NPO
#<UNK>, why don't you address that.
<UNK>, we are making great progress at CPI.
Our team is energized there.
As I mentioned in my comments, the operational improvements that have come, in part, from our cost reduction initiatives have also led to much better improvement in the plant, on-time deliveries being up, and we are seeing some commercial wins.
And so, for CPI, with our cost restructuring progress to date essentially complete ---+ we will have some small restructuring charges in Q2.
At this point it's mostly about volume.
And so, without some help from volume, we are going to have better results than we had last year, but we need some volume help as well.
So <UNK> is here with us and, <UNK>, I don't know if you have any other comments about the progress that we are seeing.
No, I completely agree, <UNK>.
The team is performing very well.
We've got the restructuring behind us for the majority of the case.
We think we have a little bit to do, as <UNK> mentioned, but the heavy lifting is behind us.
Now it's more ---+ it's all about growing in our current customers and delivering our new customers.
And in addition to the on-time delivery improvement, we're seeing shorter lead times which is allowing us in local markets to win business that we would not have won before.
So very encouraged by the team and the work that we are doing and the heavy lifting on the restructuring is all behind us.
<UNK>, we had said before that we expected in the segment, with the restructuring about CPI and some of the facility consolidations underway at GGB, that we expected $3 million to $4 million of cost savings from those initiatives for the year.
And so, we are right on track.
That's going according to our plans.
Yes, <UNK>.
First of all, heavy-duty is essentially all we do in Stemco, so it's all Class 8 equipment.
Our exposure to trailers, particularly ---+ both in the aftermarket and OE ---+ is considerably higher than our exposure to the truck or tractor, the power unit.
What we've seen in the OE world is the decline has been so far in the truck area, where we have a lower exposure.
So far, the trailer volume is essentially still at a cyclical high.
We have not ---+ the backlogs are strong.
So we actually don't see a forecast in the near-term, which I'll say is the next two to three quarters.
We don't see a decline in the trailer OE the production.
And our aftermarket is still hanging in there.
Obviously, the aftermarket is just almost completely driven by US GDP ---+ how much freight is moving.
And while it's certainly not any stronger than it was last year, maybe marginally weaker, and we see that kind of continuing on.
We don't see any signs that that's ready to fall off the table top.
So we feel pretty good about the Stemco business, which as you know is in sealing products.
And as I mentioned our team has done a really terrific jobs at air springs.
You'll know because you follow us, that when we bought that business, we didn't pay much for it on a multiple basis, and it's a fairly low margin product line.
Because of the way that the seller and the market chose to compete.
We're competing in a completely different way and, quite frankly, most of it we've had ---+ we've been working very, very hard on supply chain savings, which will be substantial for that business relative to the profitability that we bought.
But that all requires substituting new suppliers for rubber and steel components and so forth for the air spring, which requires testing, and in many cases customer qualification.
So we are well into that, so we haven't started actually seeing any savings come to the bottom line, but what we are ---+ well, we've got to qualify.
We've just begun to get some products from new suppliers that is much lower cost, better quality, and all the rest.
So by the second half of the year we should be cranking along with much better margins in that acquisition, which will ---+ and we'll also have the facility moved that we need to move ---+ the R&D and testing and administrative facility that I mentioned ---+ that was colocated with the seller's building.
So part of the acquisition from the beginning was that we had to move that.
And so we are in the process of doing that.
I would say that we should be at a much better run rate on the air springs business by the second half of the year which, frankly, was always part of our integration plan.
We knew it would take a fairly extended period of time to get new suppliers identified, qualified, and so forth.
That's the situation on heavy-duty truck.
<UNK>, let me jump in with one additional comment, just as a data point.
As <UNK> said, our business even on the OE side is not affected as much as the headlines that you see on tractor orders and production facilities.
There's one data point; if you look at just the core wheel-end products of Stemco, our OE business in the quarter year-over-year was down only about 10%.
The aftermarket side of our business for the wheel-ends was up 6% or 7%.
So, pretty good results relative to what the headlines are about the heavy-duty truck industry.
<UNK>, I think from this point forward we won't see any ---+ <UNK>, I don't know if you have handy the ---+ we are mostly affected by the euro, <UNK>, as you know.
I'm not looking to at the sheet that has the FX comparisons, but you might be, <UNK>.
But my guess is that we are now stable relative to where we were for Q2 and beyond last year.
In fact, I think we are right at the same level.
So I wouldn't expect any FX headwinds on a period over period basis going forward for the rest of the year.
<UNK>, is that fair.
Yes, I think that's fair.
Clearly there was some this quarter, as we mentioned.
Sales in total on a pro forma sales affected us by about $5 million.
But it's a smaller impact than we've seen over the last few quarters of last year, and some kind of modest impact on our earnings as well.
So, I agree with that.
Starting with Q2 when we look on a year-over-year basis, unless something changes dramatically, we wouldn't expect as much noise around FX.
It's a good point, <UNK>.
Look, I think we try to look beyond the near term business cycles when we think about M&A.
And it has more to do with the strategic fit.
