Enovis Corp (ENOV) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Colfax Corporation's second quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to your host, Mr. Scott Brannan, Chief Financial Officer. Please go ahead.

Thanks, Aley. Good morning, everyone, and thanks for joining us. My name is Scott Brannan, and I'm Colfax's Chief Financial Officer. With me on the call today, we have Clay Kiefaber, our President and CEO.

Our earnings release is available in the Investors section of our website, colfaxcorp.com. We will also be using a slide presentation, which can also be found on the Investors section of the Colfax website. Both the audio of this call and the slide presentation will be archived on the website and will be available until the next quarterly call.

During this call, we'll be making forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in our SEC filings. Actual results may differ materially from any forward-looking statements we might make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them except as required by law.

With respect to any non-GAAP financial measures, the accompanying information required by SEC Reg G relating to those measures can be found in our earnings press release in the Investors section of the Colfax website.

And now, I'd like to turn it over to Clay.

Thanks, Scott, and good morning, everyone. This morning, I'll review our second quarter 2011 results and provide a brief operational update, and then I'll turn it over to Scott for the more detailed financials and then, we'll open it up for questions.

We're pleased to announce strong results for the second quarter. Adjusted EPS for the quarter was $0.32, an increase of 78%. This was driven mainly by strong shipments and a continued improvement in productivity, slightly tempered by lower-margin marine shipments, and amortization associated with the Baric and Rosscor acquisitions.

Net sales for the quarter were $186.7 million, an increase of 51.8%, while bookings were $195.7 million, an increase of 25.8%. Average exchange rates in the second quarter of 2011 were significantly higher than in 2010, contributing 9% to the increase in sales for the quarter.

The Baric and Rosscor acquisitions contributed 28% of the 52% total sales increase. The acquisitions did not have a significant impact on net income or EPS, either adjusted or actual, as their operating profit was largely offset by $3 million of non-cash amortization as well as additional interest expense.

Sales growth was driven by broad-based strength in all of our end markets in the second quarter, while order growth was driven by general industrial, oil and gas, and commercial marine. Our directional guidance for the balance of 2011 for order growth remains unchanged. Oil and gas and general industrial should continue their strong growth. Commercial marine and power generation should be flat to up modestly. And defense should decline due to the timing of programs available for quotations.

Now, for a brief update on our five end markets and please refer to the slides for the specific growth rates for each market. In oil and gas, sales and orders were up significantly for the quarter. This market continues to be fueled by higher crude oil prices. The Middle East, Latin America, Asia and Canada were particularly robust, with applications for multiphase gas compression, heavy crude transfer, storage, and refinery and lubrication systems.

We are excited about the performance of Rosscor. Bookings continued to exceed our expectations, as we booked more orders in the second quarter than were shipped all of last year. Rosscor's additional capabilities are now being marketed and sold through our existing channels in our targeted geographic markets. Overall, the market as a whole remains robust as the national oil companies in particular have increased spending.

On the refinery side, we are beginning to see capital investment again and new refinery capacity and maintenance enhancements in the US, Middle East and India. Based on current activity levels, we expect to see continued robust sales and orders during the remainder of 2011.

Now, for a look at our general industrial market, both sales and orders increased in the quarter. We've seen continued strength in North America, Europe, and Asia for a variety of applications, most notably diesel engines, machinery and sales through distribution in this very diverse end market. We continue to expect both sales and orders to be up in 2011 over 2010.

Turning to power generation, sales grew in the quarter, despite our decision to exit certain business in the Middle East. Both our OEM and packaged systems businesses have been very robust and growth has been especially strong in South America, the Middle East and Asia. There is a large backlog of power infrastructure projects in emerging markets fueled by a significant broad-based demand recovery. We expect full-year 2011 sales and orders to approximate 2010 levels making up for the $18 million of exited Middle East business.

In defense, shipments were up and orders declined as expected. The shipment and order patterns continue to follow the timing of specific ship programs. This continues to be an end market where large program orders are booked and then delivered over a multi-year time frame.

