Standex International Corp (SXI) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen. Welcome to the second-quarter 2011 Standex International Corporation earnings conference call. My name is Caitlin. I will be your operator for today.

At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, to Mr. David Calusdian, Executive Vice President of Sharon Merrill Associates. You may begin.

Thank you. Please note that the presentation accompanying management's remarks can be found on Standex's Investor Relations website, www.Standex.com.

Please see Standex's Safe Harbor passage on Slide 2. Matters Standex management will discuss on today's conference call include predictions, estimates, expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to Standex's recent SEC filings and public announcements for a detailed list of risk factors.

In addition, I would like to remind you that today's discussion will include references to EBITDA, which is earnings before interest, taxes, depreciation and amortization, adjusted EBITDA, which is EBITDA excluding restructuring expenses and one-time items, non-GAAP net income, non-GAAP in from income from operations, non-GAAP net income from continuing operations, and free operating cash flow. These non-GAAP financial measures are intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States. Standex believes that such information provides an additional measurement and consistent historical comparison of the Company's performance. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in Standex's second-quarter news release.

On the call today is Standex Chief Executive Officer Roger Fix, and Chief Financial Officer Tom DeByle. I'd now like to turn the call over to Roger.

Thank you David. Good morning everyone. Please turn to Slide 3.

We were pleased with both our top and bottom-line performance in our second fiscal quarter, and we were also encouraged that we began to see more uniform improvement across the majority of our end-user markets. Quotation activity is up more broadly and our optimism is growing.

This quarter, all five of our business segments reported year-over-year topline growth. Sales were up 12% overall to $156 million. Our topline sales growth included organic growth of 11.9% and acquisitive growth of 0.8%.

Looking at the bottom line, we're generating solid growth and profitability, which is in line with the level of operating leverage we have expected from our sales volume growth. The cost reduction and productivity improvement initiatives we completed over the past 24 months have enabled us to accelerate earnings growth along with increased volumes.

Our non-GAAP operating income increased by 30%. EBITDA increased by 21%, and non-GAAP EPS grew 37% to $0.71 per share.

We are particularly pleased with our performance in Q2, given that we had started to emerge from the recession in the year-ago quarter, so the comparison is more difficult than in the past several quarters. Our results in Q2 are evidence that our growth strategy is working. This strategy is focused on both organic initiatives as well as acquisitions. During the past year, we have made a few small acquisitions and each one has performed at or above expectations.

Our Mold-Tech India acquisition, which we completed in the first fiscal quarter, has exceeded expectations thus far. Mold-Tech India broadens the engraving group's presence in the very strategic and rapidly growing Indian geographic market. This business continued to be accretive to earnings in the second quarter, its first full quarter of combined operations.

Further, we believe the acquisition in India gives other Standex businesses a base from which they can also benefit from this large, high-growth market. We are currently exploring opportunities in India for other Standex business units.

The acquisition of S.A. Chemical Etching in Durban, South Africa subsequent to the end of the second quarter, gives our engraving business the distinction of operating on six continents, further demonstrating our global capabilities to our customers. The acquisition in South Africa, which will operate under the Mold-Tech banner, is consistent with our strategy to continue to strengthen the global presence of our texturizing business.

Our last quarter's call, we discussed the Food Service Equipment Group's acquisition of the Tri-Star product line, which is another good example of our strategy to acquire companies that build on Standex's strategic operating platforms. I'll discuss more about our progress at Tri-Star later in the call.

The progress we've made since 2009 in lowering our debt levels enables us to continue to make strategic acquisitions like Tri-Star, Mold-Tech India and Mold-Tech South Africa. We're feeling good about our pipeline right now and we are optimistic about our ability to execute on our acquisition strategy over the next 12 to 18 months.

We believe Slide 4 does a very good job at illustrating the transformation we've executed in Standex's cost structure over the past two years and the very exciting earnings potential that we believe the Company has for the future. First, as you can see from the slide, our trailing 12-month sales and earnings peaked prior to the recession in the first quarter of fiscal 2009, where the trailing 12-month sales were $703 million and adjusted EPS was $1.87 per share.

