CLARCOR (CLC) CEO Chris Conway on Q2 2014 Results - Earnings Call Transcript

Jun.19.14 | About: CLARCOR Inc. (CLC)

CLARCOR Inc. (NYSE:CLC)

Q2 2014 Earnings Conference Call

June 19, 2014 11:00 AM ET

Executives

Tom Lawrence - IR

Chris Conway - Chairman, President and CEO

David Fallon - CFO

David Janicek - CC

Analysts

Kevin Maczka - BB&T Capital Markets

Josh Berman - William Blair & Company

Brian Sponheimer - Gabelli & Company, Inc.

Richard Eastman - Robert W. Baird

Cezary Nadecki - Schroder Investment Management

Operator

Good morning ladies and gentlemen thank you for standing by. Welcome to the CLARCOR Incorporated Second Quarter 2014 Earnings Conference Call. Today’s conference call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, instructions will be provided at that time for you to queue up for questions.

It is now my pleasure to turn the conference over to Mr. Tom Lawrence of Dye, Van Mol & Lawrence. Please go ahead, Mr. Lawrence.

Tom Lawrence

Thank you, Taylor. We appreciate your interest in joining us on CLARCOR's conference call to discuss results for the second quarter of 2014. By now everyone should have received a copy of the news release that was distributed yesterday. If anyone does need a copy, it is available on CLARCOR's website at www.clarcor.com or you can call Ava Gold at 615-244-1818, and she will send you a copy immediately.

Before I turn the call over to Chris Conway, CLARCOR's Chairman, President and CEO, I remind you that all statements made in the news release and during this conference call, other than statements of historical fact, are forward-looking statements. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company believes that these expectations are based on reasonable assumptions. However, these forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the company's actual results, performance or achievements, or industry results, to differ materially from the Company's expectations of future results, performance or achievements expressed or implied by these forward-looking statements. In addition, the company's past results of operations do not necessarily indicate its future results.

Finally, we want to let people know that the information statements made during the call are made as of the date of the call, June 19, 2014. Those listening to any replay should understand that the passage of time by itself will diminish the quality of the statements. And also, the contents of the call are the property of the Company, and the replay or transmission of the call may be done only with the consent of CLARCOR.

It's now my pleasure to turn the call over to Chris Conway for his opening remarks.

Chris Conway

Thank you, Tom. Good morning and thank you for joining us today. With me are David Fallon, our Chief Financial Officer; and David Janicek, our Corporate Controller. After a few opening remarks, I'll turn it over to David Fallon to review our financial results and updated guidance in more detail, which in light of our recent acquisitions and as seen in our press release require more commentary than usual. After David's remarks, I'll discuss our recent acquisition of Stanadyne’s Filtration business, review some operational highlights from the quarter and share a little about our announcement last night of the creation of our new innovation center before we open it up to questions.

On a GAAP basis, we’ve reported diluted earnings per share of $0.68 for the quarter after the close of trading yesterday. This compares to $0.66 for last year’s second quarter. Net sales increased 34%, primarily due to additional sales generated from the acquisitions of GE’s Air Filtration business, the Bekaert Advanced Filtration business and most recently at the end of April the Stanadyne Fuel Filtration business. However, we’re also pleased to note that our base business excluding these acquisitions grew 7% driven by many of the initiatives we’ve put in place over the last few years. As we indicated in the press release, there were purchase accounting and deal related costs in the quarter so we’ve provided a table showing adjusted non-GAAP results to help sort through these costs to understand what we believe is our true underlying business performance.

In this regard, our non-GAAP diluted earnings per share increased 15% from the second quarter of 2013 to $0.76 per share. Organic sales in our Engine/Mobile segment increased 5% driven by favorable growth in both our domestic heavy-duty aftermarket and our locomotive businesses. Excluding the acquisitions, sales in our Industrial/Environmental business increased 9% from last year with 20% growth in our dust collection business, 10% growth in our oil and gas business and 7% growth in both our HVAC and TFS distribution businesses.

