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Precision Castparts (NYSE:PCP)

Q4 2011 Earnings Call

May 12, 2011 10:00 am ET

Executives

Shawn Hagel - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Assistant Secretary

Mark Donegan - Chairman, Chief Executive Officer and President

Analysts

Cai Von Rumohr - Cowen and Company, LLC

J. B. Groh - D.A. Davidson & Co.

Howard Rubel - Jefferies & Company, Inc.

Eric Hugel - Stephens Inc.

Stephen Levenson - Stifel, Nicolaus & Co., Inc.

Ronald Epstein - BofA Merrill Lynch

Joseph Nadol - JP Morgan Chase & Co

Heidi Wood - Morgan Stanley

Noah Poponak - Goldman Sachs Group Inc.

Jason Gursky - Citigroup Inc

Samuel Pearlstein - Wells Fargo Securities, LLC

Myles Walton - Deutsche Bank AG

David Strauss - UBS Investment Bank

Peter Arment - Gleacher & Company, Inc.

Operator

Good morning, and welcome to Precision Castparts' webcast and conference call to discuss its fourth quarter earnings for fiscal 2011. This event is being recorded and will be available on PCC's company website at www.precast.com shortly after the conclusion of the presentation and discussion. [Operator Instructions] Now I will turn the floor over to Mr. Mark Donegan, Chairman and Chief Executive Officer of Precision Castparts.

Mark Donegan

Thank you, operator. I'm sure you're all familiar with the forward-looking statement and need to take in consideration when you're analyzing the following presentation.

If I look at Q4, in many respects, I think it's kind of a transition quarter for us. If I go back to where we were 13 weeks ago and looked at the rates we had from our customers, the demand that they wanted, the release pattern in casting and forge, the aftermarket is relatively flat and the IGT was stable. I think from that vantage point, the quarter certainly played out pretty much as we had expected.

Having said that in the quarter, I think there were some significant transition, did occur as the quarter progressed. We finally did see that order rates that's going to help us accelerate to support the expected growth rates that kind of start coming in, in our castings and forging operations. So again, that was something that we just had not as a line of sight to.

In IGT, we kind of had 2 basic various, we did see some acceleration orders but there was a lot of communication in terms of what could we do and what type of capacity did we have in the short term on looking forward.

The Fastener is still the kind of one last area we've yet to see any acceleration. And I'm going to get into a lot more details as we go through the segments and how it impacts each one of the segments.

But if I look at the company in total, for the quarter we saw a 16.8% rate increase in sales going from $1.43 billion last year to $1.67 billion this year. We saw operating income rose by roughly 11.2% going from just under $361 million last year to $401.4 million this year. These operating margins go from 25.2% last year to 24% this year. And operations generating EPS growth going from $1.66 last year to $1.87 this year.

If I look at the major drivers on sales. First, year-on-year, and again, we've talked about this looking kind of an apples-to-apples comparison, we had roughly $58 million of higher contractual material pass-through and higher material selling price at 3 primary mills and this was just driven by the rapidly escalating elementals. If I use that as a baseline and move forward, we saw solid Aerospace growth of roughly 19% with obviously, Investment Cast and Forged Components being the most significant contributor.

We also saw besides, kind of the components, we also saw leading indicators for us, which is our external sales into the remaining parts of the industry. Cannon saw external sales increase by roughly 2x. And again, this is the other people in the Aerospace world kind of getting in line to handle the increases that are coming. In Fasteners, year-on-year we saw small increase of roughly 3%. And this was driven by more of our market penetration, our expanding portfolio than it is any recovery in our base distribution or those core 787 orders.

On IGT and Investment Cast, versus last year, we saw a 7% increase. In Forged, even though it's on a much smaller base, with an 80% increase versus last year, and similar to the Aerospace again, this was both on the material, which is of course the leading indicator in component sales.

General industrial had a solid year versus last year, growing by roughly 23%. But in that, we still said that one significant negative driver we had to overcome was the 55% decrease in the seamless extruded pipe versus last year.

In the quarter, we did kind of see the beginning of clawing our way back late in the quarter. And if I look towards the balance of kind of that fiscal year '12, I think we see steady shipments on that front and again, we'll go through this when we get into the Forged Products.

Sequentially, we continue to see Aerospace volume across our Casts and Forgings growing by roughly 6% versus Q3. And again, as I spent throughout the last couple of quarters, the major contributor and general industrial provided a roughly 10% increase versus Q3.

If I look at EBIT, we have solid leverage on our Aerospace growth across pretty much all of our operations. And again, I'll get into this in particular segments and what it was. And even though at a lower margin that general industrial does provide solid contribution to us in that forged world. But the most significant handling overhead we had to overcome in terms of operations versus last year was the decrease in contribution from those decreased seamless pipe.

And then to a lesser degree, in the Fastener, was our shift away from our core Fasteners as our customers can even the inventory and expand their other product offerings. And then that last dilution effect on margins was the higher Fastener material selling price. And again, I'll break out the effect in each one of the segments as we go through.

If I look at our sales by segment versus last year, our Aerospace sales accounted for 57% of our sales versus 56% last year. Power decreased from 24% last year to 22% this year and general industrial grew from 20% last year to 21% this year.

If I look at Aerospace and Power in a little more detail, by far the dominant driver in Aero was the large commercial at 71%, up from 67% last year. Military was 21%, down from 25% last year. And regional and business was 8%, which is basically flat to last year. In Power, IGT represented 52% of the power market versus 47% last year. And again, the big decrease in that was seamless pipe at 22% this year versus 35% last year. And oil and gas increasing to 26% this year versus 18% last year.

If we now move on to the segments, beginning with Investment Cast products. Sales increased 19.7% versus last year going from just under $467 million to $559 million this year. Operating income grew 22% versus last year growing from $145.3 million to $177 million this year. And operating margins expanded from 31.1% last year to 31.7% this year.

If I look at the primary drivers on sales year-on-year, the major driver in Investment Cast certainly was the increase in Aerospace demand and that was both in OEM sales, increasing by 32% and aftermarket increasing by 6%.

IGT saw modest growth of 7% versus last year. And at this quarter, it was driven mostly by OEM demand. And we did see higher material pass-through versus last year in this segment of roughly $7 million. Sequentially versus Q3, we continue to see a steady ramp in Aerospace of roughly 5%. And we did see some improvements in the IGT demand and that was driven by again, the material shipments and component sales.

Operationally, we saw a solid leverage on our Aerospace growth, dropping through 35% as reported incremental margins. And if we take into account the material pass-through dilution of roughly 0.4 percentage points, the drop-through was closer into that 39% to 40% range. So again, solid contribution from the Aerospace volume.

Given that, there's not a single operation we had for Investment Cast or through all the operations that do not have numerous opportunities to attack on all fronts, and Investment Cast certainly falls into that category.

Looking ahead, again, as we talked, we're finally seeing that demand, that schedules is getting put in. We can say that they should be there. You can say they should be there. But until our customers actually load those schedules in and say they want them, our hands are tied. In the quarter this was a change, where those schedules were actually loaded in for the balance of the year and moving up beyond that. So again, our focus on this Investment Cast certainly has shifted to kind of that crawling up the output and moving through the changes that our customers wants.

The drivers for this, as we expect, would be the rate increases that are already announced in both the wide body and the narrow body, and certainly, supporting the 787 build rates as it begins to move into production and ramps up.

And again, at this point in time it's more of a feeling, but certainly, just a feeling of where I am today versus where I was 13 weeks ago on IGT, I think that we're more likely to see upside than we're more likely not to see upside. So I think that it certainly provides some opportunity moving forward.

Moving on to Forged Products. We saw sales increase versus last year of 20.5% going from $640 million last year to $771 million this year. Operating increased by 11.5% versus last year growing from $132 million to $147.3 million this year and operating margins decreased from 20.6% last year to 19.1% this year.

