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Executives

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

Mark Donegan - Chairman, Chief Executive Officer and President

Analysts

Eric Hugel - Stephens Inc., Research Division

Kenneth Herbert - Wedbush Securities Inc., Research Division

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

Elizabeth Grenfell - BofA Merrill Lynch, Research Division

Richard Tobie Safran - Buckingham Research Group, Inc.

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Joseph Nadol - JP Morgan Chase & Co, Research Division

Jason M. Gursky - Citigroup Inc, Research Division

Heidi R. Wood - Morgan Stanley, Research Division

Carter Copeland - Barclays Capital, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

J. B. Groh - D.A. Davidson & Co., Research Division

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

David E. Strauss - UBS Investment Bank, Research Division

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Precision Castparts (PCP) Q2 2012 Earnings Call October 27, 2011 10:00 AM ET

Operator

Good morning, and welcome to the Precision Castparts Webcast and Conference Call to discuss its second quarter earnings for fiscal 2012. 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. Following remarks by members of PCC management, dial-in access lines will be open for questions. [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 very familiar with the forward-looking statement and you need to take consideration when you're analyzing the following information.

I think in general, Q2 delivered a strong performance but I think more importantly than that it certainly establishes a new baseline for us to move forward with. Certainly when I look at the numbers of significant drivers we have out there in front of us, it certainly lays a lot of groundwork for a lot for us to do. Having said that, we'll get a lot more of this detail as I go through the segments, but in total for the company, we saw sales growth of the 18.7%, going from $1.5 billion last year to just under $1.8 billion this year. We saw operating growth of 20.5% going from $363 million last year to roughly $437 million this year. And we saw operating margins expand from 24% last year to 24.4% this year and this also includes a dilutive effect from the recent acquisitions across a number of our businesses that occurred in the quarter. And all this generated an EPS of $2.03 versus last year of $1.70.

If I look at the significant drivers for the company, on sales, when comparing to last year, we had a number of positive drivers. We kind of put -- begin to put on an apples-to-apples comparison in the quarter versus last year, we had incremental material pass-through and selling price of roughly $63 million. From there, certainly as you'd expect, we saw a very solid Aerospace growth of 18% versus last year. We're seeing this on a number of fronts. We're seeing it from the standpoint of we're supporting a current build schedules. We certainly are seeing some of the early announced build rate increases in our numbers. And then compared to last year, in our Castings and Forging segment, we are seeing steady 787 activity and our Fasteners were still lagging. We saw a strong aftermarket demand and we also a very strong external alloy sales.

In Fasteners, we saw improved aerospace fasteners growth of 9% versus last year. But again this is off the low point, so if I go back to what was the lowest point in our fasteners, it was Q2 of last year. Having said that, at least we're moving in the right direction in that standpoint. And again, we'll get into a lot more of these details as we go through Fasteners.

We saw strong IGT demand, roughly 21% versus last year and we continue to see industrial growth of 4% growth from last year. And we also saw the beginning effect from our recent acquisitions.

If I look sequentially, we continue to see Aerospace growth for the company of roughly 3% versus Q1 and IGT continue to be strong, contributing 5% growth versus Q1. As with the year-on-year, we also saw a contribution in Q1 from the new acquisitions, this is where they basically all occurred.

Looking at EBIT for the company, we saw solid leverage from the incremental volume. We talk about this at some of the -- we discuss with our investment community, we discuss it day in and day out with our operations, so staying squarely focused on that incremental drop-through for us is key. This -- you'll see this across all of our segments. We will get into kind of what the effect was in the segments. But along with the absorption benefit we're getting, we also continue to see improvements across our operations, in productivity and yield. And one of the areas that we work tirelessly on is continue to hold on to that revert levels. And I think the Caledonia has been huge for us as we have been able to find new ways of getting revert levels that we weren't able to get in the past, so we're in a growing market to be able to hold on to our revert levels, for us, has been significant.

