Enpro Inc (NPO) 2011 Q2 法說會逐字稿

Thank you for standing by and welcome to the EnPro Industries second quarter results conference call. (Operator instructions) I would now like hand the conference over to your speaker today, Mr. Don Washington. Thank you. Please go ahead, sir.

Thank you, Teresa, and good morning, everyone and welcome to the EnPro's quarterly earnings conference call. In just a moment, Steve Macadam, our President and CEO, and Alex Pease, our Senior Vice President and CFO will review the results for the second quarter of 2011. But before we begin, I'll remind you that our call is being webcast at enproindustries.com, where you'll also find the slides accompanying the call. You can access the presentation through the webcast link on our homepage. There will also be a replay will also be available on the website.

In the call this morning, you may hear statements that express a belief, expectation, or intention, as well as those that are not historical fact. These statements are forward-looking and involve a number of risk and uncertainties that may cause actual events and results to differ materially from such forward-looking statements. These risks and uncertainties are referenced in the Safe Harbor statement included in our press release, and are described in more detail, along with other risks and uncertainties in our filings with the SEC, including the Form 10-K for the year ended December 31, 2010 and the 10-Q for the quarter ended March 31, 2011. We do not undertake to update any forward-looking statements made on this call to reflect any change in management's expectations or any change in assumptions or circumstances on which such statements are based.

You should also note that EnPro owns a number of direct and indirect subsidiaries. From time to time, we may refer collectively to EnPro and one or more of its subsidiaries as "we", or to the business assets, debts, or affairs of EnPro or a subsidiary as "ours". These and similar references are for convenience only and should not be construed to change the fact that EnPro and each subsidiary is an independent entity with separate management, operations, obligations, and affairs.

Finally, I want to remind you that comparisons of our financial results for the second quarter of 2011 to the comparable period of 2010 reflect the deconsolidation of Garlock Sealing Technologies, Garrison Litigation Management and their subsidiaries, effective June 5, 2010. These entities have been deconsolidated from EnPro's results and will remain deconsolidated during the pendency of the Chapter 11 legal proceedings to resolve asbestos claims against GST. We refer to this as the Asbestos Claims Resolution Process, or ACRP, and you will hear us use that acronym during the call today. To help you assess the effect of deconsolidation, Steve and Alex will compare our 2011 results to pro forma results for 2010, which exclude GST from the prior period.

We'll conclude the call with a question and answer session after Steve and Alex make their remarks, and of course, if your questions aren't answered on the call or if you have follow up questions you can contact me at 704-731-1527.

Now I'll turn the call over to Steve.

Thank you, Don. Good morning, everyone.

The second quarter continued a string of good quarters, with increased activity in most of our markets. Overall, our general industrial activity was up about 10%. Heavy-duty trucking activity levels continued to rebound from their trough and maintenance spending remained healthy in our refining and petrochemical markets.

Our consolidated sales were up 5.0% over the second quarter of 2010, despite both the deconsolidation of GST and nearly 60% decline in sales at FME. As we expected, engine sales at FME fell to $0 in the quarter.

Pro forma for the deconsolidation of GST third party sales increased 19% over last year's second quarter. Year-to-date consolidated sales were up 11%, while pro forma sales were up 30%. Acquisitions completed over the past 12 months contributed about $69 million of sales or about 17 points of our year-to-date growth, on a pro forma basis. An additional 3 points came from foreign exchange, leading an organic growth rate of about of about 10%.

Our pro forma segment profits and margins also increased over the second quarter and first half of last year, as our businesses leveraged volume to offset fixed costs and we saw gains from our ongoing investments in facility upgrades, and our continuous improvement initiatives continued to pay off. Alex will go into detail about the performance of our segment shortly. Separately, GST reported a 17% increase in sales of the second quarter of 2010 and a 43% increase in operating profit.

Let's shift gears now and talk for a moment about acquisitions. In the second quarter, acquisitions completed in the prior 12 months delivered about $42 million in sales and $3.1 million in segment profit to our results. As we've discussed, these deals are strategic, either adding complementary products and technologies to our portfolio or expanding our global presence.

We've already taken actions to reduce procurement in operating costs and to create other savings that will result in significant annual cost reductions. We expect to see improving profitability at the acquired businesses as we work through their integration. Additionally, the businesses that we acquired earlier this year are ahead of plan for sales growth and our integration efforts are on track across the board.

Acquisition activity during the second quarter was modest, with a small transaction to acquire a local service center in Thailand for CPI, which improves CPIs presence in Asia and supports its global growth, but as you know, activity picked up significantly in the past week on acquisitions. With the deals that we've recently announced, we've invested over $255 million in 10 acquisitions beginning in the second half of 2011.

Looking at the recent transactions, the largest was Tara Technologies, which was closed on Monday. Tara has roughly $70 million in annual sales and is an industry-leader in the design and manufacture of specialty components and assemblies using semiconductor, aerospace, medical and power generation, upstream oil and gas markets. Tara has 3 manufacturing locations in the United States and 1 in Singapore and a strong position in the market for semiconductor equipment. Tara brings more than 30 years of technical engineering and manufacturing expertise, a strong bench of world class engineering talent, and deep customer relationships.