Looking at the drivers on sales year-on-year, and again, put it in an apples-to-apples comparison, the impact of materials pricing again, driven by higher elementals was roughly $51 million on the sales line versus last year. With that as a baseline, the most significant drivers were Aerospace growth of roughly 24% versus last year and strong industrial growth of 35%.

And even though it's on a much smaller base, the Investment Cast made an 80% growth in IGT, and again, it was both in materials and on components. But the biggest challenge Forged Products had to overcome was certainly the year-over-year reduction in seamless extruded pipe, where there was a 55% drop versus last year.

Sequentially, and again, to put on a similar comparison versus Q3, we had $25 million of sales growth as a result of rapidly escalating elements. And again, this was both in pass-through and in iron material selling prices. From there, the key drivers versus Q3 was strong Aerospace growth of 12% versus Q3. And again, the similar dynamics that we have been experiencing through the year in general industrial with growth of roughly 15%. Operationally, certainly, I think we saw similar contribution from the Aerospace growth. And even though at lower margins, the general industrial does provide solid leverage in terms of absorption and Fastener utilization.

What I try to do here is it to put some magnitude or value to kind of this headwind, thoughts about the headwind in terms of pipe and what's the challenge that Forged had to overcome. If I look at Forged kind of just look at the lost earnings from the seamless extruded pipe and look at the magnitude of that versus last year, you look at a reduction in earnings of roughly $30 million. To that, they also had pressure in terms of the math and with the higher elementals of the margins, putting pressure of roughly 1.3 percentage points. So if you look at the combination of both the seamless pipe and the margin compression, this Forged Product is looking at overcoming 4.3 percentage points from Q4 last year. So if you look at the challenge and what they had to do to kind of go from that 16%, now we're back up at 19% that kind of shows you what they're able to do.

Looking forward, I think that certainly in the Aerospace side, Forged saw the same dynamics as we saw in castings with the orders kind of come into play in the future to support the rate increases. And that also to that, we kind of did it at the bottom and at the very end of Q2, did start to again, claw our way back on the seamless extruded pipe. And I think we're looking at a situation in that pipe whether we can ramp up through all of '12. And again, I think it's coming on 2 fronts, different from the past, where our bulk of our growth is coming from the kind of that core, large diameter coal world. We see that recovering. But also, the opportunities we're now seeing in the oil and gas world of seamless extruded pipe, we're seeing a lot of quoting activity right now. Areas that we are waiting for in the past and I think that certainly can translate as we move to the back half of '12 in the volume growth and profit growth. And again, I think we continue to see opportunities on all fronts in general industrial.

Finally, with Fasteners. Compared to the other segments, I think versus last year, we saw a very modest growth of 5.6% going from $326.5 million last year to $344 million this year.

So our operating income decreased 3% going from $108 million last year to $105 million this year. And again, kind of what we have seen in the last couple of quarters, we saw margins come in at about 30.5% this year versus 33.1% last year.

If I look at the key elements, again, on sales different from the balance, the biggest driver for the fastener world was as a percentage was the growth in the general industrial, where they grew by roughly 13% versus last year. We did see roughly $12 million worth of gross in Aero but this was $12 million kind of replacing in above what our core, complex, highly engineered fasteners, replacing that volume up that we had last year.

And again, if I look -- last year we still had a significant amount of volume coming from the 787 product lines. Whereas this year, we're almost at, you don't want to say nothing, but it's certainly a very low level where the bulk of what's being built on the 787. It's coming out of the inventory that we shipped a year, a year and a half ago. And again, this is a significant shift in terms of where we were a year ago.

Sequentially, I looked at a number of ways to go over this, a number of ways to put it down, a number of ways to come up with. And I came up with one basic word, which is flat. It's kind of where we thought we were going to be. It's where we came up and there's no other real way to put it.

We did see some short cycle requests, which is the first time we've kind of seen that in a while. That typically tends to kind of demonstrate they were bouncing around the bottom and come out from there. But again, we'll see where this particularly leads us.

Operationally, it comes down basically to the replacement of our high-valued, highly engineered products with general industrial and non-aero. And again, I think until basically, Boeing and our distribution works through kind of the high engineered that's kind of the market we're in right now.

If I look forward in Fasteners, I think we are extremely well positioned in terms of contracts and share as the Boeing comes back. Certainly, the key for us is that 787. And the fact that there is a build rate going on right now and that we're basically shipping nothing into that supply chain, it's a huge opportunity for us as that begins to be replenished and it had a pretty strong effect for us. And then certainly that rate increases as both Boeing and the distribution arm reengages in that. So again, I think contractually position-wise, capability, capacity, it's there. It's just a matter of getting that core product coming back in. We talked about this last quarter, Fasteners lag the castings and the forgings by roughly 2 to 3 quarters on the way in, and I think they are lagging it by 2 or 3 quarters on the way out.

To that baseline and to that position, I feel that our latest acquisition PB, again, will be a solid contributor. If I take a quick look at PB, this is another one of our acquisitions that we're working on for more than 2 years. As it has been consistent with our strategy in Fasteners, we're out there looking for those assets that add capability, add technical expansion to us, give us something we don't have. I think PB falls squarely into that, helps expand our capabilities and range in terms of our core critical aeroplane specials, which again, is what we consider that core. PB developed the sleeve bolt technology. They have a broader range and customer base than we do. And again, they have strong 787 content, which allows us to continue to expand our market value for 787. And again, if I go back to kind of our strategy that we put in play when we bought Fasteners, PB was right in the heart of that. And again, it's just kind of marching down that road of acquiring those assets that we want.

The valuation standpoint, it's consistent with the basically, the bolt-on acquisitions we've done in the Fastener. It fits right squarely in the middle of kind of what that's been. And if I look at the timing standpoint, subject to Hart-Scott-Rodino, I think we expect to close by the end of July, or to the end of June or very early July. So again, I think PB is -- I think paces has worked for us, and again, it's part of our strategy.

So if I take and move beyond the operations, on cash, we had a solid cash quarter with roughly $336 million positive cash in the quarter. We ended with debt of $236.6 million and cash on hand of $1,116,000,000 -- $1.16 billion[ph] . I think this positions us extremely well for aggressively going after the opportunities and there are opportunities that we certainly are very interested in.

Now I'm going to give it to Shawn. She'll go over our inventory position.

Shawn Hagel

Thanks, Mark. As many of you guys are aware, we added this inventory slide about a year ago, and responses, some confusion and concern with regard to the way our inventory levels we're driving at. And we added this inventory slide so you could see a little bit more in-depth as to what's going on with our inventories. And at the time, we talked to you about it, we agreed that inventory was high but that we made a decision to utilize our balance sheet and hopefully leverage our customer position through future benefit for the company. What we've said then and what we've tried to do is hold those inventory levels flat as demand has started to come back. And if you look in the quarter, you'll see that we finished with the inventory balance of $1,459,000,000, which represents a $62 million decrease in the quarter while we were growing sales by 5%.

The biggest driver of that decrease relates to our LIFO balance, which dropped $37 million, for LIFO debit balance reserve dropped $37 million during the quarter. And that's primarily as a result of the rapidly escalating metal prices we were -- that faced us during the quarter. And what that did is it brought the FIFO balances more in line with LIFO. And that FIFO valuation is now much more equal to LIFO, which requires less of an uplift of the LIFO reserve. So what that does is it brings the LIFO reserve down, the FIFO balance up. And so the net impact to our cash with regard to this is really not a lot but it drives the inventory balances down in total.

If you look at the second driver of that decrease, it was within raw materials. And again, as I said, we grew sales by 5% during the quarter but we leveraged that demand and utilized on-hand inventory so that we could drive that balance down. And that was despite those rapidly increasing metal prices, which actually caused the underlying value of the inventory to grow even without any increase in the balance.