The recession really impacted most of our businesses beginning in the second quarter of fiscal 2009. During the second, third and fourth quarters of fiscal 2009, we executed a major restructuring of the Company, putting in place $40 million of permanent cost reductions. Most of these cost reductions were completed by the first quarter of fiscal 2010. Since that time, we have turned our attention to driving incremental share gains at each of our business units. During the same timeframe, a number of our end-user market segments began to stabilize and recover.

As you can see from the slide, our trailing 12-month sales have steadily increased from a low of $562 million in the second quarter of fiscal 2010 to $600 million in the recently completed quarter. More importantly, you can see at the same time that our trailing 12-month adjusted EPS has increased substantially to $2.53 per share achieved in our last quarter.

Comparing our pre-recession peak sales and earnings reported in the first quarter of fiscal 2009 versus the second quarter of fiscal 2011 clearly underscores the positive impact that the restructuring activities have had on our business model. As was just mentioned, in the recently completed quarter, our trailing 12-month sales were $600 million, or still $103 million or 15% less than the pre-recession peak of $703 million reached in the first quarter of fiscal 2009. Despite the reduction of $103 million in sales, the trailing 12-month adjusted EPS of $2.53 a share we just reported is $0.66 a share or 35% higher than our pre-recession peak.

From this analysis, you can see why we have focused the attention of our entire management team on driving organic and acquisitive growth as it gives us the opportunity to further leverage our new cost structure and why we are very optimistic about the future of Standex.

So with that as an introduction, I'll turn the call over to Tom for a review of the financials for the quarter.

Thank you Roger. Good morning everyone.

Please turn to Slide 5. The 12% sales increase we reported in Q2 is our fourth consecutive quarter of year-over-year sales improvement, demonstrating that our topline continues to recover from the recession which began to impact us in Q2 of FY '09.

Please turn to Slide 6. Operating income for the second quarter, which includes $0.5 million in pretax restructuring expenses, $300,000 in a pretax gain on real estate, and $200,000 of acquisition-related expenses, was $13 million. Due to the volume leverage and the cost reduction efforts we have implemented, non-GAAP operating income, excluding restructuring expenses and one-time items for both quarters, outpaced sales growth and was up 30.1% year-over-year to $13.4 million. In addition, non-GAAP operating income margin improved by 120 basis points to 8.6%.

Second-quarter fiscal 2011 EBITDA came in at $16.5 million. Excluding the previously mentioned items, adjusted EBITDA was $16.9 million, a 21% improvement from the second quarter of fiscal 2010. Adjusted EBITDA margin increased by 81 basis points from a year ago to 10.9%.

As you can see on Slide 7, we performed very well on a trailing 12-month basis. On sales increase of 6.8%, non-GAAP operating income increased 31.3% from the prior 12-month period, and non-GAAP operating income margin grew by 155 basis points. EBITDA, excluding special items, grew by 23%, and EBITDA margin increased by 139 basis points.

Please turn to Slide 8. For the second quarter, net income from continuing operations grew to $9.1 million, or $0.71 per diluted share, from $6.4 million or $0.51 per share a year ago. This represents a 39.2% year-over-year earnings per share improvement. Second-quarter 2011 net income from continuing operations includes both tax of a $300,000 restructuring charge, $200,000 of acquisition-related expenses, and a $200,000 gain from real estate transaction, and a $300,000 benefit from discrete tax items.

The second quarter of 2010 included a post-tax $1 million restructuring charge and a $900,000 gain on sale of real estate.

The acquisition costs in the current year consist of purchase accounting, legal costs, and other expenses that are one-time items related to the acquisitions we completed this year. Excluding the items mentioned above, for both periods, non-GAAP net income from continuing operations increased 41.6% to $9.1 million or $0.71 per diluted share from $6.4 million or $0.52 per diluted share in the same period last year.

The effective tax rate for the quarter was 27.9% compared with 32.1% for the same period last year. The lower effective tax rate is primarily due to the research and development credit reported during the quarter. Excluding the impact of the R&D credit, our effective tax rate was 29.5%. The projected annual effective tax rate for the remainder of 2011 is expected to be between 30% and 32.5% without regard for discreet tax items.

Turning to Slide 9, net working capital at the end of the second quarter of fiscal 2011 was $114.8 million, compared with $112.8 million at the end of Q1 2011 and $103.5 million at the end of Q2 of last year. The increase both year-over-year and sequentially was primarily due to higher Accounts Receivable as a result of higher sales volume in the current-year second quarter. Despite the higher balance, we have not let up on our aggressive management of working capital, as evidenced by turns remaining flat with the prior year at 5.4.