Our high performance sealing business has grown nicely over the past few years as we've made acquisitions. Tara brings us an opportunity to capitalize on those acquisitions in a new way and to do so, we've combined them to form the Technetics Group, a new division in our sealing products segment. This is a global business with combined annual sales of over $200 million and total of 12 facilities in North America, Europe and Asia. It will offer a very broad line of specialized products, using critical high performance applications to some of our fastest-growing and most attractive markets and we're very enthusiastic about the possibilities that it brings.

Yesterday afternoon we announced the acquisition of PI Bearings, a business that manufactures hydraulic bushing blocks in the United States, similar to products GGB manufactures in France, and strengthens GGB's position in a very important product line. The business has annual sales of about $11 million. We see an opportunity to make a significant increase in PI's production capacity, as well as to benefit from implementing PI's production technology at GGB manufacturing facilities.

Finally, we also made an announcement concerning GST's acquisition of W.L. Gore's ONE-UP Pump Diaphragm product line. This product is well known for its outstanding performance and long service life and is a fine compliment to GST's existing line of pump diaphragms. Manufacturing of the product line will be relocated to GST's facility in Palmira, New York. The completion of this acquisition demonstrates GST is committed to growth and profitable investments despite the constraints imposed by the ACRP. We continue to believe that under a fair resolution, a meaningful portion of GST's equity value will return to EnPro.

In addition to our recent acquisitions, we took steps in the second quarter to advance our long-term growth. We broke ground on a new, much-upgraded CPI facility in Germany, which not only will allow CPI Europe to remain a manufacturing center of excellence, but also provide the room needed for expansion of its field service activity. This will support the growth of our CPI Germany operation, which has been very successful even though operating in an old and inadequate facility.

We also expanded production capabilities in China for both GGB and Stemco. We share a facility in the Shanghai area and we continue to invest in equipment upgrades in number of our operations.

Before I turn the call over to Alex, I'll give us a brief update on the ACRP. GST and representatives of the current and future asbestos claimants continue in the discovery process, gathering information to support their respective positions and developing their cases regarding the amount necessary to resolve GST's obligations for asbestos claims. This information will assist the parties' experts in forming their respective opinions on the funding necessary for a trust to assume and resolve pending and future asbestos claims against GST.

Unless the parties agree to a settlement, the funding requirements of the trust will be determined through litigation. At this point, there's no formal timetable for that determination or the ultimate resolution of the case. However, when the process began, we estimated that a resolution would take 3 to 5 years. At this point, we see no reason to believe a resolution will occur any earlier than we originally estimated.

We continue to believe that when claims are properly valued, GST's resources are more than sufficient to fund the trust and is able to fully resolve claims and to return equity value to EnPro. GST would certainly entertain any opportunities to settle this case for a reasonable amount and put this chapter of its history behind once and for all, but we don't see such and opportunity on the near-term horizon.

In the meantime, we continue to fully support GST's efforts in the case to expose the nature and extent of the many abuses rampant in the asbestos-claiming system and to demonstrate that, absent those abuses, a fair determination of its liability will reflect a strong and what I believe is conclusive scientific evidence that asbestos gasket and packing, once produced by GST, could not have caused or contributed in any significant way to asbestos-related disease.

Now I'll turn the call over to Alex.

Thank you, Steve. As you can tell from Steve's comments, it continues to be a remarkably exciting time to be part of the EnPro team.

Our businesses are performing well and expanding globally. We're innovating and driving new product sales aggressively, our continuous improvement efforts are working, our safety record is among the best in the industry and our people are energized.

As Steve mentioned, consolidated sales in the second quarter were up 5.0% year-over-year, as reported, and 19% pro forma. Our pro forma sales growth came primarily from acquisitions, which contributed $41.9 million in sales and helped offset lower sales at Fairbanks North Engines. I'll go into more detail on the variances when I cover the segments.

Sequentially, if we set aside FME and the volatility in its sales from Q1 to Q2, sales grew 13%. About 9 points of our sequential growth were from acquisitions, but more than 4 points were organic, indicating that our markets continue to strengthen in Q2.

Regionally we saw similar strength across Europe and North America, with Europe growing 13% quarter over quarter and North America growing 8.0% excluding FME. Both areas benefited from acquisitions, but they also saw significant organic growth from the first quarter.

Gross margins for the quarter were 37.7%, which was 1.1 percentage points better than our reported numbers in the second quarter of 2010, and almost 3 points better than our reported numbers in the first quarter of 2011. The improvement is driven by several things, including the effectiveness of our supply chain team in countering raw material inflation, moved by our businesses to pass through cost increases, and the advantages of scale as we leverage our fixed costs.

SG&A expenses were $71.2 million or 27% of sales in the second quarter of 2011, compared to $61.2 million or 24.4% of sales a year ago. However, if we take FME and its sales out of the equation for both quarters, SG&A actually declined as a percentage of sales by 1.6 points to 28.5%. The increase in spending over the last year came primarily from acquisitions, increased selling and marketing expenses as business conditions improved and the effect of foreign exchange.