When you look at our WIP and finished goods, it grew $4 million during the quarter. And again, that's a result of the valuation of the underlying metals as well really, there was not a lot of movement in total related to those 2 categories.

When you look at fiscal year end to fiscal year end comparisons, we grew inventory during fiscal '11 by $24 million. That represented a 1.7% increase during the year while sales grew by almost 14%. What that does is it actually drops our inventory as a percentage of sales by almost 5% during the year and allows us to continue to leverage that inventory as we grow.

If you look at what the increase represents at $24 million year-over-year, it's really 2 things: First, it's the investment we made in new products that we won during the year that we had to put on our balance sheet in order to provide product to our customers; and secondly, it was the increase in the raw material cost that actually were occurring throughout the year that drove the underlying valuations up. That's really what's going on with our inventory this year. And I'll turn it back to you, Mark.

Mark Donegan

Thanks, Shawn. So if I kind of look at the summary in starting with Q4 and going back to what I said at the beginning, I think Q4 had 2 components to it. If I look at kind of the metrics, the operation, the sales, kind of our operating capabilities and where we started, I think Q4 was very consistent with where we sat the last time we were in a conversation. But if I look at kind of what we now know, what the schedules are out there, kind of what you and we are all feeling that should have been there, I think we got a lot more clarity in the quarter certainly in Investment Cast products.

I think that the kind of way we get about that, we saw strong demand in our external alloy sales, which again is for us is the leading indicator. We saw strong order traction kind of that long expected in terms of both the base rates and the 787. And again, I feel though the IGT is a promising environment. We'll see. But again, if I kind of look at the conversation we're having now, they are drastically different from the conversation we're having 3 or 4 months ago.

From Forged Products, I think the dynamics in the Aerospace same in the aerospace side were the same. In terms of looking forward, the orders, the order book coming in and kind of what the primary drivers are on that. And again, it's similar to the cast that it's just supporting those anticipated future rates that were there.

And then with Forged Products, I think again we have the opportunity. And we are going to start marching back in terms of that pipe volume coming out of the trough. And then Fasteners, Q4 really evolved and almost was kind of a photocopy of what it looked like and how it played out. And we've not seen any real traction yet on future orders from this standpoint.

Looking ahead, on Aerospace, we kind of talked about this again, the Investment Cast and Forged orders now kind of being placed but I think there's still more orders to come in. There were a lot of time talking to our customers about what we should be seeing and how we're going to handle kind of that growth.

And again, if you kind of put this in perspective, we talked about this, you'll look at 6, 4 -- 4- to 6-month timeframe from when those rates go up in terms of when we kind of start seeing that demand. But again, I think we're going to have to start moving that product through to be able to handle some of those step ups.

Fasteners, I think Q1 continues to look flat. But I think that Q2 still seems like it's kind of in an inflection point, whether it's mid to late, we don't really know yet, but again, I think we're starting to get to that bottom of what 787 can do in terms of a build rate without getting Fasteners. And in terms of kind of that distribution arm and the rates going up, we're going to have to move some of the bins and the mid-max's up and then the resurgence of distribution.

And again Fasteners, we are positioned contractually and the opportunities to be able to benefit as the demand returns, so I think as it comes back, we certainly will get more than our fair share of what's out there.

On Power, Forged Products. I think we are positioned to see sequential seamless pipe sales and earnings improvements as we move through '12. And again, I think we also have additional opportunities in terms of that forged as our current quoting activities, pretty high on the oil and gas in the seamless pipe where it translates into deliveries.

In Investment Cast, again, as time is not completely clear but we're seeing a lot more request than what we can do. And I think there's 2 primary drivers for this. Certainly, I think there's kind of an anticipation and expectation that there will be some need coming out of Japan and we see kind of that request coming in. And I think we have upside in terms of the aftermarket.

I think we still have numerous opportunities in the general industrial world. So with that, I'm sure you all have a lot of questions. So we'll open up to what you may ask.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Sam Pearlstein with Wells Fargo.

Samuel Pearlstein - Wells Fargo Securities, LLC

Mark, can you -- I guess one of the things you talked about was that as we go forward we see a flat Fasteners. You referenced a couple of times that the second half of that by '12 in both casting and forging when we start to see the pick up from 787, are those businesses flat or is it the 777 and 37 another rate increase as we start to see that sequentially pick up as well?

Mark Donegan

On the Castings or the Fasteners?

Samuel Pearlstein - Wells Fargo Securities, LLC

On Castings and Forgings, just because you referenced in both your presentation there about second half.

Mark Donegan

Yes, Castings, what Castings and Forgings are seeing, if I kind of go back to what we would expect to see. And certainly, if I look -- reading all your reports, I think that all of your endpoints were saying the same, "Hey listen, there's volumes out there, this company has got a great position, we should be seeing this." I think what we are saying is that in the quarter, we did see that order book start to come in to support the build rate already announced on narrow body 737, the 320 [A320] family and product, the wide body and the 787 kind of moving from its existing build rate up through next year. So we started getting those orders that finally saying, "Yes, I need this to support this growth rate." What we're looking at prior to this was kind of a look at it and support that and us going back to our customers saying, "Listen, it has to be there. What occurred in this last quarter is what had to be probably started coming in the castings and forgings." So yes, it is the 787 and the announced build rates that we just had and that schedules for.

Samuel Pearlstein - Wells Fargo Securities, LLC

And then just within the pipe business, can you just talk a little bit about that? Because one of the things you referenced was maintaining the volume during the trough, I guess that implies to me, you might have taken on some weaker pricing, so it's not just volume but maybe pricing and then just how is the backlog of that business?

Mark Donegan

Yes, there's no doubt about it, Sam , that if you look at where we started to ship this quarter, it was coming off, you're back 6 to 9 months ago. And it was the bottom of the bottom. And yes, we took stuff to fill the press. As that world has started to come back and we've also been able to move in other areas, yes, I think the backlog that we have as it moved forward, starts moving up both in terms of volume and the margin. But yes, this quarter, you saw the bottom of the bottom in terms of we were going to take anything and everything that would let us put a hole and push pipe.

Samuel Pearlstein - Wells Fargo Securities, LLC

And does that continue in June?

Mark Donegan

I think it progressively works its way up. So I think you kind of saw the worst of the worst last quarter, and I think we do start to move our way up. Is it a step function? No. Because again, you're going to move your way through. Certainly, if I look at where we are today and we're recording, it's a much different picture. So I don't think it's a step function. I think you saw the bottom and I think it's more of a ramp as it leads its way through.

Operator

Our next question comes from Joel Nadol with JPMorgan.

Joseph Nadol - JP Morgan Chase & Co

I wanted to stick with the subject of pipe just for a minute. It seems like your volume was down sequentially, and you started breaking out core versus presumably non-core or just a lower value-added. Just wondering if you could add a color on why this would have stepped down I guess from Q3 to Q4 first?

Mark Donegan

I think that what we saw was again, as we came to Q4, if you go back 6, 9 months, we were -- we had a timeframe for the first couple that we're kind of waiting for our base or -- our core is really large diameter heavy wall, highly, we call P91/P92, that's our core. But I think that there was a period of time, that we say, "We're going to wait for the core to come back." I think there was a time going back 6, 9 months ago kind of halfway through that quarter we said, "You know what, we just got to start taking some to fill it up." So I think it was that transition that we waited, didn't place what we should have. And again, as we started migrating our way through from that point forward, I think we started seeing more of our core come back and get more of the right volumes. So again, I think it was that blend of those 2 events.

Joseph Nadol - JP Morgan Chase & Co

Okay. Could you maybe update us on where backlog is for that business? And then kind of where China and India stand as relative contributors to demand right now?