Part of the working capital story is inventory. Returns improved dramatically year-over-year from 4.9 to 5.5 turns. As such, inventory levels only increased 3.7% from last year on a 12% sales increase.

Slide 10 illustrates our net debt position for the quarter. We reduced our net debt by $9 million year-over-year to $46.3 million. The Company's balance sheet leverage ratio of net debt to total capital declined to 17.7% at the end of the second quarter, compared with 22% during the prior-year quarter. On a sequential basis, our net debt decreased 8.8% from $50.7 million.

We define net debt as short-term debt plus long-term debt or funded debt, less cash. Our funded debt increased from $63.3 million in the first quarter of 2011 to $67.9 million at the end of the second quarter.

Please turn to Slide 11. During the second quarter of 2011, we generated approximately $11.6 million of free operating cash flow. We define free operating cash flow as cash from operating activities, less cash paid for capital expenditures. Conversion of free operating cash flow from net income was 128.2% during the quarter. We used $2 million in cash for capital spending in Q2, and our expectation for capital spending for all of fiscal 2011 is now in the range of $8 million to $10 million. We believe, in the near-term, our available cash can best be deployed in supporting our acquisition strategy, capital spending for strategic growth initiatives, and productivity improvements.

Going forward, our financial priorities remain the same. We will continue to focus on reducing expenses and maintaining a cost structure that will drive significant operating leverage as our markets continue to recover and we benefit from topline growth initiative. Second, we are maintaining our commitment to strong working capital management. Third, we will continue to focus on cash generation in order to provide the flexibility to execute on our acquisition strategy.

With that, I'll turn the call back to Roger.

Thank you Tom. Please turn to Slide 13 and I'll begin our segment overview, starting with our Food Service Equipment Group. The Food Service Equipment Group grew revenues by 12.3% during the quarter. Sales were driven by strong broad-based performance with all of our business units posting year-over-year sales gains, including double-digit growth from the refrigerated solutions, cooking solutions and Procom pump businesses. This is a nice rebound for the Cooking Solution Group, which was still soft in Q1.

Sales outpaced operating income growth of 1.2% as a result of unfavorable mix of products and services, lower pricing compared to Q2 of 2010, and higher metal costs. We had an unusually favorable ratio of price-to-metal costs in the second quarter of last year, due to the timing of price increases and metal purchases, so it was a particularly difficult comparison. We've already begun to see pricing in the markets start to readjust, so we are encouraged that our margins will begin to rebound going forward.

Looking closer at the top line, by offering a compelling value proposition to our customers, offering a more complete solution and executing sales synergies, we are taking share on both the cold and hot sides of the market. Our double-digit increase in sales is especially telling, given that the North American Food Service Equipment market is still contracting, albeit at a much slower rate than the past two to three years. To continue to provide this value, we are investing in new product development to both broaden our offerings and give our customers innovative solutions that fit their needs.

One important new product offering that has been a major hit with our customers is our new value line of upright reach-in refrigeration products. We introduced this line late in fiscal 2010, and it continues to be very well received in the market.

In addition to product development, acquisitions provide us with the opportunity to fill in product gaps. For example, early in the call, I mentioned Tri-Star, which was acquired early in Q2 and is already contributing to our top line. TriStar provides our Food Service Equipment Group with a more complete cooking solutions product offering, specifically a primary cooking product line including high-quality restaurant series and value series range platforms, along with complementary accessories. The next step is the integration of the Tri-Star equipment into our Baker's Pride brand, which is already underway, as you'll see on the next slide.

Please turn to Slide 14. In two weeks, at the North American Association of Food Equipment Manufacturers, or NAAFEM, exhibition in Orlando, we plan to feature a complete Tri-Star range line under the Baker's Pride brand with an aggressive rollout to follow. Our value line of upright reach-in refrigeration products, along with a number of other new product offerings, will also be featured at the show. Our ability to provide such comprehensive offerings across the hot and cold sides of the market has really moved the needle in terms our sales growth and prospects for this group.