Funding for the after-market programs approved earlier this year contributed to the sales increase in the second quarter. We were encouraged to learn this week that the funding for the DDG-1000 program was restored. We continue to expect sales to be flat to up modestly and orders to decrease for 2011.

In commercial marine, sales were up again for the quarter. As we've seen over the last several quarters, this is primarily due to a reduction in our backlog. However, orders also increased significantly over a relatively weak second quarter in 2010. Commercial marine cancellations were less than $2 million for the second quarter compared to $3 million in the second quarter of 2010.

As discussed in the last several quarters, there were some lower-margin sales in the second quarter related to commercial marine orders we took in 2009 and 2010. We continue to work through this backlog and currently expect to continue delivering these lower-margin projects over the balance of the year.

This situation will progressively improve as we continue to work on customer service, pricing, and cost reduction, as well as see an improvement in the supply-demand dynamics for global shipbuilding.

We are continuing to take the necessary actions to grow the higher value-added portions of our business here as well. We're expecting sales for this end market to be flat for the balance of 2011.

I'd now like to update you on our strategic priorities. During this quarter, we continue to progress with our transition to a global functional structure. Our global end market teams are accelerating their efforts to better penetrate their respective markets. The oil and gas team has been very focused on pursuing multiphase and gas compression projects in addition to the traditional storage and transfer applications.

We are no longer just selling pumps, but rather system solutions. These are big, have longer sales cycles and more volatile order patterns. Clearly, the unified organization is facilitating the flow of relevant expertise and information around the world.

Our general industrial and power generation team has made significant strides over the past quarter, especially as it relates to the development of our global accounts selling capability. Now, we have a more coordinated and effective process for selling global accounts, and we believe this will enable incremental sales across the globe.

We are in the process of integrating our distribution in Europe as well. Our commercial marine team has been focusing on rationalizing our front office and redundant field resources as well. We announced the reduction of our non-customer-facing associates at several distribution centers in Europe and are in the midst of the transition right now.

As I stated last year, many of the redundant functions were developed as a result of our poor on-time complete performance in Radolfzell. In the spirit of CBS, we needed to address the root cause, not add non-value-added steps to the process.

Our global product development team continues to streamline our product lineup and we are on track to exceed our goal of 40% part reduction for the year. I just returned from Radolfzell, where we're starting to see the benefits hit the shop floor. For a specified size of a cover on a Three-Screw Pump, we reduced the number from six to two with a goal of one and we reduced from 12 to one for a specific balloon casing and now we're going to take that across different sizes.

The rationalization process will greatly simplify our product flow; it's going to reduce our setup, simplify scheduling, as well as improve our on-time shipments to our customers.

Our customer service teams have been aggressively condensing our internal processes to better respond to our customers as well. We're utilizing Kaizen to reduce the quote and order lead times in Europe with reductions of greater than 50%. And every Kaizen event brings more opportunities.

In the past, the business units would literally have to order products from other business units like they were an external customer. Now, after two Kaizens, we've developed and implemented a streamlined process that lets customer service quote and order directly. This is going to facilitate the sale of all Colfax brands throughout the world.

Operationally, we are progressing with our plan for rationalization and consolidation. We announced the closing of our Portland plant, as we'll be consolidating it into our Warren facility. This facility will handle our US Navy business as well as our large two-screw manufacturing.

We also announced the closing of a skids manufacturing operation in Gottmadingen, Germany. Recall that this facility supplied the Middle East business that we exited last year. Business for any other customers will be relocated to other facilities with the requisite skills and capacity.

The pre-tax savings generated from these actions are expected to be approximately $3.5 million, will incur pre-tax restructuring costs of $6.2 million during the remainder of 2011. We believe these actions will provide us with a leaner, more responsive and more profitable supply chain.

We will continue to pursue restructuring activities that position us for the long term. The more continuous improvement activities that we pursue, the more we find additional opportunities for improvement, and I'm more confident than ever that we'll achieve our margin and working capital goals.