Mark Donegan

Let me start with the relative demand. I mean India is by far still the significant contributor. China is starting to come back. And again, we're starting to see some of that request for that ultra critical, which is good for us in a long haul, but it's going to require quite a bit more of kind of that core. But right now, I'd say that India is part of our total pipe demand, India is probably in that 60%, 65% range. China is probably in that 35% and then the rest of the world is pretty benign in terms of that core coal world. And again, our backlog, I don't have that sitting in front of me, but I'd say it's in the same range or up a slight bit.

Joseph Nadol - JP Morgan Chase & Co

Okay. And then switching gears, just over to the LIFO reserve. Just wondering if Mark or Shawn, if you could just help us understand if how much of an impact, a P&L impact that $37 million decline had? And really, where it came through in the P&L? Was this more on the Forged segment, or was it elsewhere?

Shawn Hagel

Well, the biggest change in the LIFO reserve was in the Forged segment because it has the largest metal content, which was what was really driving that decrease in the LIFO debit reserve for the most part. But you're not going to see a P&L impact to that because as that balance is driven down, the FIFO valuation was driven up. So really the net -- they net each other out. That's why we've explained we talked about our performance in total not LIFO or FIFO because we look at LIFO as being part of what we do in our inventory management. So again, with the FIFO and LIFO balances became much more closely aligned during the quarter because we had to bring high-value metal into the mix. And so that high-value metal comes in on the FIFO line, it comes out on the LIFO line and the net impact is really zero. So what you're seeing is that we actually drove quantities of metal down even further than the dollars but because of the high value you're not seeing that translate to dollars. Does that make sense?

Joseph Nadol - JP Morgan Chase & Co

I mean, well, because just looking at the financial statements without hearing your explanation, my inclination would be to say, they dug into a higher because nickel came up obviously during the quarter. They dug into a higher valued slice of the LIFO inventory and kind of burned that off, were able to reduce that at a lower charge than they would have a quarter or 2 quarters or 3 quarters ago when the gap between LIFO -- between what was in your inventory and the actual selling cost of metal was a lot higher, is that not the right way to look at it?

Shawn Hagel

Well, I think the way I would categorize it is that as metal prices came up, we were able to drive our inventories down because the value of those layers and the value of the current cost were the same or very close, but we were able to drive that.

Joseph Nadol - JP Morgan Chase & Co

So was it opportunistic I guess is the question since the metal -- since the metal price has come so far back, is this now an opportunity for you to sort of eliminate some of those higher cost layers?

Shawn Hagel

I think that's a byproduct of it, yes. We were able to drive our inventory values down as metals come up. But I don't think you're seeing a big P&L benefit from that. I think what we're doing is we're able to do it at current market price.

Joseph Nadol - JP Morgan Chase & Co

Okay. Just one more quick one for you Mark. Could you update us on what's going on in China, with Chengde?

Mark Donegan

Yes, with Chengde, obviously, I think the biggest opportunity in -- and I'll tell you had we not have had Chengde, I think that their ability to compete in the Indian market has been huge. So as kind of an Indian market moves and kind of that output goes to that I think it has been vital for us. If I kind of look at what kind of categories of the world are where China, and U.S. and Europe demand one set of inspection in capabilities, India has another one. And Chengde has given us an entry in that. If we didn't have a Chengde, I think our value for India platform would have been off. So I think from that standpoint, as we move forward in Chengde and India projects start getting built, I think Chengde has been huge for us. And I think we will continue to be in kind of that region of the world. Also as we look forward, I think as we would go on the oil and gas, there's certainly some capability there that allow us to quote on work today that we could not have quoted on in the past. We need their capability from a cost standpoint on the lower grade alloys to be able to compete. So I think it continues to move down the road. We're very opportunistic with it, and I think it's got a lot to do as we look forward.

Joseph Nadol - JP Morgan Chase & Co

In terms of the qualification schedule and the lumpiness, do you wonder if that there would be lower than it was a couple quarters ago, how does that look over the next couple quarters?

Mark Donegan

Yes, I think that we've been working hard to get the qualification, and this got nothing to do with Chengde. I mean we're getting -- especially in this oil and gas world, getting kind of the world used to the acceptance of our quality standards in Chengde and how we're going to manage and run it. We're spending a lot of time in that. It is what it is. Again, it's not -- I don't think it's any reflection on Chengde but we've had to do multiple, multiple, multiple things to continue to bring those qualifications through. So again, I think they come and go as we move in different directions. If I look at medium diameter thin wall, low grades, I think we're through them. If I look at large diameter heavy walls, high grade, I think we still have more to go. And if I look at oil and gas, we are still have more to go as we move kind of through check in the boxes with various customers. So it's not as though getting one, presents as the other one. So I got to think it's going to go off and on, but I think it's kind of proceeding as we hoped.

Operator

And from Cowen and Company, we'll go next to Cai Von Rumohr.

Cai Von Rumohr - Cowen and Company, LLC

Could you give us some color, it looks like the seamless pipe was down about $20 million, $25 million, sequentially, is that correct?

Mark Donegan

No.

Cai Von Rumohr - Cowen and Company, LLC

Was down less than that?

Mark Donegan

Yes.

Cai Von Rumohr - Cowen and Company, LLC

Okay. And so but year-over-year, it looks like it's off about $60 million.

Mark Donegan

Right.

Cai Von Rumohr - Cowen and Company, LLC

So you had a 50% detrimental margin presumably was a combination of volume and pricing?

Mark Donegan

There was -- taking the -- to answer your question quickly, the answer is yes. To kind of again reset, this is product that we took 6 to 9 months ago. And at that time, based on the orders coming out, yes, we took anything we could get to put the product through. As you start moving your way forward, we start ramping up as the quoting process came through, and we saw that there was going to be life in that world. Yes, I think we started getting a lot more selective than we had early on. But yes, it is a combination of pricing and probably more pricing than anything.

Cai Von Rumohr - Cowen and Company, LLC

So looking forward, I mean, are the incremental margins the same, like 50% on the way up?

Mark Donegan

Well, I think the incremental margins grow. So I think, as you move out, the further away you go from this point, I think the better they become. I don't, again, I don't think it's a step-up, but yes, I think that, as I look at the way the quoting process went, what we're quoting today versus what we're quoting 6 to 9 months ago, yes, it is very, very, very different. Absolutely.

Cai Von Rumohr - Cowen and Company, LLC

Okay. And then a follow-up to Joe's on Chengde. It looks like this was the worst quarter of the year by a wide margin. I know you have the Chinese New Year. How much of this weakness this quarter was the qualifications issue? How much of it was the Chinese New Year? And it's like, what should the financial results look like for Chengde going forward?

Mark Donegan

Well, I think that the biggest is Chinese New Year. As you well know, in Chengde it is the only time that basically people get off. So in Chengde, it is a very valued time and tends to have a kind of a gaping hole into it. So I think that, looking forward, again, I think we start migrating our way, probably more back towards what we saw early on and then migrate our way from there.

Cai Von Rumohr - Cowen and Company, LLC

Okay. And then last one, you mentioned that PB has a good position on the 787. Could you give us a rough sense in terms of what's their shifts at value?

Mark Donegan

I think it's a fair question, Cai. I don't have the exact number. I think I need to get it, and I owe that to you. So I think, as soon as we close, we'll get a better understanding of exactly what it is. But I think by the next opportunity we have to get that information out to the public, we'll do that. I think it's a fair question, and we need to add that into our number.

Cai Von Rumohr - Cowen and Company, LLC

Okay. Overall, your fastener volume was up 5%, and you were up 13% in general industrial. So am I to take it that, overall, commercial aero volume, while the mix was poor, that you probably were down in the core fasteners and that overall aero volume might have been up like 2% to 3% at best?

