similarly. So both down significantly on both the OE side, as well as the aftermarket side. And we're talking in the 20% range on both sides of the business, so we don't expect a big mix shift at least in the short-term here. India is down more, as you probably know, India took a severe lockdown, and that was the only country where we were asked to shut our factories or factories were shut for about a month in India. They are ramping up again now, as well as the supply base, but they are still well below their normal operating capacity. So we're expecting India is going to be down significantly here in Q2. Now, it's not a huge part of our business, but it does contribute -- it normally contributes to the growth.

In Asia, down significantly in Q1. We are seeing a recovery in China, mainly; it's slow, but it is certainly better than what we saw in Q1 and we are seeing sequential growth in China. Again, not a huge part of CIRCOR but it is helping and it is contributing.

Unidentified Analyst

All right, I'll get back into the queue. Thank you, guys.

Scott Buckhout

Okay. Thank you.

Operator

Our next question is from Jeff Hammond, KeyBanc Capital Markets. Please proceed.

Jeffery Hammond

Hey, good morning, guys.

Scott Buckhout

Good morning, Jeff. How you're doing?

Jeffery Hammond

Good, doing well. If you could just talk about where the write-off hit in the segments? And now -- talk about this delayed revenue and where that would have impacted you? And when that comes back or within the framework?

Scott Buckhout

Sure. So the write-off was with one customer in our industrial segment in Europe. This is a customer that was having financial issues coming into Q1 and the COVID-19 situation put them into basically an insolvent position; so the write-off was the right way to handle that. With respect to delayed revenue, we had about $12 million that was directly related to COVID-19, $9 million of that was in our refinery valve business; that was in two areas. And one area was the capital projects, where -- where we have a supply base here in the U.S. that we use percentage of completion accounting in this business at force. And the supply base basically shutdown the last two weeks of March, we did not reach milestones that we'd expected to hit in our forecast; and so as a result that hit our revenue in the quarter.

In addition, we had about -- let's see, it was eight -- eight aftermarket service teams at refineries working on projects. Of the eight teams, six of them were asked to suspend the project and basically leave the refinery due to the COVID-19 situation; so all of that aftermarket service revenue stopped in the middle of March as well. So those two situations created $9 million of revenue that was split into Q2.

The other revenue slide was a project on the industrial side of the business that they did not ship in the quarter because our customer shutdown and moved into Q2. So all of that revenue we expect is happening in Q2, the real question is, what's happening to everything else. So, we still expect -- despite the $12 million happening in Q2, we expect other revenues pushing out of Q2 across all the other parts of the business. So we're still expecting to be 20% to 30% down on revenue and industrial in Q2, but that $12 million, specifically, we will ship in Q2.

Jeffery Hammond

Okay, great. And then, can you quantify the cash restructuring costs and the cost that distributed valves, and all in? And then, just -- kind of give us your sense for what you think full your free cash flow is going to be, given this framework?

Scott Buckhout

Sure. I can talk to some of that, I think. So, we'll start with distributed valves. Distributed valves is consuming about $8 million a quarter, so they will be negative $16 million for the first half and that's just the operations of the business. There will be an incremental cash disbursements that will depend on whether we sell the business or whether we end up having shut it down, the decision will really come down to cash. And right now we still have a couple of buyers in the process but we're at the end of the process; so we'll certainly know in the next -- in the coming weeks here, which direction we're going to go. But there will be cash disbursements in both cases, but there is quite a significant range I'd rather not -- for obvious reasons, I'd rather not talk about that on the call. So that's the distributed valves situation.

With regard to restructuring; we have about $21 million of structural costs that's coming out in 2020. That ramps up from Q1 to Q2 and kind of hit the run rate in the back half of 2020. In general, the cash cost of restructuring is usually slightly less than the annualized savings, depending on the mix between Europe and the U.S. of course; so it's not a bad assumption to take the annual savings, to take a little bit off of that and that's usually around what the cash cost will be. Now, not all of the $21 million is restructuring; we can probably follow-up with you after and give you the exact number on that. But it's probably in the order of -- 60% to 70% of that is going to be restructuring related.

Jeffery Hammond

Okay. And then finally, is defense -- clearly bifurcation between defense and commercial; can you talk about how that impacts -- and all those moving pieces impact the mixed dynamic within A&D?

Scott Buckhout

Sure. So, I think what you'll -- what you should expect? Well, so first of all, let me start by saying, the commercial aerospace and defense, as of 2019 have remarkably similar margins. And whether you're looking at net [ph] OEM or aftermarket, if you're comparing aftermarket or comparing OE businesses across the two, they are very similar operating margins. As you look forward for aerospace and defense, obviously, commercial aero is going to shrink over the next, say 6 to 12 months at least but defense will continue to grow. Defense aftermarket versus OE for both, aerospace commercial and defense; aftermarket is significantly higher margins. When you look at the defense side of the business, you're going to see both OE and aftermarket grow, and you'll see aftermarket grow a little faster.

