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spk01: Greetings, and welcome to CIRCOR International's third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I will now turn the conference over to Alex Mackey, Vice President, Financial Planning and Analysis and Investor Relations. Thank you, sir. You may begin.
spk00: Good morning, and welcome to CIRCOR's third quarter 2021 earnings call. I'm joined today by Scott Buckout, CIRCOR's president and CEO, and Abhi Kondawala, 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 SERCOR 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 SERCOR's Form 10-K, 10-Qs, and other SDC filings also located on our website. On today's call, management will refer to GAAP and non-GAAP financial measures. The reconciliation of SERCOR's non-GAAP measures to the comparable GAAP measures are available in our earnings press release and slide. With that, I'll turn the call over to Scott.
spk05: Thanks, Alex, and good morning, everyone. SERCOR delivered another strong quarter and executed well despite a challenging global supply chain environment. We continue to see strong demand for our mission-critical products with year-to-date orders and backlog up 11% and 15% respectively. Notably, industrial organic orders growth was 28% in the quarter, and our industrial backlog is up 30% year-to-date, well above pre-pandemic levels. While aerospace and defense orders were down in the quarter due to timing, we're well positioned on growing commercial and defense programs and continue to launch new products for our customers. Revenue in the quarter was up 2% organically, with operating margin up 80 basis points year-over-year and 240 basis points sequentially. EPS was up 39% versus last year. It's important to note that revenue and earnings for the quarter were adversely impacted by supply chain disruptions that intensified through the last month of the quarter. More specifically, we saw approximately $10 million of revenue push out of Q3 due to supplier input delays logistics constraints, and ongoing labor availability challenges. This reduced our organic growth by roughly five points in the quarter. Our teams are working to mitigate the impact of supply chain issues by qualifying alternate suppliers, reengineering product with higher grade materials, and expediting shipping in order to continue delivering to our customers as committed. Looking forward, we expect these challenges to continue through the fourth quarter, resulting in a $15 million impact on revenue. For the year, we expect approximately $25 million of revenue to push out of 2021. This is reflected in our revised full-year guidance, which Abhi will discuss later. Our strategic priorities on people, growth acceleration, margin expansion, and free cash flow continue to be our guiding principles. I'll talk more about select accomplishments from Q3 later in the call. Now, let me turn it over to Abhi to cover the financial results.
spk02: Thank you, Scott, and good morning, everyone. Let's start with the financial highlights on slide three. Organic orders of $194 million in the quarter were up 15% versus prior year. We saw a strong year-over-year increase of 28% in industrial, with growth in all regions. Orders were down 10% in aerospace and defense due to the timing of large defense orders. Organic revenue was $191 million, up 1% versus prior year. Revenue came in approximately $10 million lower than expected as a result of the supply chain challenges that Scott mentioned up front. Adjusted operating income was $19 million, or 10.1%, up 80 basis points from prior year and up 240 basis points from the previous quarter. Finally, we delivered 50 cents of adjusted earnings per share, up 39% versus prior year, and generated free cash flow of $7 million. Moving to slide four. Industrial organic orders were up 28% versus last year and down 9% sequentially. Order growth was apparent across all regions, with particular strength in North America and EMEA. Aftermarket orders were up 42%, and our downstream aftermarket backlog is the highest it has been since 2017. Our book-to-bill ratio for the quarter and year-to-date is 1.1, an indication of continued end-market demand. Industrial organic revenue was up 3% versus last year and up 1% sequentially. By region, we saw year-over-year strength in EMEA, China, and India, partially offset by lower revenue in North America. Despite the strong backlog from the first half, supply chain and logistic constraints became a bigger challenge than expected in the quarter. This adversely impacted revenue by $6 million, or five points of organic growth. Adjusted operating margin was 8.7%, up 80 basis points versus last year, and up 70 basis points versus Q2. Improvements were driven by productivity and continued value-based pricing, up 2%, partially offset by higher inflation. We expect further margin expansion in Q4. Turning to slide five, aerospace and defense orders were $54 million, down 10% versus last year, and flat sequentially. Orders were lower versus prior year due to a large non-repeat defense order for the dreadnought submarine in 2020. But commercial aerospace recovery continues, led by a narrow body program. We've seen sequential growth for the past three consecutive quarters. Revenue was $61 million, down 2% year-over-year