Mark Donegan

Right.

Operator

Our next question comes from Steve Levenson with Stifel, Nicolaus.

Stephen Levenson - Stifel, Nicolaus & Co., Inc.

If the narrow-body planes go up in build rates again, do you have the capacity to meet the parts requirements? Or will it require any kind of material capital investment?

Mark Donegan

No. For us, in a lot of cases -- you almost have to go back 3 or 4 years ago, we spent a very, very large 2-year capital investment. And at that time, it would have been put in place to handle a narrow-body build rate of probably what's already been announced and a 787 build rate of probably 10 a month. And a JSF build rate of probably 100 a year. So that's what we capitalize, too. So I think we still have headroom to move. Even if I was -- even if we're going to take that current model that I just said and then we're going to up the narrow-bodies, we're looking at small capital, all in, maybe $25 million, $30 million. We'd look at a couple of DS single crystal lines, but no major capital, no real brick-and-mortar to handle another step-up. We've obviously looked at kind of what the proposed next step-up is, and I think we're okay.

Stephen Levenson - Stifel, Nicolaus & Co., Inc.

So it's just a little, over time, then?

Mark Donegan

It's people. For us, right now, and this is kind of what we've been trying to say with our customers -- as a strange as it is and as much as you see kind of the unemployment rates, there's a lot of people standing at the door, banging down to get in. So having the ability to get ahead of it -- and we need, probably, 3 to 4 months to handle anything more than a 6% incremental. It is people. So what we we've been really trying to reinforce to our customers is you've got to give us some time to step up. And I think, this last quarter at least, they gave us the first snapshot of "Hey, this is the step we're going to make."

Stephen Levenson - Stifel, Nicolaus & Co., Inc.

Got it. And on nickel, the price has appeared to have eased a little bit. Is there a possibility you're going to have a mismatch of any kind in your nickel purchases and what you're selling? And could you give us an idea what that lead times are, please?

Mark Donegan

Yes, the lead times in nickel are going out drastically. So it's kind of a catch-22 on one hand is where we're getting shorter cycles from our customers, and the lead times are going up. So that's one thing we want to tell our customers, "Hey, listen. This is what we're seeing." When I say they're going out, it probably would be from 16 to 25, 26 leagues, that type of number, so they have gone out. The way the bulk of our contracts work is, there can be a mismatch of a quarter. We typically chew up every quarter for the preceding 3 months and either a rapid escalating or a rapid lead decreasing. If it's rapidly escalating, we're going to have a little headwind in terms of drag and passing on. And for the rapidly decrease, we'll pick up a little positive tailwind from that. But it's turned up every quarter so that's about as -- and it's going to be something that moves pretty quick. If it moves a little bit, it blends out. But rapidly up or down, yes, there is about a 3-month kind of lag either way.

Operator

And we'll go next to Jason Gursky with Citi.

Jason Gursky - Citigroup Inc

Mark, you've spoken in the past, and this is a good follow-on question to the proceeding question, of being able to support $1 billion to maybe as much as $1.5 billion, depending on mix of incremental revenue with little capital expenditures. Is that still the case? And then secondly, what types of incremental margins should we expect from that revenue? And what do you think are the biggest risks to those incremental margins?

Mark Donegan

Yes, to answer your question, can I do $1 billion more with -- yes, I think the opportunity is there. If you take kind of last year and add $1 billion to it, yes, I think that it doesn't require a lot of capital other than kind of our maintenance and productivity in those type of gain. So yes, I think we could certainly take last year's ending point then add $1 billion, I feel pretty good about that. On the margin side, I think that castings is the cleanest to see because we are seeing pretty much the same product mix, same product type growing. And you can see that we got 35 as drop-through, as reported. And then if you look at kind of taking the dilution away and just be on nonmetal, which is kind of a numerator up and denominator flat or vice versa, the other way. We dropped through roughly 39%, 40%. So I think that is -- in the particular case, I think that's reasonable, and it makes a lot of sense. I think the other businesses, given the same dynamics, being the same products growing, yes, I think that you hit a sweet spot, and they should be able to drop that through. The thing that's making both Fasteners and Forgings a little tougher to look at is we've had this change in the terms of the product mix. So is Aerospace dropping through? Yes, Aerospace is dropping through extremely solidly. But it's having to overcome 4 percentage points, so that 20.6% last year would've gotten to 16-ish percent so you're not seeing that just because of the loss of the pipe. So again, I think that the dynamics in forges keep dropping through in Aerospace, and then, as the pipe margins come back, yes, you see kind of the movement you want to get. So I think there's a little different dynamics. Now I think Fasteners is probably pent up. So if I kind of look at Fasteners, the fact that we're kind of not shipping that core, highly engineered, highly complex -- I think, as we start shipping that, yes, I think you should start to see pretty solid drop-through in that. It's a great product. It's good for us. We're just not shipping it right now. So I think that they, once they start moving, certainly, an opportunity to move consistently with kind of what Investment Cast did when their core moved. So I think it's kind of a blend of those 3, if that helped to answer your question.

Jason Gursky - Citigroup Inc

It did. And then just quickly, with the lead times today on Fasteners, where are they relative to where you've been in the past? And has your distribution strategy changed at all with Fasteners?

Mark Donegan

Well, not really. I mean, the distribution strategy to-date, a lot has been kind of dictated by the customers. I mean if you kind of look at the way we ship product -- we have product that goes directly into the OEMs, and they dictate that. So they basically put what they view as their needs in core. And there's a secondary one that, quite frankly, the OEMs buy from the distribution arm, and they kind of define that, so a lot of kind of the distribution arm is defined. We don't own -- we're not really in the distribution business. We have one Distribution business that we acquired with SBS but it's not a desired goal of ours to kind of be in the distribution. So again, distribution supports the customers, and they kind of define what goes through distribution. So I think, my strategy standpoint, the customers define what that is. There's a second part of your question, too.

Jason Gursky - Citigroup Inc

Just the lead times on Fasteners.

Mark Donegan

Oh, the lead times with Fasteners. I think, right now for us, what we're trying to do is we're trying to stay extremely responsive and capitalized on anything that pops up. So for us, I'd say that, no -- our lead times, if we have the material, are short. Eight weeks, 6 weeks, something like that. If we don't have the material, lead times are extending drastically. So if I look at 6 months ago, what our lead time was to get raw material, either coil or bar, into the Fasteners, when it was 13 weeks, that's now gone out to greater than 26 weeks. So if we have the material, short, if we don't have the material, lead times are going out drastically.

Operator

Our next question comes from J.B. Groh with D.A. Davidson.

J. B. Groh - D.A. Davidson & Co.

Question on your cash. I mean, obviously you made the acquisition recently, and I'm presuming cash goes down a little bit in Q1, but can you talk about deployment there? I mean, I know you're always on the prowl, and you usually have a lot of acquisition opportunities sort of in the hopper, but can you sort of talk about changes in attitudes from sellers and those sorts of things that you've seen over the last 90 days?

Mark Donegan

Yes, I think, right now, it's really good we have the cash on hand. Again, we tend to work on things for a long time, and we tend to be very patient. I think that there are opportunities. Again, if I can wave my magic wand today, right now, I would suck up every bit of cash on hand, plus. So that's what's out there. Now again, discipline, patience has worked very well for us in the long haul. So staying to that is going to be key. But right now, I'm glad to have the cash on hand to be able to entertain the conversations I'm entertaining at this point in time.

J. B. Groh - D.A. Davidson & Co.

Okay. And then just kind of switching gears -- on the Joint Strike Fighter, is there significant difference in your content between the different engine options there, the Pratt and the Rolls/GE?

Mark Donegan

Well, I think that we've -- there is a better content on the Rolls/GE engine than there is the Pratt. But at the same time, from the Pratt engine standpoint, it's a good program for us, too. But if the GE rolls into our goal, yes, our content for JSF would go up.