Now I’ll turn it over to David to review more financial details.

David Fallon

Thanks Chris. Before diving into our financial results, let me say a few words related to our presentation of adjusted non-GAAP financial measures. This quarter is the first quarter where we provide diluted earnings per share guidance on both a GAAP and an adjusted non-GAAP basis. Our intent is to provide adequate information for investors to understand the operations of our business including the impact of the acquisitions but without giving effect to various acquisition related cost, which have been significant in excess of $13 million year-to-date and $14 million expected for the full year. Pages 14 and 15 of our release summarize these costs.

In my comments today I will focus on our financial performance based upon adjusted non-GAAP figures. As Chris mentioned our second quarter was successful from many perspectives including the performance of our recent acquisitions and strong 7% organic sales growth.

As a result adjusted non-GAAP operating profit and diluted earnings per share each increased in excess of 15% and our top line increased 34%. First, addressing our recent acquisitions. Our CLARCOR Industrial Air business formally GE Air Filtration turned in another solid quarter. Sales increased 20% from last year’s second quarter on the strength of 40% increase in our gas turbine filtration market and a 10% increase in our industrial air filtration market. Adjusted non-GAAP operating margin of 10% was higher than expected primarily due to higher than anticipated mix of aftermarket gas turbine element and favorable cost trends as we transition from GE's processes and systems.

Based upon our year-to-date adjusted non-GAAP operating margin of 11% in this business and our expectations for the remainder of the year, we have increased our full year expectations for non-GAAP adjusted operating margin at the midpoint from our previous 8% guidance to 9%. Accordingly, we have increased our expected full year diluted earnings per share attrition from this acquisition by $0.03. As previously mentioned, we plan to disclose long-term operating margin goals for this business in our fourth quarter conference call after working through a full annual operating cycle.

Moving to the Stanadyne acquisition remain CLARCOR Engine/Mobile solutions, May financial results were consistent with expectations including sales of $9 million and an adjusted non-GAAP operating margin slightly above the high-end of our historical Engine/Mobile operating margin range. Going forward, we intend to invest in additional resources to support CLARCOR Engine/Mobile Solutions. But we still anticipate that long-term operating margins will continue to be slightly above the high-end of our historical Engine/Mobile range.

We anticipate that the Stanadyne acquisition will be $0.08 to $0.12 accretive to GAAP EPS and $0.14 to $0.18 accretive to non-GAAP EPS in 2014. Transitioning from our acquisitions to our base business, it is exciting to talk about solid 7% organic growth in the second quarter and 5% year-to-date. The strong organic growth in the second quarter was driven by a 10% increase in our oil and gas filtration market but almost all of our filtration markets performed favorably in the second quarter.

We’re optimistic that many of our long-term growth initiatives discussed in prior quarters are gaining traction. As implied in our full year based business guidance, we expect that strong organic growth will continue for the remainder of the year supported by a significant oil and gas backlog, continued optimism that our Engine/Mobile domestic aftermarket and favorable conditions for many of our smaller filtration markets.

Probably the only significant headwind we experienced in the second quarter in the first six months of 2014 was related to our base business operating margin. Year-to-date operating margin declined approximately 110 basis points from 2013. This reduction was driven by continued unfavorable year-over-year comparisons at our Engine/Mobile segment due to higher fixed cost and material pricing and additional incentive compensation pursuant to our company wide profit sharing program and other growth related costs at our corporate entity.

We anticipate that the year-over-year base business operating margin comparison in our Engine/Mobile segment will be favorable in the second half of 2014 as a result of increased absorption from higher sales and due to the domestic price increase which should take full effect beginning in the third quarter. From a consolidated base business perspective, we anticipate that second half operating margin should be higher than the adjusted figure in the second half of 2013.