Turning to acquisitions, we continue to turn up the intensity. The new processes are starting to accelerate the flow of potential opportunities and we have several situations under our active consideration. As always, our key evaluation criteria is strategic attractiveness and fit and return on capital.

We continued to progress in building the best team. This week, we welcomed Steve Simms to our Board of Directors. Steve is currently the Chairman of the Board of Apex Tools and a former Executive Vice President of Danaher Corporation. At Danaher, he led the Chinese growth initiative for the Tool Group. He is an accomplished practitioner of the Danaher business system and an outstanding industrial marketer. We're really fortunate to have him and we all look forward to working with him.

In closing, I'm pleased with our progress thus far. The pace of positive change is accelerating, as we continue to build the best team, improve our CBS capability and deliver improved results that we know we're capable of. These are exciting times at Colfax and frankly, we are just getting started.

And now, I'll turn it back to Scott for more details on the financials.

Thanks, Clay. For the second quarter, sales were $186.7 million, up 14% on an organic basis. Gross profit margin of 34.6% was down 40 basis points from the second quarter of 2010. Adjusting for the impact of the lower gross margin businesses from the acquired entities, gross profit margin is up 270 basis points, mainly due to the positive effects of higher volume and productivity improvement.

SG&A expenses for the quarter were up by approximately $12.6 million, primarily as a result of higher commissions, inclusion of the acquired entities and a charge related to the termination of a Canadian pension plan. As a percentage of sales, these costs decreased from 23% to 22%, due primarily to the substantially higher sales volume in 2011. As such, adjusted net income was $14.1 million or $0.32 a share, up significantly from the second quarter of 2010.

In our second quarter, increased costs from accounting step-up and intangible asset amortization for Rosscor and Baric were $3 million. It is also noteworthy that all of the large projects scheduled for 2011 shipment at Rosscor have now been delivered. Total sales for 2011 at Rosscor are expected to be in line with the previous detailed guidance given last quarter.

As evident by this quarter's revenues, Rosscor's projects are large and do not follow a consistent pattern. And thus, it would be inappropriate to annualize this quarter's results. As we discussed on the last quarter's call, amortization is largely recognized in proportion to sales due to the large Rosscor projects, which were in process at the acquisition date. Hence, there will also be lower amortization expense in the remaining quarters as well.

Also included in the second quarter SG&A is a charge of $1.5 million associated with the final settlement of the Company's frozen Canadian defined benefit plan. Approximately $300,000 of this is a cash cost with the remainder being the non-cash charge-off of deferred items previously included in other comprehensive income. The impact of the [low] after amortization margins from Rosscor and Baric is significant.

Adjusting for these entities, the incremental margin on the sales increase is 33% for the quarter and 29% for the first six months. This reflects a favorable mix of sales by end market, productivity improvements and higher-than-expected sales volumes.

Our financial condition remains strong. At the end of the quarter, we had debt of $80.5 million, a cash balance of $64 million and $121 million available under our revolver.

We continue to focus on working capital efficiency. Our working capital to sales ratio remained consistent at 19% with year-end despite this being a seasonal peak for working capital. As we discussed earlier, our facility consolidations will increase the need for inventory during the transition, but will structurally reduce the need for redundant inventory once completed. We continue to attack our receivables process with Kaizen and have just completed three such events.

Net cash flow from operations was $23.7 million for the quarter and that includes $0.5 million of asbestos-related net cash inflows and $900,000 of restructuring cash outflows. As discussed on the last call, we continue to expect to conclude the trial phases of our litigation with insurance carriers for both of the relevant subsidiaries by the end of 2011.

Also, today, we have updated our 2011 guidance. We are refining that to increase the sales increase expectations to a range of 9% to 11%, which combined with our previous guidance regarding Rosscor sales results in total expected sales of $665 million to $690 million for 2011. Adjusted earnings per share for 2011 are expected to be between $1.20 and $1.26.