Operator

We'll go next to Eric Hugel with Stephens Inc.

Eric Hugel - Stephens Inc.

Mark, just in terms of thinking about how the year build, I mean, should we think about each quarter sort of increasing sequentially and maybe the back half of the year sort of seeing much steeper ramp?

Mark Donegan

I think that's a fair way to look at it. Again, I think we're going to have to start getting some of the products out. I mean, ideally, I think our customers would like to say, "Ship me everything a day before I need it," but we recognize that's not the way to go. So I think you're right in terms of sequential. And then as we get certainly closer to those build rates, we're going to have to continue to accelerate faster. Again, we're -- somewhat, bringing people in and working will throw us back in the beginning. But as we get them, and they get trained, it should be more upward. So yes, I think your assumption is pretty good.

Eric Hugel - Stephens Inc.

And with regards to the Fasteners, I mean, you talked about you're thinking a 2- to 3-quarter lag. I mean, is that based on just sort of what you saw on the downturn? Or is that based on you sort of really having good insight into what the inventory levels are at in the supply base?

Mark Donegan

I think it's a combination of all. We kind of went back when the rest of the businesses are on a free fall from the Aerospace. Fasteners kept holding up, and we certainly had conversations made. And there were some reasons that time too, there were was kind of that whole set of wing box going on in the 787 at Boeing that we're supplying. So I mean there were reasons as to why. But yes, we said, "Okay, somewhere along the way, we're going to have to repay the piper." So I think, yes, we saw it going in, and then we look at it coming out. I think that we've had conversations. We've been able to go to walk and look at the lines. So I think we do see kind of that volume on the floor coming down. And then again -- across all of our businesses, the first indications you get is when somebody says, "I need something I hadn't planned on needing." And the fact that some of that started occurring also would give us that leading indication like the last one is the kind of lead times are going out on that raw material. I think all of that kind of plays out consistently with -- we're bouncing around that bottom, and we're going to start clawing out sometime soon.

Eric Hugel - Stephens Inc.

Okay, great. And Mark, just lastly, what should we be thinking about in capital in terms of CapEx for the year?

Mark Donegan

Pretty flat to last year. Again, we're not looking at, necessarily, any capital for growth. What we're looking at is productivity and safety and maintenance. So I think, pretty flat to last year is probably a pretty darn number.

Operator

We'll go next to Howard Rubel with Jefferies.

Howard Rubel - Jefferies & Company, Inc.

Couple of things. One, with respect to the cash balances. A year from now, it will be close to $2 billion. Does that change your thought in terms of size, or frankly, geographic scope? Is there more opportunity in Europe or somewhere else rather than the United States?

Mark Donegan

Again, what we look for is capability and something that's going to add to us. So I don't think, number one, I don't think we're posed to going anywhere. Again, I've said this before, I probably wouldn't go buy, on its own accord, something located in France or Italy or -- it's just difficult in our manufacturing mentality, but if something came along, great, get it. But again, I'm more concerned with adding and growing and the platforms that are on and capability and expansion of what our product offering is. That's what I want to go after. And again, I think that PB fits that bill, and kind of what we're looking at now, all fits that bill. It adds something to us versus not. And then, wherever it may be, it may be.

Howard Rubel - Jefferies & Company, Inc.

None, all right. And then, I was a little surprised, the outcome market in Castings was, I think you said, up 6%. And I know it's always hard to sort of know what aftermarket and what's OE, but could you provide a little color there? It would seem that restocking or just when you looked at the growth in the global numbers, maybe a low double-digit rate would've been there. Is there something that happened? Or...

Mark Donegan

Yes, I think that we also didn't expect to see that. I think what we're starting to see now in the orders we got in, drive it up more towards your number. So I think what you were are seeing was a continued inventory clearing, de-stocking, not spending. I think it kind of hit the bottom. So certainly, a lot, I don't like to use that word -- certainly, a component of what we saw coming in, in terms of orders ties directly back to increasing that spare parts market, without a doubt. So I think your assumption's right. I think it's just coming 13 weeks later.

Howard Rubel - Jefferies & Company, Inc.

And then last, just to go back to the LIFO item. I mean, the way I was thinking about it is the kind of big margins between 400 and 500 basis points and maybe $0.15 or $0.16 strong. I mean, you still ended up adding higher metal costs to cost of goods sold relative to what you would add. So why shouldn't I think about -- as you sort of go through a little bit of rising metal, it sort of distorts the operating performance and that the results from how Mark thinks about operating performance was actually better by several hundred basis points versus the accounting?

Mark Donegan

Let me maybe answer and if I don't answer it right, Shawn can answer technical. I think you are correct. What it does is it did put pressure in the mathematics on the operating margins by almost, to your point, 500 basis points and 0.5% because we passed it through but we just get nothing for it. So it does dilute the operating margins, so your assumption is correct, that, yes, it does put pressure on that in terms of the mathematics. So in order to continue to overcome that, you're going to find even more aggressively. Again, I think, if we had the same pipe load that we had a year ago, I don't think -- I think the margins would've been kind of through the roof. But you are right, it does put pressure on the operating margin percentage. Yes, it does.

Operator

Our next question comes from Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc.

Mark, so perhaps you could help me with the timing of when we would see the 30% to 40% incremental at Forged and Fastener in '12? And sort of to a follow-up to what Howard was just discussing, what others have discussed, should we actually see a much, for some period of time, a much better than 30% to 40% incremental at Forged and the Fastener? Because you're going to get -- you're going to lap the mix shift, you're going to annualize the mix shift headwind and get just regular operating leverage, but then also that mix shift going back the other way. And particularly in Forged, you should actually have kind of a double mix shift with the shift back to pipe and then within pipe itself, a shift to better margin pipe. Is that all right? And when do we start to see it in '12?

Mark Donegan

Man, I feel like I'm on -- a lot of shift going on in that question. Let me try to answer what I thought that you say. I think that Fasteners -- when the core product comes back, we'll see a step. Because the product's there, it's a contractual price, it's defined. It comes in, we ship it, it moves out. So yes, I think, when that core comes back, I think your statement is kind of incremental pots we should get from that, yes, I will agree with that. The only thing I would add in Forgings is, unlike the Fasteners and the Castings and the Aerospace world, we're not out there on a contract. So you have a time-phased blend as we move off of the bottom and just saying, "I got to fill the piece of equipment," through that time, over 1 month, 2 months, 3 months, 4 months, into today and saying, "Okay, the world is better, I do have opportunities we can start thinking about differently." So I think that you quote job to job to job to job, and your mindset changes as you move further away from the quagmires of life in the pipe world. So I think it is more of a flow and a ramping to it where Fasteners -- when we do get the orders, yes, you do get a pop. Did that answer your question?

Noah Poponak - Goldman Sachs Group Inc.

Yes. I apologize for the wordy question. It just seems like there's a...

Mark Donegan

I'm just trying to make sure I answer it.

Noah Poponak - Goldman Sachs Group Inc.

It just seems like there's a multiplier effect, if you will, where even if you didn't get the mix shift back, you would start to see your normal incrementals just because you're comparing to year-ago periods where you have...

Mark Donegan

Oh, yes, yes, yes. On that front, I would agree with you. You're going to start hitting a point where you're going to compare it to a comparable difference. So yes, I misunderstood...

Noah Poponak - Goldman Sachs Group Inc.

So that would give you -- so that alone would give you your normal 30% to 40%. And then on top of that...

Mark Donegan

Yes, if you start looking at year-over-year comparisons, yes. In fact, I looked at that yesterday. You start looking at Q1 to Q1. Yes, you start comparing to a much lower pointage. You've seen that in there, they're in the numbers. Q4 to Q4, we're still comparing to a totally different world. But as you start migrating your way Q1, Q2, yes, that piece of the puzzle, you're correct, absolutely.