and up 2% from prior quarter. Slightly lower revenue was primarily driven by lower defense OEM shipments partially offset by recovery in commercial aerospace, up 10%, and an improvement in defense aftermarket revenue, up 7%. Similar to industrial, aerospace and defense was also impacted by the global supply chain and logistic constraints, which negatively impacted the quarter by $4 million, or six points of growth. Finally, operating margin was 24.2% in the quarter, up 50 basis points year-over-year, and up 430 basis points from Q2. we were still able to expand margin in a challenging global environment through pricing action, productivity, and favorable defense program mix. We expect margin in Q4 to be roughly in line with prior year. Turning to slide six, free cash flow in the quarter was $7 million, an improvement versus prior year, but lower than expected. More specifically, we had planned for higher milestone collections on long-term projects that moved out of the quarters. We will collect this cash in future quarters as we complete this project. We reduced our total debt by $23 million versus prior year and ended Q3 with $445 million of net debt. Due to the lower earnings and cash outlook for the year, we now expect to improve our leverage by approximately 0.3 turns by the end of the year. We will continue to use all free cash flow generated to delever. Please turn to slide seven. Starting with fourth quarter guidance, we expect revenue to be up 1% to 3% organically, which includes $15 million of delayed revenue out of the quarter due to continued global supply chain logistics and labor challenges. For industrial, we expect orders in Q4 to be up more than 10%, and revenue is expected to be up 3% to 6% with growth across most end markets. Fourth quarter orders are expected to be up greater than 50%, driven by large OEM defense programs. Revenue, on the other hand, is expected to be flat to down 5%, with double-digit growth in commercial aerospace and defense aftermarket, offset by lower deliveries on defense programs. We're expecting adjusted earnings per share of 60 to 65 cents in the fourth quarter, with incremental and decremental margins of 30 to 35%. Corporate cost is expected to increase by $1 million versus prior year. Finally, we're planning for free cash flow of $10 to $15 million in Q4 as we expect supply chain constraints will continue to impact our ability to complete in-process projects and collect milestone billings from customers. As a result of the supply chain challenges laid in Q3 and into Q4, we are revising our full-year guidance. Organic revenue is expected to be flat to down 2%, which reflects $25 million of revenue delayed out of the year. Adjusted earnings per share of $1.69 to $1.74 is lower as a result of this reduction in volume, and pre-cash flow is expected to be $4 to $9 million. Now, I'll hand it back to Scott to discuss our market outlook.
spk05: Thanks, Abhi. Let's get started with our industrial outlook on slide eight. As Abhi mentioned, in the third quarter, we saw continued order strength across all industrial regions, with year-to-date backlog exceeding pre-COVID levels. In Q4, we expect another quarter of double-digit orders growth led by North America. Virtually all end markets are expected to grow, with commercial marine and downstream showing the largest year-over-year improvement. On revenue, we expect modest improvement year-over-year, with growth between 3% and 6%. Our short cycle products are expected to be up 6% to 9% overall, primarily driven by aftermarket growth between 8% and 11%. Our longer cycle end markets are expected to be roughly in line with last year. Many of our midstream and downstream customers are prioritizing aftermarket projects in the near term, and our OEM project pipeline and backlog remain strong. In commercial marine, we expect to see growth as shipbuilding activity in Asia continues to recover from historically low levels. Finally, pricing is expected to net roughly 2% as pricing actions that were taken in Q2 and Q3 start to roll through our top and bottom line. Moving to aerospace and defense, Q3 orders were flat sequentially and down versus prior year, driven by a large non-repeat order in Q3 2020. We expect a significant increase in Q4 orders. The increase versus prior quarter and prior year is driven by large defense orders, continuing recovery in commercial aerospace, and strong medical growth. A&D revenue in the fourth quarter is expected to be flat to down 5% versus prior year, primarily due to supply chain constraints and the timing of shipments for large defense programs. Defense revenue is expected to be down 10% to 15% with lower shipments on our OEM program. On the other hand, government orders for defense spares and MRO services picked up in the third quarter, and we expect aftermarket revenue growth of 10 to 15 percent. Commercial aerospace is expected to continue its recovery with 25 to 30 percent growth following three consecutive quarters of sequential orders growth. Revenue from commercial airframers will be up 20 to 25 percent, mostly driven by the increased recovery in narrow-body aircraft production, most notably the A320. Aftermarket revenue growth is expected to improve as aircraft utilization continues to increase. Finally, pricing is expected to