In the first six months of 2011, pro forma EBITDAA improved 34% to $82.4 million, from $61.5 million, and pro forma EBITDAA margins were 15.8% compared to 15.4% last year. On a pro forma basis, our trailing 12-month operating ROIC is 18.8%, up from 16.4% at this time last year and reflecting the strong health of our businesses.

In sealing products, sales were up 20% as reported and 79% pro forma. Of the pro forma growth, about $31 million, or 37 points, was related to acquisitions. FX provided a modest benefit, leaving an organic pro forma growth rate of 28%.

Segment profits were up 14% as reported, but they were up nearly 80% on a pro forma basis. Segment profit margins were 17.8%. As reported, margins were down from a year ago when GST's higher margin business was included for part of the quarter. On a pro forma basis, segment margins were 16.9% last year.

Now let me provide some detail on the individual businesses.

Pro forma sales were up 61% year-over-year in the Garlock companies that were consolidated in both periods. The acquisition of PSI drove nearly 40 points of the growth over the last year's second quarter, but demand for the product manufactured by these businesses has been steady and organic growth was almost 20%.

We saw higher sales of the premium Pikotek products that go into oil and gas markets and sales in the high performance field group increased as well. We also saw particular strength in Europe. Profit in the consolidated Garlock operations almost doubled due to acquisitions, higher volume, and our price optimization programs.

At Stemco, compared to the first quarter of last year, sales were up 57% and profit up 48%. The acquisition of Rome Tool and Dye contributed 35 points of the sales increase in the second quarter, leaving a healthy topline organic growth rate of 22% at Stemco.

Operating profit was up substantially at Stemco, but margins declined slightly, just a little over a point, reflecting the increased sale of brake products, which carry lower margins than Stemco's legacy wheel end products. However, Stemco's ROIC remains very, very strong.

In the engineered product segment, sales were up 33% from a year ago, with acquisitions contributing 15 points, or $11 million. FX and organic growth added about 9 points each.

Segment profit improved 80% to $9.6 million, compared to the second quarter of 201, driven primarily by GGB, as its markets recover from the recession, and also some growth in CPI. Compared to the second quarter of 2010, segment margins increased 2.5 points to 9.4% sales, primarily due to the increase in earnings at GGB. Within the segment, GGB posted year-over-year organic sales growth of 15%.

Across the major segments of GGB's business, automotive, pumps and compressors and Con-Ag posted year-over-year gains of roughly 13%, 19%, and 9.0%, respectively, and GGB's sales team has developed a significant number of new accounts year-to-date, so the trends at GGB are encouraging. GGB's profits have more than doubled over the second quarter in 2011 and profit margins have improved substantially.

At CPI, sales were up 48% over the second quarter of last year, reflecting the benefit of acquisitions as we continue to build a multinational business. Organic growth was about flat with last year, but year-over-year same-service center sales for centers opened more than 18 months, were up 23%. Operating margins were about the same as a year ago at CPI.

Turning to the engine product and services segment, because no engines were shipped in the second quarter of 2011, sales were down compared to the second quarter of last year when the segment shipped 8 engines. Aftermarket parts and service sales were also lower than last year, but segment margins improved by almost 0.5 a point, driven by the shift in mix to the more profitable aftermarket sales.

FME has a very attractive backlog, which includes nearly $60 million in orders received in the second quarter for engines to be delivered to Navy shipbuilding programs in 2011 and 2013. In addition, FME has several orders in process that could add another $65 million to the backlog.

We're very encouraged by this because, as you know, the engines ordered for the South Texas nuclear project have been on hold since the operator of that plant pulled out of the project after the events in japan earlier this year. Even though FME's customer hasn't officially canceled the order, we assume that cancellation is likely. In that situation, FME would be reimbursed for any expenses incurred. Fortunately, the orders booked in Q2 and those in process would more than offset the value of the South Texas engines.

After net interest expense of $9.6 million, which includes the interest due to GST and a tax rate of about 34% on our consolidated operations, we reported a GAAP net income of $12.2 million or $0.56 a share in the second quarter of 2011. In last year's second quarter, consolidated net income was $45.2 million, or $2.20 a share, which included a gain of $1.64 in the deconsolidation of GST, as well as $0.03 of income from discontinued operations.

Before selected items, net income in the second quarter of 2011 was $16.5 million, or $0.76 a share. We've presented adjusted net income this way to maintain consistency with the way we've presented it in recent quarters by removing the impact of the intercompany interest expense, which was about $4.3 million, or $0.20 a share, after tax, in the quarter.

In the second quarter of 2010, when GST was included in our consolidated results prior to June 5th, adjusted net income was $17.9 million, or $0.87 a share, including a contribution of $4.7 million or $0.23 a share from GST. With those adjustments and the contribution of GST to last year's results in mind, the performance of our consolidated operations in the second quarter of 2011 improved by about 19% over the second quarter of last year.

In addition to EnPro's adjusted net income of $16.5 million, GST's net income, adjusted for interest income and expenses associated with ACRP, was $9.0 million in the second quarter of 2010. That was a 45% increase over the second quarter of last year and reflects the fact that business remains as usual at GST.