Related to our full year guidance in summary, we increased our previous GAAP diluted earnings per share expectation at the midpoint by approximately $0.10. This increase is primarily due to expected $0.08 to $0.12 GAAP accretion from the Stanadyne acquisition. Inherent within our revised guidance is also a $0.03 reduction from our base business primarily due to lower operating margins and an offsetting $0.03 increase at our GE Air Filtration business primarily due to higher operating margins.

When driving earnings estimates through the second half of the year, please consider potential changes in interest expense. In our 8-K filed pursuant to the Stanadyne acquisition, we mentioned a possibility of refinancing a portion of our long-term variable rate bank debt. As an update prior to the end of the third quarter we anticipate refinancing from $200 million to $300 million of this bank debt with longer-term fixed rate debt.

It is expected that the interest rate on this refinanced debt will range from 3.25% to 3.75%. Of course if this refinancing is completed and depending upon when this refinancing is completed, expected interest expense in the third and fourth quarters will increase from prior quarters.

This refinancing will also impact full year run rate accretion calculations for our current year acquisitions. Related to 2014 quarterly sales and earnings per share pacing, we anticipate both to increase as we move through the third and fourth quarters. Of course additional interest expense pursuant to the refinancing will likely impact the third quarter comparison to the second quarter. As a result, we expect third quarter results to be only slightly higher than adjusted non-GAAP second quarter diluted earnings per share.

With that I turn it back over to Chris.

Chris Conway

Thank you, David. As mentioned earlier, I would like to take a few moments to discuss the strategic impact of the Stanadyne acquisition, review some significant highlights from the quarter and finally talk a little about our just announced investment in our CLARCOR Innovation Center based in Tennessee. CLARCOR Engine/Mobile Solutions represents a combination of the Stanadyne Filtration business. The business within Baldwin that was concentrating on OEM private branded filtration and our Clark Filter locomotive business, we combined these businesses into a single focused entity to drive scale and capability and to take advantage of their common approaches to developing products for OE customers. Working together, this change brings us increased presence and breadth of product for global OE customers.

While Stanadyne was recognized as a leader in fuel filtration, we eventually expect to also introduce first-fit and aftermarket products in loop, hydraulics and air filtration in the group’s offering. This is complementary to our already broad offering and capability of Baldwin Filters and represents a channel that we have participated in but now believe we will be fully competitive in. We are already seeing positive reactions to this acquisition and the business combination from many of our customers who welcome the opportunity for a strong supplier to provide them choices and technology options to meet their increasing filtration needs. Moving to some of this quarter’s highlights. We mentioned that our base engine filtration business is up this quarter.

We saw increased sales in the domestic aftermarket which added many new accounts as well as in our locomotive business. We have increased our content on first-fit locomotives through the introduction of new tier 4 loop filtration solutions, business we have never participated in previously. This came about through the collaboration of a couple of our internal design teams across the company and is a great example of cross-company technology sharing that we expect to see more of in working with our new growth and innovation team. Our CLARCOR industrial air team formally GE Air Filtration had a great quarter with sales up 20%. They received a first of what we expect to be many orders from new gas turbine customers who appear to be more comfortable working with the CLARCOR company than an affiliate of GE.

Our new gas turbine cartridge product ClearCurrent PRO is seeing great success and is justifying some of the excitement we felt about the technological capabilities and proprietary products of this business when we were looking at the deal last year. The other part of the CLARCOR industrial air business that is growing well is the BHA brand of replacement bag filters. Sales were up double-digits with notable growth in the high-efficiency Preveil, which is a PTFE Teflon laminated replacement bag. This is another example of the Company’s technological innovation leading to higher sales and competitive advantage for our customers.

Dust and mist collection sales have flourished in our UAS business, up 20% this quarter, due result of our concentration on innovative products for OEM serving the weld fume, grinding dust and cooking mist markets. Our cooking mist products and technology are supported by years of knowledge and application of electrostatic collection and filtration, one of the original foundations of that business. As previously announced, we have brought UAS into the larger group of CLARCOR industrial air, which we believe will spur further growth as we cover more markets with a broader range of solutions. Our natural gas filtration business in the U.S. is having an exceptional year with backlogs at an all-time high. Much of this new business continues to be the result of high activity in the Marcellus and Utica shale plays in the Northeast U.S.