Pressure on margins in the other direction is obviously the dilution effect of the higher material pass-through, just a math formula, getting sales with no associated profit. And even though a positive on operating income, certainly the addition of the new acquisitions were dilutive compared to our base business. Basically, the case of all the -- all of the businesses we bought over the years, we establish a new baseline and we build off of that, and I think these businesses kind of fit in that same trend right now. And again, all this yielded a record EPS but we have a lot more to do.

If I look at the sales by segment, as you'd expect, we saw Aerospace go from 57% last year to 61% this year. Power was basically flat at 22 versus 21 this year. And General Industrial as a percent of total went from 21% to 18%.

If I move into the segments, starting with Investment Cast. We saw sales growth of just under 12% going from roughly $512 million last year to $573 million this year. We saw operating income increase by 17% going from $162.5 million last year to roughly $190 million this year. We saw margins continue to expand going from 31.7% last year to 33.1% this year.

If I look at the key drivers inside Investment Cast Products. On sales, key catalyst certainly was an overall 18% increase on aerospace sales for the segment. Again, we've talked about some of these. We're seeing very stable base rates. If I go back to where we were a year ago, the restocking that was continuing to go on, that's now gone. In Investment Cast compared to last year, we do have a modest 787 increase and I think we are supporting kind of the current rates in that 787.

We a saw strong aftermarket sales growth of roughly 24% and we also had very strong external alloy sales in this business of roughly 30%.

Moving on to Aerospace. We saw good IGT growth compared to last year of 7%. And again, putting everything on an apples-to-apples comparison, we saw $9 million more of material pass-through.

If I look at EBIT, we continue to see very strong leverage on incremental volumes and we've been able to -- in this side of the business for us certainly productivity is key, we've been able to kind of attack that productivity we've -- I think we've been hiring in a controlled manner. We've been able to benefit out of that. This is all -- we are getting incremental margins, kind of in that sweet spot we've talked about, of greater than 45%. And we did overcome the dilutive effects of the material pass-through and here would have been about 0.5 percentage point higher without the material pass-through on the top.

If I look forward for Investment Cast, I think we have a number of rate increases over the next 2 years on our base programs that will drive upside. And even though we do not have a specific build schedule announced yet in the 787, any increase will be incremental. And if we take a step forward and go from where we are today in this -- in Investment Cast, at about 2, to where the angle is about 10 a month, this is just a significant, significant catalyst for us in this business. And you're going to hear that, as you can well imagine through all of our basic businesses.

If I look at IGT over the next year, I think we have upside there. Even though at this point in time, there's not any significant changes in the number of engines that the OEMs are manufacturing. For us, we are seeing a mix shift, mix shift, as in the technology, more advanced parts, more complex parts and that all yields us a higher dollar content per engine. So if I look at moving into the next calendar year, we certainly are seeing a positive effect from that particular mix shift. And spares hasn't seen any significant uptick yet but I do think there is a potential as the engines are brought down for overhaul and repair.

Moving out of Investment Cast and on to Forged Products. On sales, we saw just under 20% increase going from roughly $669 million last year to $801 million this year. We saw operating income rise by 26% going from $130 million last year to $164 million this year and we saw margins increase from 19.5% last year to 20.5% this year.

If I look at the significant drivers inside Forged Products, on sales, again beginning and putting on an apples-to-apples comparison, we had $53 million of higher material pass-through and selling price. The other thing, and we talked about this last quarter too, we continue to drive more utilization of our assets for our own internal purposes. Supplying out of SMC into our casting operations certainly helps our lead times, helps our cost model so we've actually increased our internal sales by roughly $60 million. So again, we're putting a fair amount of product over our assets to support our internal needs.

From there as a baseline, we saw basically the same Aerospace growth of 18% as with Cast. And we saw extremely strong IGT demand, increasing by 73%, on a smaller base. But having said that, they've been very good at getting additional share, additional opportunities. So our Wyman-Gordon side of the business, which is in the IGT, has done extremely well over the course of the last 4 or 5 quarters.