Third party sales at GST were $55.3 million, or 17% higher than they were a year ago. Operating profit rose to $37.7 million, or 24.8% of third party sales, compared to 20.4% last year. GST continues to generate cash and closed the quarter with about $116 million in cash, compared to $87 million at the end of 2010.

Our consolidated operations provided cash of $12.6 million in the first half of the year despite an increase in working capacity, as business levels improved. CapEx was slightly higher than it was in the first half of last year, as we continued to make a number of growth and productivity-related investments in our plans. For the full year, we expect CapEx to be in the range of about $30 million to $35 million.

Before I turn the call back to Steve, there are two additional issues I want to highlight.

First, you may have noticed that in the latter part of the second quarter our stock price averaged more $43.93 per share, triggering the conversion rights in our convertible debt. While we don't expect anyone to exercise this option prior to maturity in 2015, Generally Accepted Accounting Principles require that we classify the debt as short-term for the period during which the conversion is possible. So you'll notice that change on our balance sheet.

Second, on July 1st, FME began to migrate to Percentage of Completion Accounting for our long-term engine contracts. We are making this change because we know have the systems and controls in place to allow us to track progress on engines as they move towards completion, as opposed to recording sales in the quarter when the engines are shipped. We expect the change will increase FME's sales by about $10 million in the second half of 2011, with most of the increase in the fourth quarter. Going forward, we expect it will make quarter-to-quarter comparisons more meaningful and increase the transparency of that business's results.

I, along with Don Pomeroy, our Chief Accounting Officer, will be available after the call if anyone would like to understand the technical details of either of these events.

That concludes my remarks, so I'll turn the call back over to Steve.

Thanks, Alex.

Looking to the rest of the year, our strategic focus will remain consistent with our long-term objectives. Our businesses are performing well and we're confident our strategy will continue to create new opportunities for us.

Although our visibility is somewhat limited by the short-cycle nature of many of our products, we are currently expecting steady demand for our sealing products and engineered products for the rest of 2011. These segments will also benefit from acquisitions, which have already contributed about $70 million to consolidated sales in 2011 and should contribute another $100 million over the rest of the year when we include the recently announced deals.

For FME, the outlook for engines shipped is unchanged, with 8 engines scheduled in the third quarter and 0 in the fourth quarter. With the engine shipments and a small increase from the percentage of completion accounting, third quarter sales in the engine segment should approach the level reported in the first quarter of 2011 and then decline in the fourth quarter.

For the full year, FME sales should be ahead of the 2010 sales, primarily reflecting the change to percentage of completion accounting. Although we expect some of our markets to show seasonal trends that are typical of the third quarter, the engine shipments and the contribution of acquisitions should offset any seasonality.

In summary, we're pleased with our performance so far this year and our position at this point, going into the second half of the year.

This concludes our prepared remarks and we'll now open the lines for your questions.

(Operator instructions) Ian Zaffino, Oppenheimer & Co.

Hi. Great, thank you very much. A question would be on the pricing side. How much more pricing is there that you could continue to take? And given, I guess, the current environment and what you're seeing now, what's your ability to continue to push pricing and how do you think about that? Thanks.

Well, we've seen, so far, year-to-date, approximately $8.0 million to $8.5 million of raw material cost increases. Almost all of that has been our largest four categories, which are steel, PTFE, bronze powder and elastomer. All four of those commodities have now leveled off somewhat, so we're not seeing the -- we're not forecasting for the rest of the year the increased pressure that we've seen in the first half of the year on raw material price increases.

That said, as we've talked in the past, on a number of calls, about the price optimization work that we have going on in the Company is ongoing and I'd say we're probably moving towards the end of that. We were driving a lot of that because of the raw material price increase pressure that we were facing. That has not all yet been reflected in the financial statements, as a lot of it was going on throughout the second quarter. But I wouldn't -- if you're looking into think about margins, I wouldn't expect to see huge improvements in our operating margins going forward for the rest of the year.

Alex, do you want to add anything to that?

No. I think that's about right. I think, as we looked at pricing, we were at probably something like a 50% to 60% run rate by the end of the quarter, so there's still some additional headroom to go as we come up to a full run rate, but I don't think we have any plans in place to raise prices through the end of the year. I would say that we've been, the businesses have been, very effective in terms of passing through any raw material price increase, as you see in our gross margin performance. So we've been very successful on that dimension.

And I would add one thing, Ian, which is if the situation changes in the raw material market - and our evidence that we see now of this this leveling off of those prices - if that reverses and the prices continue to go up we'll be back at it again, passing that through.

Okay and just still on the pricing aspect of this, ignoring where raw materials go, is there an ability to go out and get a fairer price for what you're selling, or do you think you're getting fair price? Are there other opportunities where you could kind of cull your customer list, just in that vein, if you could help us understand that as well?

Well, I mean, we think we get a fair price today, but we continue to do the analytic work that we've talked about in the past of laying out pretty detailed customer and product profitability and continuing to try to optimize that. So, as Alex said, probably 50% or 60% of that improvement work has been reflected in the financial statements and there's still some that will be, going forward, for work that's already been done and put in place. But obviously there's a limit on that and it's always better to that in a demand increasing environment versus a stable-to-declining environment, so.