Quite frankly, the place where demand feels the most stable and has the most tailwind, which it's not a huge tailwind, but it is actually Europe, Western Europe.
We are actually feeling just a little bit of strength over there.
I think now we would be very open to acquisitions over there because of the ---+ but we would use cash that we have in Europe.
So, yes, there's an FX benefit, kind of, but frankly if we are using euros to buy euro sales and earnings, it really kind of neutralizes.
So it's really more ---+ we don't really factor that in.
That said, we've certainly rethought our strategy in Asia because I think that's a much longer term trough that we're in.
I don't see that turning around anytime soon.
You may recall that a few years ago we bought a few small operations for Garlock in that region to try to grow our footprint in Asia.
Not just China, but in Taiwan and Singapore as well.
Those are going okay.
They were small acquisitions, so we didn't have a lot of exposure there.
But the fact of the matter is that whole region is feeling the weakness of China.
And the other place that we have really withdrawn from is Brazil.
We had both a Garlock and CPI presence in Brazil and we have exited both.
Again, they were small.
We had hoped to grow those over time.
We were investing not a lot of money but a fair bit of human capital and time in trying to move those operations forward.
We have exited both of those, so the only thing left that we have in Brazil is a GGB facility, which has always done well and continues to do decent for us.
It really supplies a lot of the automotive production in Brazil and we are able to take advantage of some low-cost production there for export into other markets.
But that's all we have left in Brazil.
I'd say it has not really affected our thought process too much about Western Europe, but it has really in South America and Asia.
Does that answer your question.
Let me address that, and <UNK>, then you can chime in.
That is the key that affected our results, <UNK>.
You've honed right in on it.
And what it was, quite frankly, is volume in some of our most profitable lines in Garlock as well as in Technetics, quite frankly.
We saw weak volume in Garlock.
There's just no way to work around it, that all through last year ---+ and I'm talking about all of Garlock, all of last year.
As we were seeing declines in oil price our volumes slowed, and as well as steel.
Garlock supplies a lot of seals into the steel industry, as well as ---+ and we have a big presence in oil and gas.
A big presence in refineries.
A big presence in chemical.
A big presence in metals and mining, and so forth.
So Garlock is just right in the teeth of the most significant hydrocarbon price reduction that we are seeing.
And throughout last year we were able to do a pretty darn good job, to be honest with you, of matching cost reduction with this declining volume.
And we've gotten that organization so lean, going into this year we were hopeful that demand would stabilize, and we had a weak first quarter.
And there's just not a lot of additional cost that we can take out.
We did not see pricing degradation.
What you're seeing there is just the cold leverage of some of our most profitable product lines.
In addition, in the Technetics Group, we saw a mix shift because our nuclear business was down a little bit.
That is more as I've explained in the past.
The timing of the ---+ it's not like nuclear demand goes down, but it actually varies a fair bit quarter to quarter.
And it depends on reviewing schedules in nuclear plants around the world, maintenance schedules in nuclear plants around the world.
And some of it was timing for us in Q1, stuff that got pushed to Q2.
That was unfortunate but it just ---+ customer demand.
But some of it is just the normal fluctuations that we see quarter to quarter.
So that compounded the effect of volume and margin decline in sealing.
We don't see that part of it really continuing or repeating, if you will.
We think that will be solid going forward.
But the Garlock piece, really we need ---+ that's just a function of the market, and we need the oil price to stabilize.
We need maintenance work to start picking up again in those hydrocarbon and basic commodity and metals markets.
<UNK>, do you want to add anything to that.
I think you've covered it.
It really comes down to volume in some of our higher ---+ most higher-margin product lines.
So I really don't have anything else to add.
We did see just ---+ we're looking for the bright spots that might be signals.
We don't know if this is one, but we did see some higher maintenance activity in the North Sea, although that accounts for a small part of our volume.
We are not seeing the turnaround season yet, at least higher than normal, in other markets.
So that's where we are keeping our watch on.
Well, that's what we have trouble with the visibility on, <UNK>.
I don't think it's too late to still have a slightly better second half.
I would still anticipate it, but we haven't yet seen any real tangible signs that that's going to be the case.
So I don't know if it's just my optimistic thinking or the fact that I can't imagine that things would get any weaker in these commodity markets we've seen here in the last, really, four weeks.
A little bit of rebound in the oil price; that's going to have a positive effect for our volume.
And we are going to see in the second half some of the improvements that I mentioned in the air springs business come through, which will certainly benefit sealing as well.
We're still working hard to try to meet the guidance that we had given before, but certainly ---+ we certainly saw a weaker first quarter than we were expecting.
Well, I think it's only natural, <UNK>.
Any time competitors ---+ any time volume shrinks, that's the tendency.
That's what free markets do, right.
However, given the nature of our products, the critical nature of our performance, the brand names, where we compete ---+ we haven't actually seen, in our numbers, a reflection of that.
We certainly hear that from our guys, right.
That, oh, things are tough or tougher etc.
, and I'm not disputing that.