be a net benefit of 3% for defense and 4% for commercial. I'd like to provide a third quarter update on our previously shared strategic priorities. These priorities continue to guide what our team works on every day. We're investing in growth. We launched eight new products in Q3. and remain on track to deliver 45 new products by the end of 2021. I'll share two exciting new products on the next slide. Next, our teams continue to drive price increases in both industrial and aerospace and defense to help offset growing inflation. Many of these price increases are permanent and will help drive top and bottom line growth going forward. In industrial, we increase prices or implemented surcharges on many of our product lines in Q2 and Q3. This drove the incremental price we're showing in Q3 and Q4. For A&D, we typically match the length of our customer contracts with our supplier contract, which has helped us mitigate material inflation. Additionally, we continue to use value-based pricing where appropriate, especially in the aftermarket. To drive margin expansion, we're making key investments at two of our biggest industrial sites in the U.S. and Germany. With new, modern equipment and processes implemented, we expect to see an improvement in safety, quality, and productivity. We're making really good progress with our 80-20 initiative. With this structured approach, we've built a meaningful pipeline of growth and simplification opportunities and have already used 80-20 to implement strategic price increases at our U.S. site. Even more importantly, when talking to the teams, it's apparent that 80-20 is becoming a part of our culture and how we do business. Before we move to Q&A, I want to highlight two new products we recently launched. These products are particularly exciting because they show how SERCOR is accelerating growth by leveraging our technical expertise into new, growing markets where we do not currently play. For the past several years, our team has been looking for opportunities to penetrate the green energy sector by leveraging our sealing technology and competence in designing and manufacturing products for high-pressure gas storage and transport applications. The first set of products is for applications in the hydrogen market. Hydrogen isolation valves and modular dome regulators are critical components of the control system on hydrogen gas transportation trailers. Our balanced isolation valve has very low leak rates at extreme temperatures and pressures, and the modular dome regulator developed and manufactured in India allows stable pressure control. We're the first supplier to meet the latest EU transportation regulation on the balanced and we're able to secure more than $1 million of initial orders so far in 2021. The second new product I want to share is a switch module with kinetic sensors for landing gear position detectors on commercial aircraft. Our switch module inside the aircraft wheel is engineered to detect the landing gear position and turn on the electric motor, allowing the aircraft to taxi itself with no engine or towing. This technology not only allows more efficient and safer ground transportation, but also contributes to reducing carbon emissions by burning less fuel. Both of these new products showcase how we're accelerating growth through new product development and expanding our portfolio into new markets. With that, B&I will be happy to take your questions.
spk01: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Nathan Jones with Stifel. Please proceed with your question.
spk04: Good morning, everyone.
spk06: Morning, Nathan.
spk05: Morning, Nathan. How are you?
spk04: Good, thanks. Starting off on free cash flow, it looks like relative to the previous guidance, about $30 million that's deferred out of this year and into next year. Can you maybe give us a little bit more color on the milestone payments, when you're expecting those, and just any other color you can give us around free cash flow and when you expect to collect that cash?
spk02: Yeah, absolutely, Nathan. Thanks for your question. So look, if you think about the free cash flow guide that we gave, previously for the year versus where we are, there's really a few different things going on. First of all, you saw our guidance being lower on the income side, so that has an impact on it. Number two, on the working capital side, the milestone billings that we expected to do for the year has been pushed out to the right, and it's really tied to two things. First of all, it's tied to logistics, both inbound and outbound, and our ability to to get product in the door and be able to ship what we need to do to be able to build a customer. Secondly, it's tied to raw materials that we need to finish the job so that we can hit the milestone, build our customer, and collect their revenue, or collect the dollars, if you will. So that's kind of what's driving it. From a timing standpoint, look, it's not gone. Obviously, we'll get the cash. It's a question of You know, it's pushed a quarter to the right or two to the right, but as we start to ship these projects and as we start to build our customers, as we hit milestones, we're going to collect this cash. So I would expect 2022 to be the year, in the first half of the year, when we start to collect this cash.