And as we've talked about over the last couple of quarters, it has been a strong desire of ours, a goal, we focus to penetrate the oil and gas in our seamless pipe. And in Q -- of quarter 2, if I look at where we were last year, where 2% of our seamless pipe sales were going to oil and gas, this quarter we're 16%. So I think we're making that penetration, it's got a lot more opportunity from here. But it was a step function in terms of kind of getting that oil and gas and making some strides.

And then we saw General Industrial growth. And again, I think we're being more selective in that but we still saw a General Industrial growth of 5% versus last year. And then, we did begin to receive the benefit from the free -- recent acquisitions besides the ability to help us get into oil and gas, we also saw the benefits certainly on the top line.

If I look sequentially, we saw $2 million of incremental material pass-through. And again, as our prices -- as the market prices are going down, our metal prices are overlaid for a period of time. So it takes -- it's a very long lag time for the lower material prices to finally work their way through the system, so we did in fact have sequential increase in material prices.

Aerospace sales increased 1%. The need from the customers was probably in that same area that castings was, about that 3%. But we did, in some cases, run up against a shutdown in some of our operations. So again, I think that 2% to 3% is where the Aerospace wanted to go ahead and not plan for shutdowns. And sequentially IGT saw a very strong quarter of growth growing by 25%, again much smaller volume than castings but getting good opportunities and good share.

The last couple of months that I've been out there, kind of in this world I've heard a lot of concern of where is General Industrial and what type of growth we're seeing, that kind of fear that it's a leading indicator. For us in fact, we did see a sequential growth of 3% in our General Industrial versus Q1. So it's holding up well for us and that levels, at this point in time, certainly seem to continue to hold up. And certainly the same we saw on year-on-year, we saw a benefit in the quarter from the acquisitions.

Looking at EBIT, certainly in Forged Products, incremental volume is a key contributor but along with that kind of talk on the font page and that constant attack on those major cost drivers and again, in this world it's kind of that material side of the business, as a result they kind of take out that material pass-through and the dilution effects from the businesses. On our base business, we are seeing incremental margins of greater than 45%. So Forged Products is certainly kind of getting the value we want to get them on that leverage. But putting pressure on that again is the margin percent is the effect of significant higher material cost and with no associated profit and the dilution effect from the recent acquisition at lower margins than the segment.

Looking forward, in Forged Products and on Aerospace side, key drivers are basically the same as castings. We're supporting the rate increase over the next 24 months. That's going to be a significant contributor. But the big upside for us as with castings and as with fasteners is going to be the rate of ramp as the 787 becomes clear. And we also do have incremental contractual share that we already have. So new share that we won that will come out in the mid -- in the end of next calendar year that we're in the process of developing right now. So again, this is contractual share that we have won and have the tools under build and it will come out as we move forth.

In seamless pipe, the coal fire demand has continued to see gradual increase in demand and also kind of the price we're getting on that, but the accelerator in this particular business is certainly that penetration of oil and gas that we have a lot of opportunity over the course of the next 12 months. And today, General Industrial again, we've been talking about being selective but we're seeing kind of a steady trend in that.

Moving on to Fasteners. We had a number of moving pieces in Fasteners. But in total, we saw a sales growth of 27% going from $327 million last year to roughly $415 million this year. We saw operating income increase by 17.2% going from $97 million last year to $114 million this year. We saw margins decrease from $29.7 million last year to $27.4 million this year. That includes dilution from the Primus acquisition that occurred in the quarter.

If I look at the significant drivers, on sales, we did see 9% growth year-over-year, but again this is off the low point. The bulk of it was coming from a noncore, but we did see the beginning of that core demand. Very, very beginning but we did see it and we'll kind of get a little bit more of this as we look forward. We also saw a further increase of 11% versus last year in General Industrial. And again, this is the segment where Primus now resides. It's now going to be called PCC Aerostructures. So we're going to let go of the Primus name, move on to PCC Aerostructures from here on out, and we did close that on August 9.