We also continue to see double-digit growth in emerging energy markets like Latin America, the Mideast and in Southeast Asia and Australia. Now I would like to comment on the additional announcement that we just released regarding our new CLARCOR Innovation Center to be located in Colombia, Tennessee not far from our headquarters in Franklin. The center will focus on filtration, research and testing, manufacturing technology development and advanced product development. Our center for filtration media research outside of Cincinnati will be relocated into this facility. We also expect to develop a customer and employee learning center at this location which will showcase all of CLARCOR’s products and technologies.

This investment by the Company is part of our previously discussed increased focus on technology and research and development which we ultimately believe will lead to long-term growth and sustainable competitive advantage. We will now open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we’ll take our first question with Kevin Maczka with BB&T Capital Markets.

Kevin Maczka - BB&T Capital Markets

I appreciate the non-GAAP guidance that helped, but I do have a question here just to kind of clarify, so the non-GAAP, we’re excluding temporary things here like the integration, purchase accounting and the deal cost; but was filled including the intangible amortization which is ongoing. So my question is when we look at it this way is there any cost that rolls off as we go into ‘15 or because the -- does that intangible continue for many years here?

Chris Conway

That intangible amortization continues for at least 10 years.

Kevin Maczka - BB&T Capital Markets

Okay, got it. So this gives us a good run rate for how these businesses are performing now and into ‘15, okay. And then my follow-up, in terms of growth how should we be thinking about growth in these acquisitions? GE was up 20%, had the great gas turbine quarter. Stanadyne, I’m wondering how we think about growth there, especially as you try to expand that channel?

Chris Conway

Yes, Kevin, great question. As we do with most acquisitions, before we throw a specific number out there we would like to get at least a year of operations under our belt. We believe, like most filtration industries and markets and companies out there we would expect GDP plus 2 to 3. There are some specific differences with both markets, meaning the fuel filtration market and the gas turbines, that expectations could be a little bit greater than that. But we’re going to wait until probably our fourth quarter conference call before putting specific growth in operating margin target out there.

Kevin Maczka - BB&T Capital Markets

All right, that’s fair. On Stanadyne, I guess just on Chris’s comment about wanting to expand that channel getting to more oil on here in hydraulic product. I am wondering kind of what the timing of that would be to really move a needle there? Is that something where you’d develop new products for that or is that just tweaking something you already have, and now that you’re more established in that channel; it’s a floodgate, if you will, is open for you to sell more CLARCOR product there? Or is that more of a difficult time consuming endeavor?

Chris Conway

Now, Kevin, I think when you look at that channel as you typically see with most people serving the lead customers, you’re working on products and programs that are 2 years to 3 years out typically. It’s not as if you suddenly create a huge floodgate of opportunities. So you will see that develop over time. That’s the nature of release of products into those markets.

Operator

And we will take our next question from Josh Berman with William Blair.

Josh Berman - William Blair & Company

First question, so it looks like GE Air was up 20% in the first quarter 20% in the second quarter, but your full year guide only calls for about 7% growth, I think if you look at 245 the midpoint compared with 230 which is the LTM revenue at the timely acquisitions. So does that mean you’re projecting around like flat growth, the GE Air for the rest of the year?

Chris Conway

Yes, and first it’s important to point out that these comps are versus the previous time that this business was under GE’s ownership. But the primary answer to your question is yes. So we anticipate relatively flat sales growth in the second half of the year. The biggest issue there are just very more difficult comps in the third and fourth quarter.

Josh Berman - William Blair & Company

Thanks. And then, in terms of the deal related costs going forward, am I right, it’s only about a million left and that’s coming from GE Air?

Chris Conway

That’s right.

Josh Berman - William Blair & Company

Alright so Stanadyne that was all done after just that one month?