We have also adjusted the expected restructuring cost for 2011 to $8 million, to reflect the actions that Clay described earlier. We also made some small revisions to other amounts and assumptions, which are described in the slide deck.

And with that, I'd like to turn it back to Clay.

Now, we'd like to open it up for questions.

(Operator Instructions) John Inch, Bank of America.

Thank you. Good morning, everyone.

Hi, John.

[Good morning].

Hey, good morning. Firstly, just out of curiosity, did you guys experience any sort of quarterly progressive disruptions? If you look at the months in the quarter and then sort of what you're seeing in July, I mean obviously, the macro economy has sort of hit a bit of a speed bump, right, in May. Did you experience anything like that or how should we think about it?

No, we didn't.

But down 6% organic, I understand the compares and the issues with Navy and so forth, but is there a big picture comment you'd like to make about sort of its significance? I mean, the question really against the backdrop of the uncertainty right in the macro. Is it some sort of a forward indicator? It doesn't seem to be reflected in your guidance, but I'm just curious, how do you provide a little more color around that?

Yes, I think it's important to re-emphasize how our business works and that is, as you know, John, we've got very large orders. And over the last three years, we basically have shifted away from bare shaft pumps to [system]. So these projects that we're working on are extremely large. So when it comes to any quarter-to-quarter comparison, that becomes a little more difficult, but it actually can be misleading, at times.

So just to give you an idea of what we evaluate, obviously sales, the quotation activity. But even more importantly than that, the activity that we've got, we're working very closely with our customers on developing those large system solutions. So we know exactly where we stand in terms of those and that's why we continue to think that or to know that it's extremely robust in oil and gas in particular, as we look at these end markets.

Yes, well, that makes sense. There's evidence that government spending, depending on the end market you're looking at and this is less a Colfax comment versus just more broadly is beginning to freeze up. If the US specifically goes into a bit of a budgetary paralysis here kind of going forward, what do you think the risk is to your business? It's probably small, but I'm still curious, if the US federal government specifically has to meaningfully pare back all spending, where is that going to be impacted for you and are you sort of thinking about contingency plans?

Yes, obviously, mainly in defense if we take a look at that. So we're monitoring those programs. We were certainly encouraged with what happened with the DDG-1000 this past week. But, if you take a look at defense, we've been on every ship since 1939. So that's not going to change in terms of the relationships that we have and the capability there. So basically, it's going to be driven though by what programs we approve and obviously, which ones they don't. But that would be the extent of our exposure to it.

Okay. Just lastly, Clay, how are you feeling about the acquisition pipeline? I mean, obviously, under the prior management, you hadn't done much. You've been doing more, but some companies are calling out sort of higher purchase pricing. Are you experiencing that in sort of the markets that you are looking to enter and just a little more color in sort of how you're feeling about the progression, about the opportunity at this point in time?

Yes. Regarding pricing, it's sort of a mixed bag. It depends on which parts of the market that we're looking at. I mean, you can tell overall that a lot of the price has gone up out there, but we have opportunities where we feel good about the pricing. I'm extremely pleased with the process that we've put in place. Dan certainly has been a breath of fresh air to bring that in. And we're very, very encouraged by the activity that we've got with regard to our pipeline.

So the weak dollar doesn't really change the equation?

Not for us, no.

Okay. Thanks very much.

Thanks.

Mike Wherley, Janney Capital Markets.

Good morning, guys.

Good morning.

Good morning.

I was just wondering if we could dive in a little bit deeper into the power gen business. Last quarter, there was a core sales gain of $10 million and this quarter just $1 million. And I'm wondering is that almost all due to the exit business or was there some sort of change in the rest of the business?

Actually, we're very pleased with what's gone on with power gen. Recall that last year, we were still taking orders for the exited business and we expect for the year to make up for that $18 million. So again, as I relate to John in the last answer, you got to be -- really understand what's going on with these projects and how they can fall from one period into another, but no question, it was a tough comp based on the Middle East, but we feel very good about that for this year.