Please turn Slide 15. Engraving segment sales increased 4.7% compared with the prior-year quarter. This growth would have been greater, but there was a 2.2% negative effect from foreign currency during the quarter. The growth in Engraving was driven by robust mold texturizing automotive demand in North America and China. Additionally, we saw strengthening demand for non-automotive mold texturizing applications and increased quotation activity for process machinery. We are encouraged by the non-automotive trend, since the applications were quite diverse across a broad section of markets, including, for example, the medical and industrial sectors.

Looking at the second half of the year, we believe that the demand environment will remain solid. We expect that international Mold-Tech's rising sales, especially in China, will continue to strengthen and that Innovent should be stronger as well. This should more than offset slower growth in the North American automotive market, where we do not expect to be able to sustain the very high sales levels we've seen in the recent quarters. We expect demand for roll Engraving to remain relatively soft but stable.

Turning to the bottom line, Engraving reported a 39.7% increase in operating income in the second quarter as a result of our ongoing cost reduction program. We've begun to source machinery components and unfinished rollers from China for operations in North America, Brazil and Western Europe. This is the next major phase of our cost reduction plan for Engraving which we expect will enable the Group to even more competitive in this particular segment of the market.

Turning to Slide 16, I'd like to talk for a moment about the direction of the Group and its potential as a strategic platform for both organic and acquisition-driven growth. As I mentioned, our acquisition in India has already been very accretive. Mold-Tech India is clearly developing into a strategic success with significant potential for the Engraving group. This services the rapidly growing Indian automotive market through Indian and non-Indian OEMs located throughout the country. We anticipate a strong automotive platform launch scheduled for the OEMs in India for the next several quarters, which will continue to benefit our Indian operation.

With the acquisition of the Mold-Tech South Africa only a few weeks ago and the start-up of our third China facility in Tianjin, we now have a strategic presence on six continents and in the fastest-growing emerging economies. In short, we are where the customer needs us to be on a global basis in a way that is unmatched by our competition. By rapidly sharing our technology from location to location through such tools as digitized design, we can meet customer needs in an integrated fashion across the globe. For example, Mold-Tech South Africa is already performing program work for Ford that we were previously awarded. Since the molding of the plastic parts is being done in South Africa, we are now able to perform the texturizing close to Ford supplier and provide additional value by being nearby to help with adjustments during to prove-out process.

In addition to the success this quarter in China and India that we've already discussed, we continue to grow our existing business in emerging growth regions such as Brazil, Singapore and the Czech Republic, penetrating non-automotive markets in addition to our OEM customers. For example, about six months ago, we began making embossed plates in Turkey that are used to make synthetic leathers for the fashion industry. This sales initiative is being well-received in the (inaudible) centers of both Europe and Brazil.

Please turn to Slide 17. Engineering Technologies revenue for the second quarter was up 9% year-over-year, while operating income increased by 32.6% due to strong sales leverage. Our second-quarter sales reflect an increase in aerospace and aviation shipments, which were partially offset by softness in the energy market. On the last quarter's conference call, we discussed our expectation that energy will be soft for the near term and we still believe that to be the case. However, we are gaining market share at the major gas turbine manufacturers in the US, which should position us for good growth in this market when recovery occurs, possibly early in calendar year 2012.

In Aerospace, we were pleased to receive some clarity on the federal government's NASA funding plans. Late last year, Congress approved the NASA Authorization Act of 2010, which provided funding for commercial rocket systems designed to support the resupply of the International Space Station, and for NASA to develop a heavy launch manned vehicle system for deep space exploration with a scheduled first flight in 2016. The heavy launch vehicle funding came with a caveat that NASA should use existing suppliers, technology, and contracts from the space shuttle, Ares and Orion programs. Since we are suppliers to all three of these programs, we are optimistic about our prospects in aerospace. So while there remains some uncertainty due to the political climate in Washington, we expect to benefit from this funding beginning in the calendar 2012 and beyond.

Looking forward at our performance in calendar 2011, we expect that the softness in the energy will result in overall sales performance in Engineering Technologies similar to calendar 2010, with growth resuming in calendar 2012. For the second half of fiscal 2011, I should note that we expect to have a difficult comparison in the group as the result of unusually large shipments in the third quarter of 2010 for a contract order related to our NASA Teledyne Brown contract.