Okay and then any commentary that goes in the current environment right now and what you're seeing? I know you had very good strength in this past quarter, but how would you really characterize the environment now? Is it flat-to-declining, or is it flat, or exactly what are you seeing?

Yes, I would -- well, again, we have a short-cycle visibility into this, so we're not seeing -- we can't see through the end of the year. We can only see the next couple of months but -- and we do have seasonal effects that affect us in the summer months, particularly in Europe as a lot of folks in Europe go on vacation in the summer and that's tends to effect demand a little bit, as well as few other kind of seasonal anomalies.

But all in all, if you take all that out, we feel like our demand pattern is pretty level and pretty solid, actually. I mean, we're not pessimistic by any stretch as we look at our order pattern. I would describe it as "cautiously optimistic" because of all the uncertainty that's obviously evident in how the stock market's behaving and all the most recent moderated financial -- or economic forecasts from all the economists is slower growth.

But if you just isolate on our order patterns and how our individual business are doing, we still feel pretty good about it. I think we're taking share, which is part of it, but we haven't seen anything that would suggest to us that we're going to fall off the tabletop, so.

Okay, great. Thank you very much.

Todd Vencil, Davenport & Company

Thanks. Good morning.

Good morning.

Good morning, Todd.

Just to follow on a couple thing that you just said, Steve, if can. In the last little bit, or actually, Alex said this, you mentioned a 50% to 60% run rate on the pricing. Do you mean, in terms of the prices that you've put through, your sort of 50% is sort of reflected in the prices of shipments, about half of what you've put through so far?

Yes. You're interpreting that correctly, Todd. Let me just clarify one statement, building on something Steve said. What you said about pricing is accurate. Of what we've put in play, call it 50% to 60%, is reflected in the current financials. There is obviously a huge amount of ongoing work in terms of rationalizing our customers, thinking about customer profitability and who we want to serve, which effectively increases the price that we're able to get for our most attractive customers, but does not raise the waterline on prices.

So that's part of the ongoing commercial excellence work in our continuous improvement programs that we talk a lot about and that work will continue to go on. I don't want to confuse people to say that we're not continuing to push that work as well.

Got it and if we just think about the absolute price increases that you put in where you are 50% to 60% through, I mean, is that sort of matching what you're seeing flow through and in raw materials coming out of your inventory that were previously rising? So are we basically caught up and as we get through that other half of the price increase, we're going to stay even with the raw materials flowing through?

Our strategy, Todd, has been to essentially try to pass through raw material cost increases.

Right.

And I think you've seen that in terms of how our gross margins generally perform.

Got it. And Steve, on the engines, I think I didn't catch all of what you said about the third quarter. Did you say you think you'll be approaching the level of the first quarter sales during the third quarter?

Yes, because we're shipping 8 engines in the third quarter.

Okay, so you shipped 6 in the first quarter.

Right.

So is there a little bit -- I mean, is there a little bit lower ticket price there?

Yes.

Okay.

Yes, just because of the size of engines.

Yes, okay, fair enough.

And then we'll pick up -- we're changing, as Alex said, to what we did in July, July 1 we changed it to percentage of completion, which is going to add about $10 million of revenue for the year, but most of that'll be in Q4.

This is a good time to make that change for us, because we're finishing up a lot of the engines, of these 8 engines that are going to ship and we're just now beginning to start some new engines. And so, theoretically, we wanted to make that shift when it wasn't a big -- going throw everything out of whack and so we're going to be phasing that in as we begin new engines going forward.

Got it. Looking at the corporate on allocated, there was a little jump there of $10 million, I guess, in the quarter, which was up a pretty fair amount over the year-ago in the first quarter. Was that acquisition spend in there?

The vast majority of that, Todd, was acquisition-related. As Steve alluded to, our integration efforts are ongoing and so you won't see the benefit of a lot of that redundancy elimination and consolidations quite yet flow through the P&L. There's also a little bit of impact from FX and then there was some organic increases as well.

Okay. Alex, as I think about that line, that corporate and allocated line, how do you see that playing out as we sort of move through the year?

Well, I mean, I think we, from a corporate expense standpoint, we continue to be very aggressive on costs and I think we do a very, very good job maintaining responsible discipline around costs in the corporate center. That's said, we have made a number of strategic investments around our continuous improvement teams, which deliver well above what we pay for that and so we'll continue to make those investments where it makes sense.

I also think we're continuing to look at ways to improve the efficiency of our operations. You know our operations are quite complicated and distributed and so we're looking for ways to consolidate our operations and take costs out. So I don't see anything on the horizon that leads me to get overly anxious about our SG&A or our corporate expense profile. We're pretty good at controlling that cost, centrally.

That's fair. Do you -- I guess what I'm asking is was there -- if we -- should I look at that $10 million as being sort of maybe effected by some relatively onetime or short-term stuff related to the acquisition program? Or is that going to be more persistent at that level?