Okay. And can you give anymore detail on those emerging markets' power infrastructure projects like where they are or sort of the time frame on those projects?

Well, time frame, I mean, it's going to be through throughout the year. In terms of the locations for them, as I stated, it's basically South America, the Middle East and Asia.

Okay.

There's a lot going on in China.

Okay. And then, I guess the other question I had is when you talked about sort of changing your global functional structure and adding things to just being a pumps company, are you getting the sense that the market is starting to see that way, as a company that's more than just a pumps company? Are there any early indications on that?

Sure, we have a number of them. I mean, the projects that -- some of the ones that we landed last year as well this year, I mean, there's clearly a recognition of that and pipeline activities certainly with solutions like multiphase gas compression and we're seeing it in general industrial as well. It's interesting. I mean, that's a capability from a sales standpoint that we need to develop over time, because it's a lot different obviously selling pumps than it is overall solutions.

But we've had some really good success with that. Really, it's going to happen. What's going to facilitate that whole process, sort of couple of different things. Number one, we have to have the right model to be able to go show and prove to the customer with our data exactly what the value is of those solutions. And then, clearly, you've got to have the sales capability developed and the field to be able to do that as well and we're working on both those things.

Okay. Thanks a lot, guys.

Thank you.

Okay.

Kevin Maczka, BB&T.

Good morning.

Hi, Kevin.

Good morning.

I guess, I'd like to first touch on your recent acquisitions. It seems like in terms of sales and order rates, they are performing very well. But I think, Scott, you said, the bottom-line impact is still not significant yet due to some of these amortization charges and that's holding back the incremental margins that we might otherwise be seeing for the total Company. Can you just give some color on when you think that works its way through and when we might actually see these 30% plus incrementals for the total Company?

Yes, I can. As I gave in the guidance last quarter, particularly with the Rosscor, which is the larger of the two sales contributors, the amortization is -- the most significant portion of the amortization will be complete in 2011. In the Baric situation, a similar although smaller magnitude will also essentially be that the amortization for 2012 will be significantly less there as well. So, I think, as far as periods for the future outlook, both of those acquired entities should contribute substantial margins to the bottom line beginning in 2012.

Got it. And then, a similar question, Clay, related to Radolfzell, all the activity going on there, all the Kaizen work, it sounds like maybe the margin performance there is still a little bit masked by some of this poorly priced business and backlog that's being shipped out of that facility. When do you -- I know you don't give guidance specifically by facility, but when do you think that might really start to show up in the performance of that business?

Yes, that -- and as you know, that was related specifically to the commercial marine business that we had in that facility. But I mean, in terms of what we took in 2009 and '10, as we start to get our arms around it, I'd say definitely through this year. But, then, just keep in mind, we're going to have to bring that up progressively. It's not like you're going to just take the prices up overnight. It's going to have to be a progression. Obviously, we've got to prove ourselves in terms of performance and we've been doing a lot of work on that. But, I would look at that more as the -- some of the [topper] pricing by the end of this year and then to progressively bring it up over time.

Got it. And then, just finally, from me on the defense side, can you give a little bit more color? You made the comment that, that business, the orders tend to track ships -- specific ship programs and you've got this DDG-1000 restored. Can you just give a little bit of color of what does that program being restored mean to you and what the timing of some of the next big ship programs looks like?

Yes, our expectation was that we would know more about ship programs in 2012. The DDG-1000 that was restored, it's hard to say when those orders will come in, but I mean it sometime could happen this year, it could happen in the beginning of next year and then translate into shipments from there. We've worked on one of those ships and they're going to have two more. So we have a pretty good idea for with that will entail. But, I think overall, the -- when you take a look at that, I mean, we're going to have to see what kind of programs the government cuts. But, again, in emphasizing that I did earlier, we've been on every ship since 1939. So, if they're going to build any ships, we're going to be part of it.

Got it. Okay. Thank you.