Please turn to Slide 18. Once again, the Electronics and Hydraulics segment reported excellent results, including 36.5% year-on-year topline growth. We continue to have exceptionally strong operating leverage in this group, which resulted in operating income growth of 187.6% in Q2. Increased sales of electronics were driven by continued strong demand from a broad base of end user markets, including medical, general industrial, aerospace and automotive. The magnetics competitive landscape is very fragmented. But our Electronics unit is unique compared to most of its competitors, as it has a strong reputation for technology and innovation, a solid engineering resource base, and the benefit of low-cost production in China and Mexico. The combination of these strengths makes Electronics a highly desirable partner as end users consolidate their supplier base. Our success in being named a preferred supplier at an increasing number of our blue-chip OEM customers has been critical to our significant growth during the past several quarters. We continue to be encouraged by our prospects in Electronics as we execute our strategy to gain share by introducing new products, penetrating new geographies, and applying existing technologies into new applications and customers.

At Hydraulics, after seeing initial signs of recovery in the North American market in Q1, based on the second quarter, we are increasingly encouraged that the recovery appears to be real and developing momentum. This represents the second consecutive quarter of double-digit growth for Hydraulics in the North American market.

We're also pleased with our progress in expanding our Hydraulics presence internationally through our operation in China. We are doing this in three ways, first by targeting the huge domestic Chinese market where we have recently been designated as the number two supplier to some of the largest users of our type of products in China. Because of the large size of the overall market, this designation provides us with a significant growth opportunity, since the total available market is very large.

Second, we continue to introduce products made in China to be exported to Southeast Asia, Australia, and South America. For example, we recently shipped prototype products into Brazil and Peru and expect to see further growth in those markets.

Lastly, our China facility is producing rod cylinders, a complementary product, for sale in the US and other global markets. We see great potential for these products, which were previously too costly to competitively produce at our US-based plant. We continue to be encouraged by the prospects for top and bottom-line growth in this segment.

Please turn to Slide 19. Air Distribution segment sales were up 2.8% in Q2. Our operating loss for the quarter was about $300,000 or slightly lower than the year-ago quarter. ADP continues to be affected by the downturn in the housing market. However, we are continuing to drive market share gains at ADP through our traditional products and customers, as well as by adding new business through new products, penetrating new wholesaler accounts, and expanding our presence in new geographic locations.

Please turn to Slide 20 for our summary highlights. First, we are encouraged by how broad-based our topline performance was this quarter, where all of our business units reported year-over-year quarterly sales increases. We have stated in the past that, for most of our business units, we have very limited forward visibility based on our order backlog. As a result, we are unable to make any specific statements about our future sales performance, which remains true today. As a result, for the last several quarters, we've indicated that we are cautiously optimistic about the recovery in our end-user market segments as we reported year-over-year sales gains and saw improving booking performance in most of our units. This quarter, we are pleased to say the emphasis is more on the optimism side of that statement.

All five of our segments reported topline growth, and ADP is the only segment where market conditions have not shown any improvement. Engineering Technologies will probably show no growth in calendar 2011, but we are bullish about that group beginning in calendar 2012.

Second, the cost reduction and productivity improvements that we've implement during the past years have made a significant impact on the bottom line. We have achieved our seventh consecutive quarter of year-over-year growth in non-GAAP operating margins and non-GAAP EPS grew 37% to $0.71 per share. We've reported $2.53 in non-GAAP EPS in the trailing 12 months.

Finally, our acquisitions have been performing at or above expectations in terms of both their financial and strategic contributions. Looking forward, we have significantly lowered our debt levels and our net debt to capital ratio is down to 17.7%. This provides us with the dry powder to execute on our acquisition strategy in the coming quarters.

Tom and I will now be pleased to take your questions. Operator, can you assist us?

(Operator Instructions). Rick Hoss, Roth Capital.

Good morning gentlemen. I wanted to focus on the FSC, Food Service Equipment segment. Sales were very strong. Was there anything in particular, any large one-time orders or anything that you can point to to describe why you saw that bump?

Good question. There were really no significant one-offs or large rollouts that contributed to that sales increase. We saw just generally improving performance really across the breadth of Food Service.

So can we think of it as -- I know there's going to be some seasonality, but can we think of it as kind of a run rate, a normalize run rate then?

I don't think you can look at the 10% increase as a normalize run rate, but I think you can definitely look at it as an improving trend in our top line.