So, when you look at that you'll see the mix of CIRCOR shift to be more defense, less commercial aerospace. And you'll also see the aftermarket part of defense growing faster than the OE piece, at least over the next 6 months or 6 to 12 months or so; so that'll be a favorable mix as well.

I think the last thing I would say about margin and mix in aerospace and defense is that, we are raising prices; we have carryover price in 2020 from 2019 and we're adding incremental price increases, we have been all the way through this year. So, we expect a net 3% on both sides of the business, this year which is in line with what we had expected coming into the year as well.

Jeffery Hammond

Okay. Thanks, Scott.

Scott Buckhout

Okay.

Operator

[Operator Instructions] Our next question is from Nathan Jones at Stifel. Please proceed.

Nathan Jones

Good morning, everyone.

Scott Buckhout

Good morning, Nathan.

Nathan Jones

Welcome to the team, Abhi.

Abhishek Khandelwal

Thank you, Nathan.

Nathan Jones

I'm going to start on the balance sheet and cash flows as well. Nice to see the leverage coming down post the I&A sale, 3.3 pro forma, the way the bank calculates it. Your covenants at 6.5, I'm sure you guys stress tested your models. Would you be willing to talk about how bad would things have to get before you would be in danger of tripping that covenant? What kind of revenue level we need to see for that to be in any danger just to start with?

Scott Buckhout

We have stress test -- stress tested, Nathan; I'd rather not get into the -- kind of the specifics. But in the -- we've ran three scenarios; we have a most likely, we have a best case of course, and then we have an extreme worst case. And even in the extreme worst case, which is significantly worse than what we're showing everyone today; we were comfortably -- we had comfortable margin between the covenant and where we end up at the end of the year. So, we're feeling confident that the covenant is not going to be big issue for us.

Nathan Jones

Okay. Maybe a follow-up on free cash flow. Do you guys expect to be free cash flow positive for the year, even if you take into account the cash headwinds that you're going to see in 2Q and 3Q from restructuring and whine down the DV business?

Scott Buckhout

It's unlikely that we'll be cash positive for the full year. So, what you're likely to see as cash flows out for the rest of the years; you will see cash in Q2, likely coming in more or less in line with Q1. Q3 will be significantly better than that. And then, you'll see clean positive cash flow in Q4. We netted all out for the full year, you should expect that we'll still be negative but we'll be exiting the year with clean positive cash flow in Q4. Q3 is not clear, exactly where that's going to fall yet; a lot of it's going to depend on timing of -- timing and the size of disbursements associated with exiting distributed valves. So, it's not perfectly clear to us yet. But certainly Q3 will be better than Q2 and Q4 will be clean.

Nathan Jones

Okay, that's helpful. I guess then, maybe if you could just comment on your available liquidity and how you feel about the liquidity, in the face of these cash requirements over the next two, three quarters?

Scott Buckhout

Right; so we're very comfortable. While we -- if you look at our balance sheet today, we have $171 million of cash sitting on our balance sheet. We will probably consume some of that through the year as we continue the transformation of the company here in Q2 and Q3. But we are very far from being concerned about cash and liquidity for the company.

Nathan Jones

Okay, that's helpful. Thanks for taking my questions.

Scott Buckhout

Okay.

Operator

Our next question is from Brett Kearney with GAMCO Investors. Please proceed.

Brett Kearney

Hi, guys, good morning.

Scott Buckhout

Good morning, Brett. How are you?

Brett Kearney

Doing well. Abhi, you mentioned the positive impact that exiting the distributed valves business would have on the leverage ratio, as pertains to the bank's definition taking it down to 3.3 times. Can you just help me understand is that -- I guess how the bank looks at that? Were you just referring to -- I guess once the company gets through a full year kind of clean look without that business, what -- kind of leverage would look like or how does the bank factor in the exit of that business? Do they allow for -- kind of look forward pro forma consideration?

Scott Buckhout

So -- it's a good question. So, the banks -- the banks look at the leverage ratio a little differently from the way you and I might look at it. They will -- they make certain adjustments that you and I might not make. So, when you look at the bank adjusted EBITDA, and we talk about exiting distributed valves; once we've exited the business, either shut it down or sold it, we -- the banks will exclude distributed valves from the trailing 12 months of EBITDA. And as you know, distributed valves has been significantly negative EBITDA over the trailing 12 months; so that increases the way they look at EBITDA. Some of the other adjustments that the bank will make is, they will add back stock-based compensation, they also will add back on a forward basis restructuring that has been executed; so there is some adjustments that they make to come up with their ratio in general, I'd say they are favorable adjustments. And so when you exit distributed valves and look at what our leverage ratio would be without that, you essentially exclude the business from the last 12 months and that's how you come up with the 3.3 that we're showing on the chart.

Brett Kearney

Yes, that's helpful. Thanks, Scott.

Scott Buckhout

Okay. You bet.

Operator

Ladies and gentlemen, there are no further questions at this time. Thank you for joining us today. This does conclude our conference call. You may now disconnect your lines.