Chris Conway

Yes.

Operator

And we’ll take our next question from Brian Sponheimer with Gabelli & Company.

Brian Sponheimer - Gabelli & Company, Inc.

Just a couple of questions here, with the GE Air now being $0.03 higher than you thought of be for the year. How repeatable do you think this performance is or do you think you’re getting a business that’s actually better than what you had originally anticipated and something that you can maybe build on in the future?

Chris Conway

Yes, I think, we -- as the more we’ve gotten into the business working with the people there and as David mentioned, we’re still kind of holding our perspective to see a full year’s cycle, but they’re hitting stride with every one of the programs that they’ve talked about and making inroads in the areas that we expected them to. So I think it’s something that we see continuing to build and the strategic initiatives that they had put in place are starting to show signs of bearing initial fruit.

Brian Sponheimer - Gabelli & Company, Inc.

Would it be wrong to say that this maybe slightly more profitable business than you thought you’re getting?

David Fallon

I would say our expectations when we bought this company were that there were opportunities to improve the profitability. So if you look at this business, it was probably between 11% and 12% EBITDA margin business. We believe that there are opportunities to improve that. As we said in prior quarters, we’re not quite ready to put a long-term target out there. But those opportunities are pretty consistent with what we had anticipated heading into the deal. The one uncertainty is the level of sales growth that we expect to get going forward. First half of the year was very good growth and it may flatten out a little bit here for the second half of the year. But a lot of the opportunities that we’ve identified with this acquisition related to expanding our customer portfolio for gas turbines beyond GE, that is still an uncertainly but we think that is a very significant opportunity to get higher than expected sales growth going forward.

Brian Sponheimer - Gabelli & Company, Inc.

Got you. Moving onto just the Engine/Mobile business, with the understanding that there is a bit of price and material cost in balance, when should we expect the compensation cost to level up?

David Fallon

Okay, I believe you’re referring to the incentive comp related to our company wide profit sharing program?

Brian Sponheimer - Gabelli & Company, Inc.

Yes.

David Fallon

Okay, so that of course is a figure that we deal with every year if we are coming in above expectations that number increases if it’s below internal exceptions, that number goes down. So, that’s probably more dependent upon the dynamics within a certain year, in the long run, that certainly smoothes out. The drivers of operating margin fluctuations and more recently down in the last 12 months or so have been more related to the addition of fixed costs as we’ve expanded some facilities in addition to some material pricing that we saw at the end of the last year.

We anticipate that beginning in the second half of the year that we should start seeing favorable year-over-year operating margin comparisons in that business for two reasons. Number one, the flow effect of the pricing increase should take effect beginning of the third quarter and in addition, we’re seeing some very nice growth in the 5% range, which should certainly help us absorb fixed costs. So historically, Engine/Mobile has been in the last recent years has been over 22%, it dip below that last year and will be below that this year, but we certainly believe as we exit 2015, we should be in that 22% plus range.

Brian Sponheimer - Gabelli & Company, Inc.

Got you. Thank you. And just one more just within engine you called out the 9% growth for the heavy duty aftermarket, where within that are you seeing the biggest pockets of demand?

David Fallon

It’s pretty much across the board Brian. The first quarter and notably in the second quarter in the months of April, May we’re very good. And you can look at any number of trucking statistics and trucking has been fairly strong here in the last six months or so.

Operator

And we’ll take our next question from Richard Eastman with Robert W. Baird.

Richard Eastman - Robert W. Baird

Can I just ask again I am just trying to maybe step back up few feet, looking at the base business when I look at the operating profit in the base business, your commentary kind of surrounds this maybe $0.03 of maybe taking $0.03 out of your guidance for the full fiscal year and attributing that to the base business. And I recall coming into this year, you know, we buried maybe another 5 million into the base business that was IT expense and R&D.