spk04: Okay. Thanks for that. And then you talked about supplier input delays, freight, and labor availability. Maybe you can just expand on each of those. I mean, obviously... everybody's feeling these kinds of things out there, but just any color you can give us on those things, what you're doing to work around them, and when you think you might be able to catch up to the backlog here.
spk05: Sure, I'll take that one, Nathan. So I think the first thing to point out about CIRCOR that people that maybe isn't apparent when you start thinking about this, is we don't really make any standard product. We're not building product for inventory. Everything we make is custom. So we get an order, we source it, we build it, and we ship it. And so we're pretty dependent on our supply base to ship us product on time. And so what we're seeing is pretty broad-based in terms of supply chain disruption. It's global. To drill down a little bit, The common things that are global are really around logistics, both inbound and outbound. We're seeing challenges on castings from casting suppliers globally and to some degree labor availability. The main, if you were to step back and say what's impacting our revenue the most, roughly 80% of the impact on revenue is driven by the supply chain and logistics challenges that we have. And it's mainly the input delays and then the delays with respect to logistics. About 20% I would attribute to labor availability and to some degree customer delays, which may be supply chain related as well, but we do have customers basically telling us they don't want the product on the original ship date and to hold on to it and ship it later. For us on the labor availability piece, we're on average across CERCOR running about 5% below where we'd like to be on direct labor. But that doesn't capture the real story. We have certain factories that are running up to 10% below direct labor where they'd like to be. So we're having some challenges getting the direct labor in the door. If you drill down a little bit by business, industrial, the sourcing challenges that we're having is mostly around motors and actuators. To some degree, we're seeing some bar stocks and raw material challenges, but it's mainly motors and actuators. On the A&D side, it's more linked to electronics. So we've got a pretty broad-based industry. team working across the globe on this and they've been working for actually quite a while since we saw this coming six months ago. But we're qualifying new suppliers as you would expect to increase the number of options. We've been re-engineering a lot of our products with alternate materials. We're expediting material where it makes sense and where we can. We've been very proactive about raising price. We're getting a lot more price here in the second half than we did in the first half. And on the labor side, our whole team pretty much globally, we've added shifts and we're running overtime to try to compensate for some of the shortages that we have. around the world. So I just wanted to just clarify where we are on this. So we did see a delay in Q3. We're anticipating that it doesn't get better in Q4, so that we're going to see about $15 million of revenue drop out of Q4 linked to all these different delays on the supply side.
spk04: Just one follow-up to that on the supply chain stuff. getting worse in 4Qs and 3Qs. Is there any expectation that this improves early in 2022 or are we looking at this well into 2022?
spk05: Well, what our suppliers are saying and our supply chain team is saying is that this is likely to give us some kind of headwind through the first half of next year. So we're expecting that Q1, we're still going to be dealing with some of these issues, and then it starts to get better in Q2. So virtually nobody around the world that we're hearing from is expecting this goes away this year.
spk04: No, I don't think so either. Thanks for taking my question.
spk05: Thanks, Nathan.
spk01: Our next question comes from the line of Jeff Hammond with KeyBank. Please proceed with your question.
spk06: Hey, good morning, guys. Good morning, Jeff. Hey, Jeff. So just to follow on the revenue delays, is the thought that do you keep pushing to the right? So, you know, you ship some of those in one queue and you get further delays or like, I'm just trying to understand like when the catch-up happens.
spk05: Yeah, that's it. I'll take that and then you can jump in a B. But in essence, that's what's happening. And, you know, B mentioned it with respect to large projects, which is affecting cash as well. So essentially what we're seeing is is we're not seeing suppliers aren't shutting down. I mean, it's not an issue of not being able to get supply. It's just everything is shifting to the right. And in some cases, it's shifting to the right a lot. And so we're seeing revenue, we're seeing milestone billings, we're seeing shipments all moving to the right. And so the $15 million that we're highlighting in Q4 will go into Q1. The question is how much of Q1 is going to shift into Q2. But we do expect that these delays are going to take into early next year into Q2 before they're going to be fully worked through.