Noah Poponak - Goldman Sachs Group Inc.

Got it. And then I'll follow-up on the M&A question, as well. It sounds like you're looking at a lot of different things. Is most of what you're looking -- can you help us size what you're looking at? Is most of it in the few hundred-million-dollar range? Are there actually things that are over $1 billion? How big are we looking, currently?

Mark Donegan

I'd say we look 200, and you start brushing up against the billion, is probably the range and kind of what we're looking at.

Noah Poponak - Goldman Sachs Group Inc.

And it just sounds like, since you say there's a lot of things you're looking at, it seems like the hang-up is just price?

Mark Donegan

Well, yes and no. I mean, somewhat we've been working and working, and the interest has sparked up. Some of that was the interest is there, and we're trying to find common ground. And some of it is, they're finally starting to say, "Yes, okay." But if I look at PB, it was a blend of all those. They weren't ready, the price was off. And then certainly, we kept talking, talking, talking, talking, and then kind of the desire popped up, and then we found common ground in the price. So I think it's kind of a blend of all of those things.

Noah Poponak - Goldman Sachs Group Inc.

Okay, so you feel like in that...

Mark Donegan

There's one more thing to add, too. And also kind of getting more clarity to the future is, it's not always just us saying "You reprice, you reprice, you reprice." We're not moving. It's also saying, "Okay, the world has changed." So now, kind of that common ground is gettable between you and us, coming to a more reasonable point, to where we are, which is not all one-way.

Noah Poponak - Goldman Sachs Group Inc.

So it's fair to say you are closer to that common ground on things in the range you quoted there than you were 3, 6, 9 months ago?

Mark Donegan

Yes.

Operator

Our next question comes from Ron Epstein with Bank of America Merrill Lynch.

Ronald Epstein - BofA Merrill Lynch

So maybe just another pipe question. Where do you stand on the 9 5/8-inch pipe of opportunity today?

Mark Donegan

Well, that's a good question. We were -- we are in the final qualification phases. We had a process to go. When we got to that particular process, one of the end customers did not want to use a one part of the process outside of the U.S. into China, so we had to go get another process through that. So in terms of our capability, where were we, where's the customer -- yes, I think that that now is product that is going to be acceptable. I think we thought we were there in terms of what was going to be acceptable using Chengde. That particular customer said, "Hey, we need -- you need to give us another solution," and then we just got qualified on the other solution. It's only one aspect. It's not an aspect of the process that changes metallurgical properties. It's just the position this customer took. So we just now have gotten approved that piece of the puzzle, so we'll resubmit and go again.

Ronald Epstein - BofA Merrill Lynch

Okay. And then when we think about sizing that opportunity, has your view on that changed at all, if you could say in a review?

Mark Donegan

No. Oil and gas, if I kind of look forward, if I snapshot a year or a year and a half from now, and I look at that opportunity in that oil and gas and chemical world, it's the worst kind of world. We would've considered the normal business in kind of what we considered that seamless extruded pipe. So I think that that whole new management structure we brought into play, and some of the people we brought in, have really changed our mindsets. I mean, if we're successful, our traditional seamless extruded coal will be a smaller percentage of seamless extruded pipe than the oil and gas and downhole. I mean, the market's moving our way. So we're moving to higher alloys and nickel based, and that's a good thing for us. So I think that it will change. Like I said, a year and a half from now, we're sitting here and saying, "You know what, I'm talking more about coal than I am oil and gas." I'll consider that we didn't do our job.

Ronald Epstein - BofA Merrill Lynch

Okay. And then maybe one more, just changing subjects a little bit, and I think you touched on this a bit before. The balance sheet's really strong, right? And kind of only getting stronger. Would you contemplate a dividend?

Mark Donegan

Our model and our success has been finding the right things and getting them and driving the living crap out of them to get improvement to our shareholders. If I were sitting here not looking at the opportunities, I think I need to be having a different conversation. But it's almost a flip now. I mean, there's just a lot of opportunities. So quite frankly, if I'm not running operations, I'm spending a lot of time now figuring out if we get -- how we're going to manage and what we're going to do. So my brain is at a different point. It's not sitting here saying, "I'm not looking at anything. I got nothing to do. What am I going to do with the cash, what am I going to do with the cash?" It's really, "Okay, if these things happen, how am I going to manage them? What am I going to do? How am I going to integrate them?" There's enough there that it's not making my brain sit idly, wondering what to do with the cash.

Ronald Epstein - BofA Merrill Lynch

Okay. And then maybe just one follow-on to that and then I'll jump off. When you -- those opportunities, when you think about that opportunity set -- I mean, as outsiders looking in, how should we think about it as where there could be space in the portfolio? Does that make sense?

Mark Donegan

Well, I think that it hasn't changed. I think that Fasteners, it always continues to be an area. I think that there are other space platforms, not engineering designs, steel components, that we have line of sight, that would be great fits for us. We still have holes in our forging capabilities. We still have holes in our casting capabilities. And if I look at that power world and what it is, I think there's still processes that we need to get that would let us compete in that. So again, I think power, castings -- Power, Aerospace, Castings Fasteners and then Forging processes is still something we're interested in.

Operator

We'll go next to Heidi Wood with Morgan Stanley.

Heidi Wood - Morgan Stanley

Mark, I came in a little late, so I apologize if you touched on this already. But can you expand a little bit on the opportunities that you see, given the news in Japan and its hold on nuclear plants and kind of what that means for you guys? And then maybe kind of go over with the power demand outlook, what -- when you're seeing a recovery by geographical segment?

Mark Donegan

Yes, let me kind of think of how to best recap this. Yes, if I kind of go back, Heidi, to where we were 15, 16 months ago, I think we're looking and saying, "You know what? The IGT market feels pretty flat to us. And that's kind of where we're going. If I kind of look at what's transpired since the disaster in Japan, I think we've seen a lot of the IGT people quickly come back to us and say, "Listen, we anticipate this type of increase. What can you do? How can you ramp up? What does it looks like?" I think we've seen some initial ordering on that. But I think that there's certainly been a lot more request than a lot more conversation of, "Can you do more?" So I think our expectations are that, in Japan, in the short haul, that there will be some power needs. And we see all the 3 primary IGT people asking us those questions, in "What can we do?" I think that there is a belief that some of the pause that's been caused around the world of either adding or, in some cases, shutting down, that that's going to put some additional future demand out of the IGT world. Germany basically said, "We're going to shut some of these older ones down." I think there's certainly been a pause in the United States. So I think our belief is that that will provide opportunity in the short haul in the IGT. Again, we're seeing a lot of comments or questions in asking what type of ramping can we do. We've seen some order placement, not a lot, but I would expect that we'd see more to come.

Heidi Wood - Morgan Stanley

Okay, and when do you expect the United States to get there? In your best analysis, when do you see that...

Mark Donegan

You know what, at this point in time, we've still felt as though it would be sometime in '12. I don't think on its own accord, that's changed. I think we're going to have to digest, "What are they going to do with the power?" And if they do take it off the drawing board some of these nuclear plans, what is that going to do in terms of putting demand? But I'd say, right now, on the U.S. side, it still feels like sometime mid- -- early to mid-next year.

Operator

And we'll go next to Peter Arment with Gleacher & Company.

Peter Arment - Gleacher & Company, Inc.

On the oil and gas, back to the 9 5/8, just -- are you saying you got to pull in some of the finishing capabilities, I guess, back to Houston versus Chengde? At least that's the way I was understanding you. Has that changed any of the margin opportunity for you guys in that product line? I think that it's...