So maybe the question really surrounds that core base business up profit. You touched on engine/mobile being maybe a cost issue, price issue but I’m curious, are you taking the opportunity here to you know use some of the accretion from Stanadyne and GE Air, and put it back in the base business, is that and we should get some benefits from that, you know out next year and the year beyond or, how should we think about the base business profitability.

Chris Conway

Great questions Rick as always, you know what we have guided to for the full year is an operating margin for the base business at a midpoint of about 15.7%. That’s below last year by about 40 basis points or so, and we called out at the beginning of the year some of these additional growth related costs, you know without giving a specific update on those costs there’s some additional cost that we experience as we move through the year. Some are normal, including incentive comp, you know we talk about a little bit early on the call but there are some ancillary costs that are attributable to the acquisitions but not necessarily allocable back to the acquisitions when we determine accretion. There’s certainly some legal costs, as these go up and other ancillary support that’s needed. Some of those costs we would anticipate to go away going forward, so that bucket of costs that we’re seeing this year certainly should be an opportunity going forward when you look year-over-year, 2015 and 2014.

Richard Eastman - Robert W. Baird

Like in the you know the engine/mobile business I mean the sales again, the sales were up maybe 7 million and up profit was off a few hundred thousand dollars, kind of year over year and I guess that’s material cost, are there any mix issues in there or, I’m trying to maybe just make sure I identify that there is operating leverage in this base business really more for ’15 than ’14.

Charles Conway

Yes, we certainly believe so and if you break down our operating margin guidance at that segment level, you certainly can see the development as we go through the year with that engine/mobile operating margin. Without doing the specific math, you know first half engine/mobile operating margin for that base business was probably a little bit below 20%. That’s probably a point or a 100 basis points lower than last year, for the second half of the year for the base business we actually see the opposite. We see the engine/mobile operating margin being 50 to a 100 basis points higher than the second half of last year. So year-over-year operating margin in that business compared to adjusted numbers last year if you recall we had the serve cost that were allocated to the segments but year over year operating margin at engine/mobile should be relatively flat.

Richard Eastman - Robert W. Baird

Thought so, okay, all right, and then just one question and just sticking with the engine/mobile for a minute, you know rest of the world sales in engine/mobile you know I think were referenced as flattish and could you just give us maybe a quick take on Europe, Middle East and then also on how’s China do and what’s the outlook there in the second half.

Chris Conway

Real quickly, the two largest markets outside of the US for engine/mobile as you mentioned are Europe and China. Europe was down, mid to high single digits, and China was up mid to high single digits. The rest of the world was relatively flat and you blend all that and you get about a 1% growth rate for the quarter. Going forward I think we’re cautious. We did not see signs of recovery in Europe, we’re still optimistic that the second half we’ll see some recovery and as it relates to China we’re still very cautious based on our first exposure there, so I would say our full year expectations for growth in the low single digits for our foreign business in engine/mobile is probably still consistent now with what it was at the beginning of the year.

Richard Eastman - Robert W. Baird

Okay, so, thanks, all right, and just one last question, could you just speak to, Chris or Dave, could you just speak to the HFAC growth of 7%, that’s a very good number and is that against an easy comp or is there any, any new program, anything sustainable there.

Chris Conway

I think part of that is our commercial and industrial businesses is steady there. We’re also seeing a pick and what we call our wholesale side of the business and I think that’s a little bit of shift in the market as some of the competitors shift from one channel to the other. So our wholesale business is up there. The [swine] business that we’ve talked about in the past is still a small part of that and I think at this point still fairly lumpy as we are still early in the adoption cycle or filtration for that business.

Operator

And we’ll take our next question from Cezary Nadecki with Schroder.

Cezary Nadecki - Schroder Investment Management

Thanks for the call. Just two sets of questions, one on revenue growth and then kind of few on margins for the acquisitions, on the revenue growth on the Engine/Mobile I think you’ve talked about the 9% growth and you attributed to industry as well as success in attracting new customers, can you parse those out a little bit kind of what would be the industry growth and what do you think is your success and kind of may you talk a little bit more about it? And then on the industry environmental I think you’ve talked about the organic growth in the global and oil business being 10%, what would it be ex-vessels how big were those in that growth?