spk02: Yeah, the only thing I'd add is just one more thing is our customers are delaying delivery too, right? I mean, they're having supply chain issues on their end, so they're asking us to delay our shipments to them as well. So the effect is all over. And to Scott's point, look, I think it's getting pushed to the right because you can see our backlog is pretty strong. So you should expect to see that come back in the first half or 2022 for that matter as supply chain issues start to settle down and we start to get this product out the door.
spk06: Okay, and just to be clear, the 10 million in revenue that you missed in 3Q, does that ship in 4Q?
spk02: Yes, so if you think about the revenue, right, that 10 million that got shifted out of Q3, some of that is going to come back in Q4, but then you have an effect on Q4. So for the year, really what you're looking at is a $25 million shift out of the year. But, yes, some of that 10 from Q3 comes back, but then Q4 also has some revenue slipping out of the quarter into the next year.
spk06: Okay. And then just on, like, the lumpiness and, you know, defense, I just want to understand what's lumpiness and what may be a change in the trajectory. Because I know, like, F-35, you know, they've changed some, you know, delivery schedules, et cetera.
spk05: Yeah. So we're expecting – so in terms of change in trajectory, we're not – We're not expecting any kind of change in long-term trajectory and growth rate in our defense business. So, yes, it's lumpy. We've had three-quarters of relatively low orders, which might be what you're referring to, but you're going to see a very strong quarter here in Q4. We're expecting Joint Strike Fighter large orders. We've got a number of different missile switch orders that we're expecting to come in. So you're going to see very strong orders here in Q4. So the underlying momentum in that business we still feel good about. The last thing I'll say is that in addition to the programs that we're on that are growing, we continue to launch a lot of new products in aerospace and defense. More than half of the products we're going to launch this year are in aerospace and defense. It'll be north of 30 of the 45 products we launched this year in aerospace and defense. And as you probably know, we don't launch products in aerospace and defense unless we've won it and unless it's on a platform. So we continue to add to the portfolio here. So there's no fundamental change in our outlook for defense right now. And on the commercial side, as you know, we continue to see that improve quarter to quarter.
spk06: Okay, and this last one, the refinery business, I think you said people are kind of delaying projects and shifting to aftermarket. Just, you know, any kind of thoughts on how that flows or changes into 2022?
spk05: Yeah, I think we – if you were to have asked us – Six months ago, we would have expected stronger revenue in our downstream business in Q4 than what we're guiding right now. And the difference is not the aftermarket piece of the business. That part is running pretty strong right now. It's the OEM piece, the new capital projects piece. So the backlog remains good. The pipeline of new projects remains good. We're expecting a strong first half in orders. and then that turns into stronger revenue in probably Q2, Q3, and Q4 of next year. So, it's delayed from what we would have said six months ago, but the aftermarket is looking pretty good. The aftermarket tends to be higher margin, but we really start to make good money in downstream when both the OEM and the aftermarket are kicking in. And so, we don't expect that to start hitting into the revenue until the middle of next year.
spk06: Male Speaker 1 Okay. Thanks, guys.
spk05: Male Speaker 2 Thank you.
spk01: Our next question comes from the line of Andy Kaplowitz with Citigroup. Please proceed with your question.
spk03: Hey, good morning, guys.
spk02: Morning, Andy.
spk03: Scott Irby, your incremental margin, you know, that mid-40s in Q3 was relatively good despite, you know, the supply chain stuff you talked about. I think you talked about 30% to 35% in Q4. So can you talk about what you're doing to maintain margin? I know you've talked about using material productivity to offset costs. what do you look like in terms of price versus cost and given second half 21 margin performances that give you confidence that you could drop through at that 30 to 35% level in 22?