Thanks.

Jeff Hammond, KeyBanc Capital Markets.

Hey, good morning, guys.

Hey, Jeff.

Good morning.

Hey, just to go at the one-time costs a different way, can you quantify what the magnitude of the one-time costs related to the acquisitions are that's built into the $1.20 to $1.26?

Yes, there is approximately $7 million of amortization that's built into that. There is $400,000 of acquisition costs related to the Rosscor acquisition and then, there is this pre-tax $1.5 million pension charge in there that would be sort of unusual items that are included within the $1.20 to $1.26 range.

Okay. Okay, that's helpful. And then, just on the oil and gas biz, I mean, it sounds like quoting activity is robust and you'll get some pretty good orders in the second half. Can you just talk about what typical lead times are in that business? Does that translate into shipments in '11? Is that more a visibility for '12? And maybe how do those lead times move around as you shift more to systems and solutions?

Yes, they get longer as you shift to that. So, some of those could go out a year, others could be less in terms of magnitude, but most definitely, the sales cycles and the implementation cycles of those extend. And I saw -- I was able to see some of that a couple of weeks ago when I actually visited a couple of customers, a refinery and petrochem plant. But most definitely, they get extended. So I would look at anything as we move forward in this year as a precursor of next year for shipment.

Yes, certainly on the large orders, the orders we take will be shipped in 2012.

Okay. And then, a follow-on on the system solutions side, I mean typically, as you're building more system solutions, there is kind of the pass-through items, so you get a larger ticket item, maybe larger profit dollars, but lower margin. That doesn't seem to be flowing through your business. I mean, how do you think about margins as you shift from pumps to solutions?

Well, we're always going to try to improve them, that's for sure. And one of the things, especially as we've dealt with companies that we bring in and integrate, these two specifically in terms of really going through that process and establishing a better pricing process frankly for the value that we actually provide for our customers. And again, that's where we see some opportunity with both Baric as well as Rosscor.

Okay. And then, just final question on acquisitions. You talked a little bit about pipeline and price, but just as you think of bolt-ons likes Rosscor versus this idea of platform addition, as you look at additional platforms, is that something you're reviewing now? You have ideas in the pipeline. Is this kind of a longer three to five-year time horizon?

Well, we think about both. As we've stated in the past, clearly, we think there's a lot of runway in terms of the fluid handling market and industry, but we continue to think about both.

So if -- I mean, we shouldn't be surprised if [some were] to break free in the next year or so, you could potentially do a new platform deal?

Well, I wouldn't put a time frame like that on it, but suffice to say, we will look at both.

Okay. Thanks, guys.

Thank you.

Mike Halloran, Robert W. Baird.

Good morning, guys.

Hey, Mike.

So first, on the general industrial side, could you just talk about what kind of seasonal patterns you typically see in that business? I'm guessing not a lot, but I'm just trying to look at the absolute dollar amounts and then compare that to what have been very strong orders on the general industrial side. When you're working the back half of the year, I know you said you continue to expect very strong growth there, at least strong growth there. Sequentially, are the absolute dollar amounts going to continue to trend higher from current levels or is there a different seasonality component to it?

Well, I mean I think over a six-month horizon, the answer is certainly yes. But I would respond to your questions, we do have a definite seasonal pattern in that the fourth quarter is significantly stronger than the third, mainly due to the European vacations season and this is a pattern we've seen over the last decade. So it's not an indicator of the pattern of the business, it's just an indicator that there's less activity in Europe during the summer months. So you will see a stronger fourth quarter than the third quarter, but that's mainly due to when people are at work, not to the underlying nature of the business.

And I would say, Mike, in terms of the order patterns, it's really -- for general industrial, it's more consistent. I mean, that's the one that would follow sort of normal GDP growth, but in terms of our business right now, we've seen that it's improved in polymers, chemicals, for example, as well as machinery and diesel engines. That's pretty consistent throughout the year.