Yes. The -- well over -- well, there's a little bit of an effect with the deconsolidation of GST, but we basically acquired almost $10 million of SGA&A with the deals that we announced. So I won't go through the exact breakdown, but the vast majority, as I mentioned earlier, is related to the acquisition.

Got it and then, I guess staying on the acquisitions a little bit, you guys mentioned that there's another $100 million of revenue to come in the back half of the year from the acquisitions. Can you break that out between I guess sealing products and engineering?

Let -- Alex, do you have that -- at the top? Of the 100 that's coming, how much of that is engineered and how much of that's sealing?

So it looks like, I would say, about 30% or so coming from engineered and the balance from sealing.

Got it and --.

And that -- sorry, that was some on-the-fly math, because --.

Yes, (Inaudible - multiple speakers) a little bit more. I'd guess 80/20.

Yes. It's probably a little bit skewed, because I wasn't taking into account in that number the recently-announced acquisition, so (inaudible - multiple speakers) more.

Yes, two -- two acquisitions have been done in engineered. One was Midwestern at the back half of the year for CPI and the other is what we just did, PI for GGB. PI is annualized $11 million and I think we talked about Midwestern when we did that deal, so you can go back to your notes and find that. The rest of it is all sealing and the Tara acquisition that we just did, closed on Monday, is about an annualized number of $70 million, so we'll 5/12ths of that through the balance of the year.

So we're really excited, Todd, by the way, about this Tara deal because, as I mentioned in the remarks, we're taking advantage of that pretty sizable acquisition to really create a new business within the sealing segment, which is all the high performance sealing stuff that we do, as separate and apart from the more old line traditional gasket business of the Garlock family of companies and it's really great.

It's a -- when you look at the portfolio of products that we now have and this one and we're going to call this the Technetics group and it will include the Technetics business that we purchased a couple of years ago. It will include Hydradyne. It will include the Plastomer business that we folded into this operation and will include all the high performance sealing stuff that we had before, which is all the nuclear pressure vessel O-rings that are very specialized and all the E-seals and C-seals that we do and all the Helicoflex line of seals, etcetera.

So it is a really high technology, specialized applications, high engineering solution, custom work kind of thing, kind of business. We have a global footprint and it really is targeted at some of our most attractive end use segments of downhole oil and gas, nuclear, semiconductor, aerospace and we're getting a great, great team of people from Tara and we've got a really, really good team of folks on our side. And this is going to be over a $200 million part of our Company, so we're really excited about it.

So, just jumping off that - and by the way, congratulations on all of these deals. I don't know if I said that, but you guys have certainly been putting quite a few of them up and I know it's a lot of work. If you look at Tara, I mean, you mentioned that sort of pulls all of those thing together and a new way to go to market, I think. I mean, can you elaborate on that a little bit?

Well, the markets go primarily direct, as opposed to through distribution. There's a much heavier customized and engineering component to it, so obviously, when you sell a gasket or packing or some of the more traditional oilfields, closure of oilfields, the traditional stuff from the Garlock family, they still serve critical applications, but they're really competing against other products that claim to do a similar function within the system.

This new group that we've got, many of the applications that have been developed for customers are, in fact, unique for that customer. There is no other substitute and so once you're kind of spec-d in, you're not only spec-d in for the initial use, but any use that happens in the aftermarket, over time, you get that business as well, because there's really no substitute for it and this business has that characteristic kind of across the board, which is unique.

And so the percentage of engineers we have, for instance, would be a lot higher in this business and like I said, it typically doesn't go through a distribution channel. It would go direct and we'd be dealing directly with end users. So that's a bit why we've kind of said let's carve it out and begin calling it a different business. I mean, we'll still invest and grow in the traditional Garlock family like we did with the -- like GST did with the ONE-UP Pump business that we described, the pump diaphragm business.

But that's typically a much more competitive environment than what we're talking about on the high performance seal side. People are really -- on the high performance seal side, customers are really buying our expertise.

Got it. Thanks for that. I'm going to give somebody else a shot, but I'll probably jump back in queue.

Yes. Okay. Yes.

Gary Farber, CL King & Associates

Yes. Good morning.

Morning, Gary.

I just had a couple of questions. Can you talk about your appetite for acquisitions going forward from here? What kind of pace might we expect?

Yes, that's a good question, Gary. I mean, obviously we've been pretty successful here in the first half of the year. As I said before, the 3 that we did, the 3 large ones that we did very early in the year we were targeting 2 of those to be done by the end of 2010, last year, because of the expiration of the plan, the original planned expiration of the Bush tax cuts. And once those got extended, the pressure for those owners to sell, by the end of the year, was released, so those spilled over into 2011. So most of the work done on those transactions, getting them ready and so forth, was just in the second half of last year,

So we got those done early this year and then the team has been working hard on these next three, actually for a number of months, as you might imagine. And so, at this point, our pipeline is thinner than -- we have a natural ebb and flow, kind of a natural business cycle, if you will, around acquisitions as well, so there a chance we'll have one more this year that will be relatively small in the order of magnitude of the PI transaction.