If I look sequentially, again I think we're starting to see the very beginning of a ramp in Aerospace. I think the de-stocking is behind us, all except for the 787 if I kind of look at the balance of that and I think we are kind of -- I think that did occur in Q2. General Industrial was basically flat. And again, as we look to the year-on-year comparison, we started to see the beginning of the Primus acquisition in the quarter sequentially also.

Operationally, we continue to see operational improvements. And I think that these -- if I look at some of the larger fastener plants, the capital we've invested during the downturn, kind of the productivity gains they've gotten and look at what they're going to be able to get out of their assets to where we were 2 or 3 years ago I think they're a much better position in terms of being able to perform than they were going into the last downturn. So I think they are positioned very well as that base recovers. But again, in this particular business for the quarter, the major driver was, in the margin, was the inclusion of Primus at lower margins.

If I look forward, I think we are now looking at a positive trend over the next 3 or 4 quarters. We are starting to see orders out there in the future for our core products. And we do have new market share gains and we transition these over the course of Q4 and Q1. So from that standpoint, the contracts we've signed do have market share gains in there for us.

Right now, in total, fasteners is a slope. It's not a step function. It is a slope so that can change. But again, we do see the positive trend now coming in Fasteners. And then even though we are filing in the right direction in terms of fasteners, a significant content we have on the 787 is residing in the fasteners. So I think we have a couple of step-ups that need to occur, different from castings and forgings. We are not at the current bill rates. There has been -- pretty much what's been built has been coming largely out of inventory. I think when that is depleted, we'll take a step up to the current bill rates, and then certainly as with castings and forgings, as the -- from there as the bill rates go up, supporting those bill rates will be important.

Also we just completed the acquisition of PB Fasteners in -- at the beginning of Q3. So we have that coming into our Fastener operation. Besides the overall PB, they have a very strong position on the 787, so it will add to our content on the 787.

And then Aerostructures, as with all of our recent acquisitions it has a long, long runway in terms of improvement on cost takeout, sales growth, synergies between the business. Well, again I think this is a platform that we have a lot to do and in addition to that, certainly being able to have upside in terms of other acquisition opportunities.

Moving on to segments now. And on the cash, I think in a nutshell, we're basically able to deploy $1.28 billion in the quarter for acquisitions. We ended up with cash on hand of $143 million. And we...

Shawn R. Hagel

Cash on hand of $195 million.

Mark Donegan

$195 million, excuse me. Sorry, $195 million. Shawn corrected me. Appreciate it. And we had debt of only $15 million. So I think we deployed the cash in the right manner. Having said that, we still have significant opportunities to improve our cash position. So with that, I'm going to turn it over to Shawn. She's going to cover our inventories

Shawn R. Hagel

Just a quick clarification, our debt ended at $244 million as a reduction of $15 million -- an increase of $15 million, excuse me. Well, both confused this morning.

Anyway, inventory. We ended the second fiscal quarter at $1.784 billion and that represents a $171 million growth from the first quarter this fiscal year. However, the majority of that, over 80%, didn't -- wasn't represented by organic growth, it was through the acquired inventory we had with the acquisitions that were closed during the quarter. In order to provide you with a little more clarity, we've given you an additional column on the slide this quarter. So you can see the components of that inventory and how they relate to the total.

The organic growth that we incurred during the quarter related -- we're really in 2 areas. The first was $17 million of inventory build that relates to the Saudi Aramco order that we've recently announced. And as that ships that inventory will work through our system and out. The other $17 million increase relates to contingency development in 2 areas. The first one relates to maintenance that we had, not only planned for the quarter, but also a significant project we have planned for this upcoming summer and we have built inventory in anticipation of both of those events.