Chris Conway

Yes, I guess to address those in order so, I think your first question was related to the U.S. aftermarket growth?

Cezary Nadecki - Schroder Investment Management

Yes.

Chris Conway

So just to be clear that is just for the U.S. aftermarket, not for the entire engine mobile segment. So that was up 9% compared to 7% in the first quarter year-to-date 8% combined. I would say it was a pretty good combination of organic same customer sales and also adding new customers in distribution. We generally don’t provide specific detail on that mix, but we did well in both areas sufficiently enough for us to mention in the press release. Your second question as it relates to.

Cezary Nadecki - Schroder Investment Management

Global oil and gas.

David Fallon

Global oil and gas?

Chris Conway

Yes and after growing about in the low single digits in the first quarter, we certainly had a better second quarter. And we expect even more significant growth going out into the third and fourth quarters. If you look at and what we have talked about historically is a percentage of vessels versus elements in that business, we certainly believe we’ll have a higher mix of vessels in the second half of the year than we did in the first half of the year and specifically in our fourth quarter. So we have talked about an all-time high backlog, we will certainly see the benefit of that vessel backlog hitting in our fourth quarter. We are ranging anywhere from 50% to 60% vessels. In the fourth quarter, we could be 60% to 65% vessels and that’s important to understand not only from the perspective of growth but also margin, our operating margins in industrial environmental and specifically oil and gas are impacted by that mix. We have great margins on vessels but they are lower than what we see in the aftermarket. As a result, if you look at the second half of the year in industrial environmental that certainly will impact margins there.

Cezary Nadecki - Schroder Investment Management

Okay. And thank you so much for that. And then on the Stanadyne, I think at the time of the acquisition you guys talked about the margins being around 34% before amortization or including amortization around 20 and it seems like adjusted we’re looking somewhere around 28%, is it just -- we don’t have enough of a full quarter to look at these margins or you actually coming little bit higher than what you initially thought?

Chris Conway

Yes, the most significant uncertainly as we announced that deal was the amortization of intangibles. We completed that work and here at the end of the second quarter and we believe ongoing amortization expense will be about $12 million per year, so about 11% of sales. We probably anticipated that that number would have been a little bit higher and that was the assumption that was inherent in our initial communications with the deal. But long-run we believe operating margins will be slightly higher than the high end range of our historic Engine/Mobile operating margins.

Cezary Nadecki - Schroder Investment Management

Somewhere around 25% as reasonable or is that too high then?

Chris Conway

We have pretty consistently said we expect operating margins in our Engine/Mobile business to be between 21% and 24%.

Cezary Nadecki - Schroder Investment Management

Okay. And my last question, it seems like on these adjustments you’ve excluded purchase accounting step up when you talked about Stanadyne but you didn’t for GE Filtration, anything different there or is it just small amount we didn’t look at or is there something in each of those.

Chris Conway

We did in fact include a purchase accounting inventory basis step up in our acquisition call for Stanadyne. The total number for the second quarter was 4.4 million, 1.4 million of that was related to the inventory basis step up.

Cezary Nadecki - Schroder Investment Management

Yes, but you didn’t seem to include that when you talked about GE Filtration, the 664, so I’m just wondering if there’s anything different about that.

Chris Conway

There is not. We have in fact included that inventory basis step for GE as well.

Operator

(Operator Instructions) And we have no further questions and I would like to turn the conference back over to Mr. Chris Conway for any additional or closing remarks.

Chris Conway

Thank you, Taylor. Our acquisitions are performing well, the base business is growing and we have a lot of new and exciting developments that are driving improvement and growth for the future. All of these things come as a result of lots of hard work and contributions from our employees and from the interest of our customers, all of whom I’d like to thank here today. Thank you for your interest and your questions.

Operator

And this does conclude today’s conference call, at this time you may disconnect.

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