But that will probably be it for deals this year and we'll be working hard on the cultivation and kind of refilling of the pipeline so that as we move into next year we'll be able to continue our growth program. It's been very successful for us and as I've shared with you, when we've been together at conferences and so forth and on the road. The strategy that we have of these bolt-on acquisitions is really working well for us. It's driving great growth. It's expanding our product lines. These deals have very nice returns of us. They're deals that we can manage the integration very, very effectively. I believe we're getting better at how we do the integration all the time. So I think it's a really terrific strategic growth platform for the Company, so you'll see us continue with that, but I wouldn't anticipate a lot for the rest of 2011.

Great. Can you discuss, roughly, what you think your debt balance and your cash balance is going to be after these two acquisitions announced this week?

So we put about -- 40% of the acquisitions were funded with cash and then about 60% was funded by against the revolver and we'll likely be looking for ways to refinance that little piece that we put on the revolver.

And would you spend maybe $60 million in total for these two things?

We spent -- it was about $70 million total.

Yes.

Okay.

But (inaudible) that does not include the ONE-UP Pump product line that GST bought and that was bought out of the GST, LLC entity with GST, LLC cash.

Right. Okay and can you also talk about, even if it's just an estimate, when you roll all these acquisitions in together, just at the parent company? You have that slide in your investor presentation that lays out your end markets in detail. If you take the truck market, the oil and gas and exclude the defense, what percentage of revenue are those to end markets possibly and what's going to be the third-biggest end market after that?

We're going to have to get back to you on that, Gary. I don't have that at the tip of our fingers.

Okay and can you also give us some sense of where you think D&A might be headed after all these acquisitions?

Can we follow up beyond that, Gary?

Yes. Yes.

I wouldn't -- I don't think it's going to be materially different given the size acquisitions, relative to the overall portfolio, but if you want us to give us a specific estimate, we can do that.

Yes.

But my off-the-cuff answer would be I think it's going to be materially different than what you seen historically.

Right and then you talked about, I think it was $10 million number on SG&A from the acquisitions. Can you at least give us a sense or quantify, when you go into next year, just on those acquisitions, should we expect a step down in that absolute number?

I wouldn't. I think, over time, you will see that number trend down, as we eliminate some redundancies and we consolidate facilities. There is some fairly ambitious work going on right now to consolidate a number of facilities, which I won't go into in detail for sort of obvious reasons.

That said, I think the full synergy capture is probably more like a couple of years out and its contingent on some of our ARP system implementations, which we've also talked to you about. So we won't be able to eliminate all of the redundancy until we get the systems in place to more centrally manage some of these businesses, but that's more of a two-year vision than a one-year vision. Is that fair, Steve?

Yes. Yes.

Okay and then just one last one just to make sure I understood you correctly. Did you say earlier in the call you expect a sort of operating margin -- you didn't expect huge operating margin improvement for the third and the fourth quarter, basically?

I think that's a fair statement.

Okay. Alright, thanks again.

[Jared Leon]

Hi guys, just a question. I'm wondering if you can give us a little more color on kind of what you're seeing within CPI, just the end markets and how that trended through for the 2 q?

Yes. Well, we saw a little bit of recovery, particularly in Western Canada late in the quarter. So the trend there seems to be, again, a stable to slightly positive, as we entered the second half of the year. There's always a bit of a pause there in July and August and then a reasonable amount of activity in September, October and November before it gets real cold, so. And we're still hearing -- and again, these things can be canceled, but we're still hearing positive remarks about the level of activity anticipated for this fall.

Excellent and also, just in the other regions that you're seeing or the specific end markets, refining or petrochemical or natural gas?

Yes. Yes. Refining --.

Across the board?

Yes, refining is still strong, petrochemical is still strong. Natural gas, like I said, that's where -- what we're starting to see, actually, because the gas price has been so low, a lot of maintenance, but you can only do that for so long and we're starting to see some of that activity come back as deferral.

I mean, because they're still pulling a lot of gas out of the ground and a lot of its driven by NGL activity to get that out of the ground, so, yes, the volume seems to be decent. Again, it improved in the second quarter, particularly late in the second quarter.

Excellent. Alright, thanks so much. I appreciate it.

Yes.

Joe Mondillo, Sidoti & Company

Good morning, guys.

Good morning, Joe.

I might have missed it, but I was just wondering, the sequential decline in operating margin in the engineer products, what was the reasoning behind that? Is that a product mix on a seasonality basis or?

In engineered it's going to be largely driven by some volume declines, so it's a bit of a scale impact. Did you say engine or engineered?

Engineered.

Joe?

Engineered products.

Yes.

Your sales increased by about $8.0 million sequentially and the margin came down sequentially? Just wondering what closed that.

Well, I think it was because of the acquisition done in CPI.

Okay.

That kind of onetime costs that we saw in some of the integration activity that we're doing there with (inaudible - multiple speakers).

Okay, that makes sense.

Yes.

Relating to those acquisitions specifically, the acquisitions earlier in the year, are you able to quantify or do you have any more clearer picture on sort of what kind of synergies are related to those acquisitions? And beyond that, on the Technetics group, what kind of synergies are going to be related to that?