spk05: Yeah. So, um, thanks for your question, Andy. I think, uh, let me, let me start with what we're doing and then I'll get into the confidence going forward. The, um, The way this has evolved through the year, you might remember the first half of the year we were delivering material productivity in excess of inflation. and the price increases were dropping straight through. That changed here in the back half. As the inflation has started to increase and have a bigger impact, our material productivity versus inflation equation flipped. And so, now inflation is bigger than material productivity, but we've also been very proactive with price. So, we're getting significantly more price in the back half than we were in the first half. So, as you look at what's happening in Q3 and Q4 for SERCOR overall, Inflation is higher than material productivity, but price, if you add in price, net-net, we're still dropping through positive to the P&L. So inflation is eating into what normally would be 100% drop through on price, but the price is still in excess of what we're seeing on the inflation side. So we've been very, very aggressive on the pricing side. Regarding the drop through in Q3, that's largely what it is. It is largely driven by our price and productivity that we've been driving across the company. So not just material productivity, but factory productivity as well. There is some mix help as well in Q3, but yes, we're expecting the same drop through in Q4. As we go into next year, I want to talk about 80-20 a little bit because you're going to start to see the impact of 80-20 build through next year. I don't think you're going to see huge numbers from 80-20 until the next 12 to 18 months, but certainly the low-hanging fruit is already starting to surface. So as you know, in the industrial side of the business, we've been working on 80-20 and three of our largest sites for the last six months or so. With the overall goal of simplifying, really understanding the core in this part of the business and focusing resources where we can drive profitable growth. And we're making a lot of progress here. And, you know, we've got some large customers where we know we're not getting 100% share of wallet. We're changing the way we work with them. We're driving a lot more intimacy with them than what we had before, and we're starting to see some good reaction from that. There's also some low-hanging fruit. One of the early things that we identified here is the way we price. We price our 20s customers very similar to the way we price our 80s customers. That's allowed us to be a lot more aggressive here in the back half of the year in the way we price, and it's some of what you're seeing in the drop-through as a result of us driving 80-20. and driving pricing in a more strategic way across the portfolio. So that's just a couple examples. So regarding drop-through going into next year, we're feeling pretty good with all the things that we've got in process right now.
spk02: Yeah, and just to build on that a little bit, a couple more examples that I want to add to just give you more color and is, look, as Scott mentioned, there's a lot of low-hanging fruit that we're working through. Another good example is In the past, we have not charged our customers, for example, expedite fees when we have done something special or above and beyond the normal course of business. So it's a low-hanging fruit, and it's not big dollars. But again, these are things that we're looking at, and 80-20 Lens has given us the ability to actually go identify these opportunities. As you think about 2022, just to build on what Scott said, part of this exercise also is to really simplify our operations and look at our factory and the layout and how do we streamline our factory to over-serve our 80s and take out complexity. So you should also see, in general, us driving more productivity because of 80-20 as we streamline our operation and streamline our factory floor.
spk03: Very helpful, guys. And then I just want to follow up on previous questions in the sense that You mentioned the five points of organic growth headwind in Q3 because of supply chain. That would have still put you short of your previous guidance for Q3 organic growth. Is that just the defense timing and the OEM oil and gas headwind? Is there anything else going on that's holding you back a bit?
spk05: Yeah, you're right. The supply chain issues is not the full gap to the guide, and it really comes down to the timing on aerospace and defense deliveries. And so we did see some shipments get pushed out of the third quarter into the fourth quarter. We're not exactly sure why, if it's maybe supply chain related with our customers. But we've been asked in certain cases on both sides of the business actually to not ship the way we originally intended in the third quarter. So it's mainly just timing on the defense side.
spk02: And anti-sequentially, if you look at the aerospace and defense business, you're going to see a big ramp up from Q3 to Q4. To Scott's point, the timing in common, I just want to tell you that sequentially, Q3 to Q4, there's a pretty decent ramp in aerospace and defense business.
spk03: Great. And then, Scott, just regionally, you mentioned industrial strength should be led by North America. What are you seeing, for instance, in China, given some of the macro concerns? And India has had supply chain issues in the past, but seems like better now. So what are you seeing internationally?
spk05: So... We are, so yes, so North America is by far leading in terms of orders growth in the fourth quarter. I'd say we're seeing more modest growth in EMEA. China, we are seeing a slowdown. So I would say we saw much stronger growth in the first half in China orders than what we're seeing right now. India continues to be good for us. India's order strength continues to be good. So China would be would be one area that's definitely weaker than what we were seeing in the first half. So we're seeing very modest growth in China right now.
spk03: Appreciate it, Gus. Thank you.
spk01: Our next question comes from the line of John Franzrev with Sidoity. Please proceed with your question.
spk07: Yeah, I just want to go back to the deferred revenue. My original take was that it was largely concentrated in aerospace and defense, and now I'm not entirely certain Are there certain programs that are being pushed to the right or certain businesses across your business that are being hit harder than others? And if your customer base elects to maybe, you know, pull forward some of those orders and deliveries, do you have the labor capacity to fill those orders if they decide to move it quicker than you expected?