Yes, not on a percentage basis but on a gross sales number, I guess.

Correct.

Okay. Then the one thing that concerned me is just the deleveraging at the great topline growth, and then a meager operating income on a gross dollar standpoint growth rate. You said that there was -- in your press release, you talked about there were some raw material costs and product mix that played into that. Can we expect, in subsequent quarters, can we expect to see the operating income outpace sales growth?

I really can't give you that kind of specifics going forward, but I can provide you maybe just a little bit of color that can help you understand it. First of all, there's really two issues. One is the mix of product sales versus what we call service or installation sales. We've seen an increasing level of installation sales in our base run rate. This is due to customers wanting us to take the responsibility to coordinate and assure the proper installation of some of the products. Service sales, as you can imagine, we do those through a third party, so our markup on those is quite small as compared to the margins that we would see on our hardware sales. So that trend will continue going forward.

The other contributor, and the bigger of the two, frankly, is this adverse price and cost mix. As we tried to suggest in our comments in the press release or in the conference call here, last year, we had a very favorable situation that developed. We had implemented price increases in the six months prior to the first quarter a year ago. At the same time, we actually saw a favorable lowering of metal costs. That all came together really in the first and second quarter of the prior year. After that, we saw metal costs start to increase, we saw price deteriorate in the market and really brings us forward to today.

Going forward, I'm happy to say that there has been a number, a large number, frankly, of the competitors that have publicly announced price increases through the AutoQuote system, which is a public domain where dealers and customers can go to access pricing. The January report out of AutoQuotes indicated that there was a large number of competitors that were increasing prices along with ourselves. So I think that part should definitely improve as we go forward. Recognize that there is probably a four to eight-week period of time before new pricing begins to flow through our backlog and into our P&L, so it will not be an overnight experience. But we do expect that part of the trend to improve going forward.

Okay. So when we think about sales, FSE sales for the year, then we need to think of -- also think about the effect of price increases. So when we're thinking about revenue growth, there is going to kind of be a real versus nominal comparison, and the nominal is going to include anticipated price increases along with the inflationary pass-throughs with raw materials (multiple speakers)?

That's correct.

then remind me. Amongst the different segments, the FSE has fairly large seasonality. The other businesses are fairly stable?

There are a couple other businesses that do have some seasonality. Food Services clearly, being the biggest, it has also the biggest seasonality, would be the biggest contributor. But our Air Distribution business, which is also construction-related, would see the third quarter being the weakest. Historically, there's elements of our Engraving business that also are weakest in the third quarter. Part of that is, again, related to the fact that there is a segment of our business that's exposed to building products. So, those are the three that definitely would historically demonstrate seasonality where our third quarter fiscal quarter we are currently in, the January quarter, would be our weakest.

The last question for me, the Engineering Technologies operating margin looked fantastic in the first half of this year. Do you expect that to continue, or would you say that your [work] should be back into maybe the 20% range?

I'd say it's probably in between. I don't believe we will necessarily keep those high margins, the exceptionally high margins, but I definitely think we're going to be above our historical margins, primarily due to the fact that we implemented a number of cost reduction initiatives in that business over the last 12 months or so. So, I would say in between is a probably more likely occurrence.

Perfect. Thanks guys.

Michael Saloio, Sidoti & Co.

Hi guys. I wanted to ask about the Engineering Tech group. Could you be a little more specific on where the demand is coming from as far as Aerospace and Aviation? What specific products you are seeing demand for there?

In our traditional product lines -- and again the business tends to be a little lumpy. But in the Aerospace side, it would be -- the work we're doing with United Launch Alliance, which would be the Boeing and Lockheed side, we saw good work with Bombardier through the lipskin side which would be in the Aviation segment, so with our traditional customers.

Okay. Then you expect the business this year to be roughly in line with what it was last year and return to growth in 2012. Is your assumption that the business returns to growth in 2012 including the benefit from the NASA funding you were talking about, or could that be incremental on top of what do you think demand is going to look like?

No, that's included. We are, in that area, assuming that there will be some funding provided and that we will see some of the -- at least the developmental projects that would always precede any kind of new vehicle would be released and be funded so that we could ship an invoice out during calendar '12. Clearly, the developmental programs are not as significant in terms of dollar value as when we get into the production side of it, but that's the nature of the beast. You'll see developmental programs in the early stages of a new program and then you'll transition that to production later on.