But when we look at the numbers that are generated, we're not seeing a reduction in price effect on our market.
It is volume and what you are seeing there is how those products leverage when you have ---+ when we have really, in our view, hit the bottom of what we are able to do on the cost side, other than materials and efficiencies and so forth and so on.
We just can't take a lot more labor out than we did throughout last year.
We pulled the trigger on the CPI.
I think you could argue maybe we should have done it quicker, but I'm certainly glad we pulled the trigger when we did.
Our team has done a great job of executing that restructuring.
As you guys know, because you follow us, we've moved ---+ we really had the equivalent of four plant relocations last year in GGB as well.
Those are all done as well, as we sit here today.
We're in decent shape now from a cost position across the Company, and hopefully that will clean out some of the restructuring noise and other cost noise that we've had in the last couple of quarters.
We should have a much better, cleaner look going forward, and obviously our numbers this quarter were affected by the ACRP settlement.
I think ---+ and we also had the unexpected requirement to settle this lawsuit in FME that ---+ obviously we were working on that.
But as that case progressed towards trial, we concluded that we needed to settle it because we felt like the exposure was larger obviously than we ---+ potentially larger than we settled it.
So that was kind of a one-time thing.
That was a contractual dispute from many years ago, and so obviously that won't be recurring either.
<UNK>.
Yes.
<UNK>, we are not disclosing the price, per agreement with the sellers, but just to give you some direction.
We paid roughly 6 to 6.5 times trailing EBITDA.
And we've indicated in the announcement about the acquisition that we had sales of about $17 million in that business.
<UNK>, do you want to take that.
Let me take the EDF part of it first, and then we can go back to <UNK> with any other questions.
EDF in the quarter ---+ if you just looked at the year-over-year ---+ I mean in the quarter, the impact of the foreign exchange, as you know ---+ I think you understand the background, <UNK>, of how we are accounting for this.
When the swing in foreign exchange last year threw us into a loss position on the contract, the accounting policies require that the full loss be recognized for the entire contract, even though it's a multiyear contract.
I think you understand that.
Since then, quarter to quarter we have been looking and recognizing the impact on the P&L of the change in foreign exchange on the contract based on the euro to dollar rate in effect at the end of the quarter.
So if you look at the impact of just the foreign exchange part in the first quarter of this year, it was a positive.
Because the dollar weakened from the end of the year through the end of the first quarter.
It was a positive $3.3 million, approximately.
Due to our estimated costs to complete going up for the contract, we offset that so we recognized no income nor loss associated with the contract.
So, EDF had a zero impact for the first quarter.
Now, if you look at going forward through the balance of the year, we are going to continue to be recognizing the sales on a percentage of completion basis as we go.
And we'll be doing our estimated cost to complete.
And the combination of the estimated cost to complete and the exchange rates at the end of each quarter, the combination of those two, will determine what the P&L impact is on the EDF contract for the balance of the year.
So that's EDF.
And so let me jump in, <UNK>, here.
<UNK>, we said at the beginning of the year one of the things that will affect power systems this year is we have $40 million, roughly, of revenue that's zero margin stuff.
Probably roughly half of that is EDF and half of that is two other completed contract engines that have to ship this year that we built several years ago and are just holding, waiting to deliver to the customer.
These are commercial engines into the nuclear reprocessing facility that Shaw runs for the US government.
And we took a charge for those because a couple of years ago, actually, when we realized that cost to produce those engines was going to be significant.
So we are not going to lose anything when we ship them; they're on completed contract; they will ship in Q2 and Q ---+ one in Q2 and one in Q3, I believe, is the current schedule.
So we have still ---+ we've shipped ---+ where we booked $10 million of percent completion EDF in Q1.
So we had $30 million more through the balance of the year for both the Shaw engines, as well as other percent completion that we forecast for.
For EDF it will be zero margin new engines.
So that's what's affecting the margins and mix in FME.
Now, in addition to that, we'll see a little bit higher expense, but not much, for OP2 development this year versus last year.
So, the R&D expenses should be ---+ I would imagine through the balance of the year relatively similar.
Maybe $1 million more or something like that, would be my estimate of that.
And that's really the effect for FME.
And R&D, just to round out some of your other sub-questions ---+ R&D was up about $700,000 over the first quarter of 2015.
And that's largely because of the spending on the OP 2.0 engine program.
Warranty costs were up on a specific ---+ one specific project that we've dealt with and it's behind us.
Should not recur.
No, there's no cash now.
And yes, the pro forma financials now anticipate the plan that we have agreed to in the consensual settlement.
Now, the only possibility is if for some reason we can't get that plan approved by the court.
But assuming that that ---+ which is unlikely.
It's at this point highly likely because we have a consensual deal with both the current claimant's committee as well as the future claimant's representative.
Which is why it was such a big deal, what we announced March 17.
But what's in the financials now reflects the completion of that.
It really reflects as if that plan would have already been adopted.
So that's what we anticipate happening, and none of it will be cash until the final plan of restructuring is approved, closed, and we reconsolidate and create the actual trust, which is likely to be sometime next summer.