Yes. And if you think 2Q to 3Q, then the implication will be a step-down in absolute dollars because of the shutdowns and then a ramp back again in 4Q?

That's right.

Right.

All right. On the commercial marine side then, very strong orders still. It sounds like that the backlog is bleeding off a little bit faster than the order growth, which you've intimated over the last couple of quarters. Just to make -- to clarify one thing first, you guys said that you were expecting flattish orders in the -- a flattish growth in the back half of the year?

Right.

Okay. And when you think about the dynamic of the orders versus that growth rate, I'm assuming that it's more of a comparison driven and then a little bit maybe lighter demand, is that what the underlying assumption is there?

Yes, I think, that's fair. And we're going to continue to be cautious about that market. We still think that the supply/demand dynamics have to balance out a little bit, but as you know, what we said last year was we thought it was going to be down. So --

The first two quarters have been strong, but as Clay said, given the industry supply/demand dynamics and the fact that we have worked on the backlog somewhat, we prefer to remain cautious and to call that market flattish for the balance of the year.

Okay. So in other words, the orders still stay strong with some upside potential in the back half of the year, but for now, it's a tough business to predict?

Well, and just keep in mind the relative comparison, Mike, because strong for orders against relatively weak comparisons of last year.

Yes.

Just keep that in mind. I mean we expect this to be great for the long term and there's no question we think that goods are going to flow throughout the world that way. But we're cautious in terms of when the actual supply demands sort of balances out.

Okay. That's good. And then, the last one. I know quarters past, it was the defense and the commercial marine side, which was causing the divergence between your order growth and your backlog growth organically. Same reasons this quarter?

Yes.

Yes.

All right. Great. Hey, I appreciate the time again.

Thanks, Mike.

(Operator Instructions) Jason Feldman, UBS Securities.

Hi, good morning.

Hey, Jason.

So you talked on the commercial marine business about pricing and the backlog. For the remainder of the business, the other segment or the other end market, can you talk a little bit about what price realization has been like, whether you're now kind of at a point where you're effectively offsetting commodity inflation and also whether there are any other issues besides commercial marine in terms of pricing and the backlog?

You're talking about across the other four end markets?

Yes.

Yes. No, we were basically able to offset that from a pricing standpoint. Sure.

Okay. So there hasn't been too much push back in that price increases from customers, okay. Litigation costs and guidance are up slightly relative to, I think, the June 1 guidance. But I think I heard you say that you expected the asbestos-related litigation to be fully resolved by the end of the year. Should we expect that to essentially go away next year, the litigation expense?

Let me clarify that. What we said was that the trial phase is expected to be over this year. So I think the answer to your question, specifically, we expect that cost to be significantly less next year, but there's always a possibility that any of these parties may appeal. So I won't go out on a limb and predict that the thing will be completely over this year. But it will be reduced and in the most ideal situation, if no one appealed, it could in fact be over this year.

We did take the expense guidance up slightly for that. We did have a change in judges in one of the cases that caused a little bit of additional legal expense. But there hasn't been any material developments so far in that and we still expect it to conclude the trial phase by the end of the year.

Okay. So we also should -- again, I understand that it can always be appealed, but we should also then hear from you presumably by the fourth quarter results give or take on what the resolution of that litigation was?

Yes. We would expect to have something to report in either the third or the fourth quarter.

Got it. And then, lastly, in general industrial, you certainly -- the orders continue to be very strong. You've mentioned a couple areas of particular strength, diesel engines and whatnot. Have there been to any other kind of subparts of that business where things have slowed or areas that have been weaker than you would have expected?

Maybe the building materials portion might have been slower than usual. But most definitely, polymers, chemical, machinery and diesel engines are up.

Okay. The building-related stuff is like elevators, correct?

Right.

Okay. Thank you.

You're welcome.

Welcome.

I'm showing no further questions at this time and I'd like to turn the conference back over to management for any closing remarks.

Thank you. And thank everyone for joining us today and we look forward to talking to you again next quarter. So thank you.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.