So again, the point we tried to make there is launches in 2016, you will see developmental programs '12 and '13, you'll begin to see some hardware '14, '15 probably if they maintain those schedules.

Okay, but what would the sales impact be for next year?

I don't have a number for you. Again, it remains to be seen as to exactly what the funding levels and what is provided for funding through the government.

Okay. On ADP, I think you mentioned in the past the business typically lags housing starts by a quarter or two, but we are starting to see a little bit of a sales rebound there. I guess is there a certain sales level where you think that business will start to turn profitable again, given we are starting to see comps up in sales but operating profit roughly in line with where it's been for the last few quarters?

Okay, a couple of responses I guess. First of all, the lag is probably more like eight weeks, plus or minus, of a lag. It's really a lag from building starts, and it's just our kind of historical perspective as to when the metal shows up at a job site after a start is issued, or a start is initiated at a job site.

As far as building starts, my perspective is a little different. If you go back to December of 2008 and look at housing starts over the last -- through that timeframe, my perspective is more that there really has been kind of a general bouncing in a range of high say 400,000s to maybe low 600,000 annualized starts and that, yes, one month it's up, one month it's down. But if you looked at that perspective, you'd see it's been relatively flat.

So in my mind, there really hasn't been any recovery that's consistent by any stretch of the imagination, but it's been just kind of range-bound. There's been some noise, if you will, from month to month or quarter to quarter. So as I see it, the good news is we have stabilized.

The real question is, there is still a pretty high number of months on hand of existing housing inventory. The question is how long does it take to reduce that inventory? How much more foreclosed inventory comes into the backlog, and how long does it take to clear all that? Frankly, I just don't have that -- those answers yet.

So the sales gains you're seeing are basically all from market share gains?

Market share gains, and then just timing issues as various customers restock, that type of thing.

Okay. Could you give us a little, I don't know, color, if you will, on what the acquisition market looks like for the remainder of the year next year in Engraving and in Food Service?

The good news is that we are fishing in a number of ponds. In other words, being that we have multiple platforms that we would like to hold onto, we have a pretty broad approach to the marketplace and looking in for a number of our platforms. So, that gives us the opportunity to fill the pipeline in a number of different ways.

The second point I make is I think, in general, that we are seeing more interested sellers. We have been back in the acquisition market probably for the last 14, 15 months. Certainly, as compared to those early days, there's I think more willing sellers in the world perhaps than when we first started. So that's encouraging.

Multiples, which is really the other question that people ask, seem to be firming up. That would be the deciding factor for us, is that we are a willing buyer. As the willing sellers come forward, can we come together on multiple and price? Of course that remains to be seen. But in general, we are getting some momentum as we've initiated contacts with potential targeted companies, and are encouraged about what we see and where we might be in the next 12 to 18 months.

Last question on Food Service -- are we seeing the return of QSR customers to the market at all? I know those are typically higher-margin customers.

It's spotty. There is definitely -- McDonald's, as an example, has had a very strong building program really over the last six, nine months, and our Refrigeration group in particular has benefited from them. Yum!, on the other hand, has, from a domestic standpoint, had very little build, very little new investment, which has hurt our topline, frankly. So it's spotty. But I think just in general, yes. There is a growing confidence I think on the part of most of the larger companies, and you're seeing them be a bit more aggressive. Again, it depends on the chain in terms of construction, in terms of capital deployment.

I think (inaudible) be said beyond just new store openings, I think that there's probably a backlog that has occurred in terms of new menu enhancements and new capital renovations for existing stores, where we are hopeful that some of these chains will begin to catch up with some of that backlog and release capital funds in those areas.

That's all my questions for now.

John Walthausen, Walthausen & Co.

Yes, good morning, and congratulations on another good quarter there. A couple of questions. On the Engraving business, you put together some nice, interesting acquisitions. From what you say, am I correct in assuming that there is substantial ability to improve the margins there, not just by the leverage you get from growing sales, but by reorganizing where these are sourced and overhead, things of that nature?