spk05: So... I'll start, and then maybe B can jump in here. The supply chain issues and the delays to revenue are very broad-based. They're global, and they're across both aerospace and defense as well as the industrial business. So if you look at the $15 million in Q3 of deferred revenue, roughly four of it was in aerospace and defense. I'm sorry, the $10 million in Q3. I'm sorry, I correct myself there. The $10 million of deferred revenue in Q3, four of it was aerospace and defense, and six of it was industrial and linked to supply chain. And it's logistics, it's supplier inputs. In some cases, it's customers asking us not to ship. It's a fairly broad-based challenge that we've got around supply chain issues in the business. So I don't know if that answers your question, John. There were some delays on shipments in aerospace and defense. It was in one facility, and it was linked to a couple of programs. The Joint Strike Fighter, for example, was one of them. But that's not the major concern that we have here going forward.
spk02: And then, John, just taking a step forward and looking at Q4, the $15 million that we talked about is pretty evenly split between industrial and A&D. And it's really, again, tied back to what Scott said earlier, which is all supply chain related. Again, 80% of that is supply chain and logistics related, both inbound and outbound. The revenue doesn't go away. It just gets pushed to the right. So that's why if you kind of take an impact of Q3, throw in the impact of Q4, you're looking at a $25 million push out from 2021 into 2022. And so that's where we are.
spk07: And if those orders did come in, do you have the labor capacity to fulfill them?
spk05: Yes, we do. So we're working on that. It has been a challenge, and I don't anticipate it's going to go away right away. But as I mentioned a little bit earlier on the call, we're adding shifts really across the globe. We're running overtime across the globe, so it's costing us a little bit of money to do this. But we're pretty committed here to making sure that we can ship for our customers as well as we can in this kind of environment. So, we are, you know, we're tracking this pretty closely. We feel like we're going to be able to close the gap on the labor side over time, and we don't think labor is going to be the challenge going forward. We're more concerned about the supplier input challenge and managing that than we are the labor side.
spk07: Okay. Thanks. Ed, I don't know if you can answer this, Scott, but the aftermarket growth Do you have any sense if your customers are kind of rebuilding or restocking their own inventory, because they're worried about their own supply chain, or is there jobs out there that they're actually going forward with? And it looks like there's going to be increased service revenue or service maintenance work in the incoming quarters.
spk05: Well, I think the aftermarket growth that we're seeing in industry, across both business is really driven by the increased activity around the globe. So, as you know, in industrial, we sell into, you know, textiles, automotive, power, I mean, all kinds of different industries. And, you know, as the economy is growing, utilization is going up, and I think that's driving productivity. as driving usage of our installed base and aftermarket in support of that. So I think that's largely the same on the aerospace and defense side, especially on commercial where aircraft utilization is going up and driving more aftermarket. So it's really the only area of the business that we're seeing capital projects coming back slower is those long-cycle businesses downstream and midstream. Even in those sectors, the aftermarket is running pretty strong. It's really the OEM piece of that business that we're seeing. We're seeing it come back slower. So the pipeline still feels good. We've still got bidding on a lot of work, but it's slower coming back on the OEM side.
spk07: Okay. All right. And you highlighted the hydrogen product. I'm curious a couple of things. How much product do you actually sell into the truck market? And is that actually an avenue that you're exploring to launch additional new products?
spk05: So hydrogen for sure is an area that we're looking to launch new products. So we've got a We've got a strategic business development team in our industrial group that is breaking down the different aspects of the hydrogen economy, the emerging hydrogen economy, if you will, segmenting the supply chain and identifying opportunities for our technology. And that's really how they identified this opportunity with us. within truck trailers. We don't sell a lot into the trucking industry, John. We do sell a lot into energy and all the different components of energy, you know, whether it's natural gas or oil and then hopefully hydrogen here going forward. So we're always looking for these opportunities. This happened to be one I thought was interesting that we could highlight. Hopefully we'll have more of these going forward because I think there's going to be a lot of severe service, mission-critical flow control kinds of opportunities in hydrogen as this market starts to grow.
spk07: Great. Great. Thanks for taking my questions. Thanks, Ben.
spk01: 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 disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
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