In addition, we had 4 -- I'm sorry, 5 union contracts up for renegotiation this quarter. And in anticipation of any potential strikes, in order to be able to support our customers, we did build inventory in that area so that we'd be able to react. I'm happy to announce, however, that we were able to successfully negotiate renewals on all sides of those contracts and so you'll see that inventory start to work through as well.

Any additional growth that we incurred related to volume increases during the quarter were offset by inventory reduction programs that we have at all of our operations throughout the company, therefore mitigating any additional growth that we would have seen. That's really where inventory was for the end of the quarter.

Mark Donegan

Thank you, Shawn. So if I look in summary, for the quarter, in Investment Cast, we are now back in alignment with the basic airframe bill rates. We are certainly seeing the demand from the rate increases in the first half of calendar year '12 and we are supporting the current 787 volumes in Investment Cast. I think we continue to see good growth in IGT. In Forged Products, we have the same Aerospace dynamics as Castparts. In addition, we did see additional IGT demand and we did see a significant increase in our oil and gas as a percent of pipe in Q2. We also saw the early benefits from our recent acquisitions.

Fasteners, again I think we began to see the very early stages of a long-awaited Aerospace recovery. We had higher General Industrial sales and we certainly began to see the beginning of a long road in terms of the -- our Aerostructures plant. And we did reset the margins but again, I think it's something we can move forward with.

As I look forward from here, in Aerospace and Cast and Forged Products, on the base programs again, we have a number of step-ups we have to support over the next 24 months. We also have to that an additional catalyst in the 787 increase in the bill rates. Again, Boeing is going to determine the rates and the rate of acceleration. We are positioned well to handle pretty much whatever rate increases they want to come our way. I can't make those rate increases go. Boeing is going to be the ones to determine at what rate those will go. I think we still have aftermarket upside as we move into next year.

We already again have that awarded share in Cast and Forged that we need to bring into production throughout the course of next year. In Fasteners, we are coming off the bottom. Our current order book is strengthening for the next several quarters. Again, today it's a slope, not a step function. We closed PB after the quarter and we'll begin the integration process immediately.

And in terms of our Aerostructures group, again we have a long runway on all fronts: costs, growth, future acquisitions, synergies. In power, Investment Cast Products, for us even though the OEM build rates are relatively stable, as we move into '12, we have that favorable mix in the product. And again, we're looking at those programs at the higher-dollar content, so we will see a benefit as we move forward in that. I think we are also at the upside, possible upside, from aftermarket. And the OEM increases are potential as we move into mid to late '12. We are seeing some indications of some movement in those build rates. Again, I don't think it's a blind step in terms of overall bill rates but we are seeing the request of what can we do in terms of some growth out there.

In Forged Products, a traditional seamless pipe to call interconnect. Volume is a steady growth. And also our future order books has improving margins in it. So again from Q1 through Q2 moving forward, we are seeing that order book kind of get stronger as we look out in the future. But we do have an accelerator in this, at oil and gas, that 16% we got in Q2. I think we move up from there. And I think we have a lot of opportunity over the course of the next 3 or 4 quarters. Certainly, that long-awaited Saudi Aramco order, that was a big step for us. And again, I think it's the beginning of a lot of upside for us.

And in General Industrial, I think we're looking at steady growth and I think we're selectively taking the right work for our assets. So with that, I'll turn -- open it up and turn it over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today will come from Ken Herbert with Wedbush.

Kenneth Herbert - Wedbush Securities Inc., Research Division

Just the first question, Mark, on the 787. Can you provide -- I mean I know Boeing's talking about a first quarter next year step-up again from the 2.5 they're at now. Can just give an update on what you're seeing in the various segments in terms of schedules and any specifics on timing for additional step-ups here for the 787?

Mark Donegan

Yes, I think that on the -- I have to kind of break them into 2 categories. I think Investment Cast and Forged, we are probably at a rate of 2.5. Probably as we move into next quarter, Q4 will probably be at a rate of maybe 2.5 to 3. I think Fasteners, right now, we're probably at a rate of 1. So again, I think the bulk is from coming inventory. If I look at our order books going out into Q4, Q1, I think we start migrating our way up to that 2.5. I don't think we've seen anything in terms of the Fastener side of the business that would kind of go up above that. But again, Fasteners, we typically will get lead times of 10 to 12 months -- excuse me, 10 to 12 weeks type of things. So but that's kind of where we are today.