Well, we have not typically shared those, Joe, publically, at the acquisition level, I mean, at the specific acquisition level.

Can you talk about what you're doing? Like, are you consolidating many facilities or --?

(Inaudible - multiple speakers)

No, no. I mean, in the case of Tara we have no plans to consolidate any facilities. It really is a product line expansion strategy and market access strategy into end use markets. The Tara facilities are great and they have -- one of the big plusses in that acquisition is a facility in Singapore and we've been working on how to expand and move some of our Plastomer operation over to Singapore anyway, at the request of the customer and this'll provide us a wonderful platform to do that.

So, in fact, we're not planning on consolidating anything from Tara, or PI for that matter. It's really strengthening product like and kind of end use market access and filling out the product lines, so.

What about the prior acquisitions? Rome Tool and Dye, Midwestern?

Yes.

Those are all related to your prior businesses.

Yes.

Are you consolidating facilities there or how many or?

Only in the case of Midwestern into CPI. Rome Tool and Dye is one facility and Rome Georgia, that is a stamping, makes brake shoes and we're actually moving our brake friction operation, which is a warehousing operation, because that's our partnership with Dura-Line, which is the Brazilian brake company.

So we're moving the warehousing and distribution of that friction product out of Longview, which is where Stemco is headquartered and moving it into the Rome facility, okay, so, but in terms of manufacturing, there's no real opportunity for consolidation there.

On the Midwestern front, there are 3 facilities that have already been consolidated. We got that done in the first half of the year. Most of that activity was in the second quarter and it was cities up in Canada where we had a facility and they had a facility, and in some case we moved into theirs and in some cases we moved into ours. So that work has been done, so you'll see the impact of that in Q3 and Q4.

Okay.

But again, our strategy for acquisitions is not really to acquire direct competitors and then work the whole consolidation play and get immediate cost synergies. That said, we've gotten -- we've done a nice job in the case of the PSI acquisition in driving procurement savings and synergies that has been north of $1.0 million on a run rate basis that's been put in place.

But from a -- our strategy for acquisitions is typically for product line expansion, market access, finding a really good product that's in a small company that we can leverage through our global sales force and global network, or giving us geographic access in a new market. A big part of the PSI acquisition was some, a couple, of global facilities that we needed to have presence in, so.

Okay. How about the capital investments that you're making at CPI? Where are we in that in terms of opening up the service centers, investing in the ERP system? Are we looking at a couple more quarters of that or are we almost done with that or?

Well, we've got -- there's one more service center that it's in the process of being opened. It will be open in the third quarter of this year in Columbia, which is what's on the docket there. There's no more, but there could be going into next year. We just -- but right now, there's none underway. And the ERP system is probably 40% to 50%, I would say, and through the balance of this year and next we'll be, hopefully, moving toward conclusion to that (inaudible - multiple speakers) --.

Okay, it's going to take all of next year?

I'm sorry?

It'll take all of next year to finish that?

Yes, but I don't think the spending will be at the same rate for the full year.

Okay.

Most of the spending for that has actually already taken place.

Okay.

Within CPI.

Okay and then on the engine business, did you receive any orders this quarter and sort of how has your 2012 outlook sort of changed on that business at all?

Yes. Well, as we mentioned in the script, we got -- in Q2 we got $65 million worth of new orders for engines.

Okay.

And there's a bunch of -- and those will ship in '12 and '13 and we got a bunch of kind of quotes out and expect to hear hopefully positive news in the next several months as well, so, yes.

The only thing that's bad that's happened to FME was what is the likely cancellation of the South Texas project, which was going to be four new engines, beginning to ship in 2013. Which is certainly extremely likely to not happen because of the cancellation project by the operator in -- after the events in japan, so we're not going to be -- I don't think we're going to be making those engines, even though, as Alex said, there hasn't been officially cancelled. And there is a little bit of cost recovery.

But we weren't far enough into that project really to make a huge bit of difference. I mean, we have done some work, some engineering work and a little bit of procurement work, but not a ton. But our backlog in FME actually looks pretty good.

Okay, so I know you don't give guidance this far ahead, but with the new accounting change and these new orders that you see, how does 2012 sort of look or how is that shaping up in your mind?

I mean, 2012 and 2013, as Steve mentioned, look very consistent with the performance that business has delivered historically and the real benefit of this migration to percentage of completion accounting is it will give you much better transparency and visibility in ability to sort of model the long-term performance of the business.

Yes, Joe, it won't shift around, quarter-to-quarter, based on engine shipments. Now it still will be a little bit lumpy, but based on the activity going on in the shop, because that varies from one or two or three engines, to four, five, or six engines depending on how many are in process and where they are in the stage. But it certainly will be a lot smoother quarter-to-quarter than what we've had in the past. So we fully anticipate '12 and '13 to be positive years for FME relative to this year and last year.

Okay. Great. Thanks a lot. I'll hop back in queue.

Yes.

There are no further questions in queue at this time.

Alright, everyone. We thank you for dialing in and we'll be available for the rest of the afternoon if you have further questions and we'll look forward to talking to you then.

That does conclude our conference for today. Thank you for participating. You may all disconnect.