Not so much due to (inaudible) cost reduction side. These businesses that we have been buying are very profitable, frankly. We think the growth is more on the volume side, because these economies are generally high-growth economies. In many cases, particularly South Africa and India, what we see is that our automotive OEMs are preferentially investing in new models in those countries. So, we think that the real benefit to us is just going to be in helping us more with topline growth. We are buying profitable businesses in those areas, and our operational strategy is more to bring them access to our technologies, which provides them with a higher level of quality and service to the OEs.

That's helpful, but there's not a thought that they can bring you lower manufacturing costs?

Well, the two that we've done thus far are mold texturizing, and those, again, service local markets. It's really a service business versus an actual hardware business. The other comment we made is on the roll engraving and machinery side of the business, and very much we see cost reduction opportunities there. We mentioned that we are actually, for example, sourcing what we call blank rolls. A roll is produced as a steel cylinder, and then we will engrave on that cylinder. We are shifting some of our sourcing at the blank roll from US sources or Western sources, (inaudible) to China, and we are seeing 30% to 50% reductions in blank roll costs, so very much are using like a low-cost sourcing to help us drive cost reduction and margin improvement and just to make us more competitive in the marketplace.

Good. Then on the Engineering side of the business, I don't remember you talking about gas turbines before. Now, definitionally, those -- you're talking about natural gas powered generating units? Is that correct?

Let me give a little background there. We use energy to describe what is really land-based gas turbines. The land-based gas turbines that we sell into are used for both power generation as well as gas and oil pipeline pumping. Our largest customer in that segment is Rolls-Royce Energy Systems, and they produce turbines for both applications, both for power as well as pipeline. [Solar] Turbine is another good customer of ours. Pratt & Whitney is another good customer of ours in that segment. Again, depending on the customer, they have a different mix of whether it's power or pumping.

Right, okay, good. Are those new parts that you are making or is it something that you're just looking towards the revival of that market, which has been a little slack for a while?

Our perspective is that the leadtime on turbines is obviously quite long. Let's say nominally a year. So I think what we are seeing, frankly, from our customer base as we talk with them is a delayed reaction to the recession, that in our short-cycle businesses, the recession impact is almost overnight. But in the case of these turbines, the customers have quite an extensive backlog on hand. What we are seeing is just that, a delayed reaction to that. So as we talk with the Rolls-Royces of the world, they are saying, yes, you're going to probably be soft here in calendar 2011, but as they look into their I use the word pipeline, as they look into their sales, future sales forecast, they see some strengthening again in 2012.

Right, I agree with that. I guess my question was are these parts that you are talking about are parts that you have been making for a long period of time or are these new wins for you?

I'm sorry. A little bit of -- predominantly things that we've been doing for a long time. We've had a relationship with Rolls-Royce that goes back decades. So that business is stable, and we grow with them, if you will. Pratt & Whitney and Solar Turbine are good examples of, over the last 12 months, we've actually been awarded additional components. We've had relationships there but we are growing our penetration, our market share, if you will, in those two customers in particular.

Great, thanks. That was very helpful. Again, congratulations.

Rick Hoss, Roth Capital.

Just one quick follow-up on the FSE segment. Are you comfortable with the operating structure of the segment at this point?

I'm not sure I follow your question.

I guess what I am looking for is, at this point, are we just focused on growing revenue and leveraging the current structure? I'm trying to figure out when -- at what sort of revenue levels can we start to see mid teens, and then mid teens type operating margin?

If the essence of the question is do we have any major restructurings planned for Food Service, the answer is no. We don't have any major restructuring plans. We have a pretty aggressive cost reduction initiative that's ongoing. We have really three primary drivers there. One is using lean enterprise throughout our existing operations to drive continuous improvement in cost and margin. We continue to move product lines, more product lines, into our low-cost manufacturing facility located in Nogales. You'll see us move on an ongoing basis more product into Nogales. More recently, we are looking very aggressively into low-cost sourcing, again predominantly in China, bringing in both components as well as some of the what I'll call low-end value kind of products to supplement our existing products that we produce here in the US.

So all else being equal, if we were to just draw a flat line at revenue, what sort of improvement on a percentage basis do you think these ongoing initiatives produce? 50 bps a year? 100? What do you think?

We don't have a number, but it would certainly be less than 50 bps a year.

Fair enough. Thank you.

There are no further callers in the queue. I would now like turn the call over to Mr. Roger Fix for closing remarks.

Once again, we thank you for your interest, and we look forward to speaking to you again next quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.