Kenneth Herbert - Wedbush Securities Inc., Research Division

Okay, great. And then so on Fasteners, you said it's running about 1 a month now in terms of what you're shipping?

Mark Donegan

Correct.

Kenneth Herbert - Wedbush Securities Inc., Research Division

Okay and then as that steps up, are you -- do you ever think you're in a situation where either your customers or the supply chain look to perhaps restock? Is there any concern that we might be in a situation where you could see some accelerated purchasing in that segment?

Mark Donegan

Well, again, if I go back and look at the cycles over the last 3 or 4 cycles, Fasteners at some point in time will typically -- does accelerate. It hasn't yet. That's why I'm saying right now, it is a slope-to-slope, doesn't move forward, but you typically do see acceleration at some point in time. Do I think it's going to come, yes, I think we will see an acceleration. Do I have POs for it yet? No.

Kenneth Herbert - Wedbush Securities Inc., Research Division

Okay, great. And then just finally on the Castings and the Forging side, are you seeing from a material standpoint, any concern in terms of lead times, stretching specifically to support the 787?

Mark Donegan

No, not on the Castings and Forgings, we're not. Fasteners, we are. And we've -- we try to make sure that our customers understand that we are seeing our lead times go out on Fastener stock. So what I want to make sure they're all aware of is that Castings and Forgings, we pretty much supply ourselves so we have a line of sight to it. Or it's much more predictable to build material items, so we don't get as many surprises. Whereas Fasteners, not being able to build a material item, you get a lot more urgent needs. So we've tried to, certainly on our a high-volume stock, tried to put some material on hand. But we are seeing the lead times on Fasteners stock stretch. And it's probably the one area that stretched more than anything at this point in time.

Operator

And next I move on to Sam Pearlstein with Wells Fargo.

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Mark, you mentioned a couple times, you called how we're going to see things I guess over the next several quarters a slope, not a step. And I guess are you -- is that specific to Fasteners? Because I mean certainly if I just look at the next quarter, you get an extra month of Primus. Just trying to think through is that specifically Fasteners as we play out in the second half of the year or do Castings and Forgings also catch up with that?

Mark Donegan

No, I think the slope is more towards the Fasteners. And again I did emphasize that because Fasteners are the one area that at least I've tried to communicate and unsuccessfully done that as to what's kind of been going on. So the slope effect is going to be more towards Fasteners, in the base Fasteners, Sam, because I know that Primus is in there. So no, we will pick up another quarter in terms of Primus but the slope was referenced more towards what I would consider our base Fastener business.

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Okay. And then just within Primus, can you talk about your opportunities now that you -- now that it's closed in terms of cost reductions and then also just secondarily, what's going on in Thailand? Has there been any impact in terms of the production there as well?

Mark Donegan

Yes, let me start with the second question first. In terms of our facility, the answer is no. We have not gotten any problems with the floods. Traveling in and out of Thailand, it was a problem and getting around the city is a problem but our factories have been intact, then operational. So from that standpoint, they're okay. What I want to do is I think that I can give you the type of things. We're seeing an opportunity to supply ourselves with fasteners. We are already moving some of the work over and providing some of the forgings to ourselves. So I think that there is a tremendous amount of cost containment inside that world, either the raw material going into Primus or the flip side. We've also started saving all the chips and bringing them back in. What I want to do, Sam, is I need about another 30 days and I'll come up with a range similar to what I do with the other businesses. I'll tell you what we expect to get in the first 6 -- first 12 months and 24 months, but I mean it's not a small number. We buy $15 million of fasteners. We buy castings. Primus buys castings. Primus buys forgings. So all this work and transition back in. And it's going to be in the tens of millions of dollars.