Mark Donegan

No, no, the one particular process was a coal draw. So if you look at the value, it's a very, very, very low point, the product already is. The material around, it's already been heat treated, it's already been machined in a lot of cases. So what you're really doing is just kind of putting the final wall and diameter thickness on this particular product. So it's a fairly low-cost operation. The capital required is $3.5 million so it's just not a high value. It's not as though we're going in and had to complete way to come up or pull or do heavy machining or labor intensive. It really is 2 men, one machine pulling across a mandrel. And I don't mean to downplay the technology, but in terms of the value or the cost, that's relatively low.

Peter Arment - Gleacher & Company, Inc.

Okay. And we were in Houston in March. I mean, it seems everyone's pretty bullish on the potential for this market, and you certainly indicated that it could dwarf. One of the comments was that the one customer had met qualifications and others were close. Where does this stand? I mean, it seems like you got a number of potential customers that are lining up.

Mark Donegan

Yes, I think there's a desire for the customers to get us into this. So it's not as though we're out there trying to shove a wet noodle against a wall or something. We have a need, but there is a concern. I think, had we had a coal draw process, I think we would've gotten a substantial piece of work already. So getting this coal draw redefined in the United States was a piece of the puzzle. We've just gotten that initial qualification now. The rest of the process have been completely qualified. So if you look at the metal, the forging, the processing, that's all qualified. It's just this last piece. So now, we've just gotten that, we're going to have to go back again. I mean, I think the market wants us, the market needs the product. I think the market would like that precision in this business. I think they'd like us to have a cleanup. Right now, it is not a Houston solution. It is another outsourced solution. But I think that there is a Houston solution on the horizon very quick.

Peter Arment - Gleacher & Company, Inc.

Okay, that makes sense. And then a switch over on the Fasteners. Boeing's been out there regarding pursuing, I guess, a lot of large multiyear deals directly with some of the fastener OEMs. Can you give us an update on where that stands and when that might kick in?

Mark Donegan

Well, I need to be -- yes, what you're hearing is correct. I think we are a very active participant. I think that we see potential for us. I think we're kind of in the final throes, but it's going to be a matter of Boeing and us coming into agreement. So I think it's there, we're -- it's very important to us. It's something we certainly want to have a strong presence on, and we're just kind of going through the normal contractual debates and discussions on the points. But I think it's important.

Peter Arment - Gleacher & Company, Inc.

Is it just the timeline in the back half of this year, is when do you think you'll be something settled?

Mark Donegan

Yes, yes.

Peter Arment - Gleacher & Company, Inc.

Okay. And then just one last one. You haven't talked about SMC in a while. Can you give us an update on how that business is performing? And what are the opportunities for that business?

Mark Donegan

Yes, I think that SMC -- all of our businesses, you can imagine that, when their market imploded, they just said it's a tough road to haul. If I kind of look at the evolution, the way we've been progressing -- I mean, 2 quarters ago, we went into the quarter probably 25% booked, and we were just out scrambling for everything. We're now ending the quarter in a 75% to 80% booked, and kind of I'm looking where some of them are we're actually 100% booked. So I think there's been a nice recovery and evolution into that world. And I think SMC has certainly got some up. If you look at the next 12 to 16 months, I think SMC has got quite a bit of upside. And again, they also play kind of in that oil and gas in that world. So as the market's moving towards that nickel-based superalloy, certainly SMC should benefit from that too.

Operator

Our next question comes from Myles Walton from Deutsche Bank.

Myles Walton - Deutsche Bank AG

Mark, you went through the mix as being pretty much the driver of the margins that we are seeing here. I'm curious if you can also comment on revert managements in the quarter. And just from a perspective of the percent you were able to capture in your input, maybe the spread diversion, if that's moving and if it was a plus or minus in the quarter?

Mark Donegan

I think that's consistent. I think, if I kind of look at Q3 to Q4, I think our revert percentages held reasonably solid. We've had to work hard to find it. We've had to scrub, sweep floorings probably a little more aggressive. So I think it's held consistent. I think we've got our speeds picked up and the amount we turn it. So if I go back to a year ago, what was revert, how are we getting it, how quick do we turn it -- I think that, if we just had those traditional kind of speed and times and areas to get it, I think what I'd be telling your right now, I know our margin percentages have gone up. But I think, the fact that we've been able to turn it, move it, get it quicker and move across plants and divisions and get different ways, I'd say we're holding -- we're fighting our way and holding flat right now.

Myles Walton - Deutsche Bank AG

Should we think about it as any margin headwinds to next year, though...

Mark Donegan

No. Again, I think that we just got to -- I think we got to get smarter. If we were sitting in, we tap at every single idea, and we had one nanosecond between the time, we took a chip off, we'd put it back into the metal -- but I think I'd tell you, no, we don't. But we still have opportunities in whole. That's one way to look at the corner view process, it's kind of what we represent. So that is an opportunity in that standpoint. And again, another thing that drives us going to the scrapper rework is as that comes down across the entire company, you require less material to be poured, and you get to go that. So again, scrap and rework has an impact in yields in the SNC side. So all that blended in, no, I wouldn't say we had any undue headwind.

Myles Walton - Deutsche Bank AG

All right. And then one other one, you mentioned a little while -- maybe 6 months ago, that in the second half of this year, fiscal '12, that you might be back towards that $500 million in your annualized rate at the Seamless business. Is that still consistent towards that vault?

Mark Donegan

I think that, as we get to the back half of the year, I think that's an opportunity. Is it going to be the exact same $500 million? Probably not, probably not. Well, if I go back to the $500 million, we probably had P91, P92, P29 -- I know these mean nothing to you, but they're various grades diameters. I think what you'll find is probably more concentration in the coal on a higher end and then a much stronger presence in the broader spectrum across product lines in oil and gas. But no, I think that that overall sales growth is where -- I think it's just going to be a different product mix.

Operator

And our final question today will come from David Strauss with UBS.

David Strauss - UBS Investment Bank

Mark, most of my questions have been asked, but we went back and forth on Aerospace in terms on when exactly it's going to go into ramp up. But simplistically, Aerospace grew 18%, I think, in total last year. Does that growth rate accelerate or decelerate in '12?

Mark Donegan

Well, again, I think what you're going to find is a couple of things. I think the comparisons -- so we're going to start coming into a time where Q1 was already starting to see some growth and then Q2 and Q3 and Q4. And so if you look year-over-year, I think you're going to find that no, we're not going to go at 18% quarter-over-quarter. I think what you can do is kind of take as a point-to-point -- if you look at what some of the announced build rates are already -- the narrow-bodies are going up in that 10% to 12%, the wide-body is going to go up 10%, 787 is going go up by some magnitude when that gets clear to find. I think, kind of saying year-over-year, yes, you can start looking at those particularly points. I think that that's the way I'd calculate from here on out.

David Strauss - UBS Investment Bank

Okay, but lower than 18%, overall?

Mark Donegan

Yes, because, again, you're going to be comparing it against a -- Q1 we started to grow the Aerospace so you're going to see -- that doesn't say the dollars may not be significant, it just means that you're going to be comparing it against a higher baseline.

David Strauss - UBS Investment Bank

Okay. And last one for me, I don't think you touched on this: tax rate for next year. I mean, you trended down. I think you came in lower than what we thought initially for '11. So what to think about for '12?

Shawn Hagel

I think, when you look at '12, if you look at the overall tax rate for FY '11, you'll see something that's fairly consistent with that.

David Strauss - UBS Investment Bank

So around 33%, Shawn?

Shawn Hagel

Probably a little higher than that, but yes.

Operator

And that concludes our question-and-answer session. On behalf of Precision Castparts, Mr. Donegan and PCC management, I would like to thank you for joining today's call. As a reminder, the webcast and call has been recorded and will be available on Precision Castparts website at www.precast.com for approximately 30 days. This concludes today's meeting.

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