Operator

Next, I'll move to Steve Levenson with Stifel Nicolaus.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Are you finding any impediments to your hiring plans? Are there enough qualified people? Or do you find you have to do more training than in the past?

Mark Donegan

Well, I think we have to do more training. We certainly -- I got to back, probably 4 months ago we were really struggling to find the rate at which we wanted to get. So we took kind of a step-up in that. But we've seen now is we've kind of gotten a more consistent drumbeat. So our ability to at least attract and get people in is better. Now we're hiring at a more consistent rate. But we are going deeper back into what we have to train people. So the skilled workforce that one would think is out there is not coming forward at this point in time. So we're doing a lot more training from scratch. We're bringing people through and training them ourselves, so we're not seeing a flood. If you expect -- if you put a "Help Wanted" sign up, there'd be a 1,000 people waiting to come work, we're not seeing that.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Is the training a 3-month sort of process or 6 months?

Mark Donegan

It varies and again if you think it as kind of an evolution, so we may bring in an entry-level job. An entry-level job is probably a month to start to becoming somewhat proficient, probably 3 months to be fully proficient. And then we'll move whoever that person is up to the next level. And so if you look at a typical progression, you'll go from a grinder to a welder to a x-ray shooter to an FDI Level 3 and so on down the road. If you want to go from a grinder all the way to a Level 3, it's a 3-year training process. But we'll move, everybody will move up the chain, so we don't bring somebody necessarily in from the street to become an x-ray Level 3 shooter. They'll come from an x-ray shooter, or it will go to an x-ray reader type of thing. So you're constantly in a -- in this environment, we're constantly in a teaching-hiring-training mode as we go through this upturn.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. One other question on, as the Airframers try to shrink their vendor bases, do you think there are more opportunities like your fastener arrangement with Boeing?

Mark Donegan

Yes, I do. I think that if I look at kind of what's going on -- again, we've been in the airframe business since we got SBS. And certainly we saw a growth, we call that our Aerostructures group, we saw a growth through the entire downturn because there has been a desire of airbuses and the Boeings to take more of their assets and build claims versus manufacturing subassemblies or parts. So I think that as that continues, there is a lot of opportunity for us to handle more of that outsourcing as well as kind of consolidate the market, which we did in Fasteners. That was one of the attractiveness for us in this whole Aerostructures world.

Operator

Next I'll move to Richard Safran with Buckingham Research Group.

Richard Tobie Safran - Buckingham Research Group, Inc.

Mark, I guess just a question here on IGTs. If I understood your remarks correctly, you're saying the build schedules are a bit light. The mix is going to be better, more higher value parts. Just want to know if you could be a bit more specific, maybe comment on, for example, are you seeing demand more international, domestic? And then also, you noted the build schedules are nearly flat year-over-year. I just want to know if there's any room in there or not or is it locked, that kind of thing.

Mark Donegan

Let me see if I can answer. At least somebody can come back to you. But I would say in general right now the build schedules overall are kind of flat, so they're not slightly down, they're kind of flat. The bulk of what we are seeing today will be coming more from the international side and they're on the advanced engine. So if you look at -- we're looking at engines that are going to be high efficiency, low emissions and again that typically drives more technology in our particular products. Alloys that can sustain higher heats, DS, single crystal versus equiax, complex cooling schemes. So all of that typically will yield for us a higher dollar content in the newer engines versus the older engines. So it can be a ratio of -- our dollar content of a current, new-generation high-efficiency, it could be 2x of what an older, 10-year-old technology type of situation is, so it's of that type of magnitude. If I look in terms of what type of surge or what happens, unlike the Aerospace, where you get a year to a 2-year announcement of a build, IGT tends to come at you pretty quick. So it's not uncommon for us in a 6-month period of time that we go from "tell me where we are today" to "we have a 15% increase". So that is the way it comes. It doesn't necessarily come in terms of long, established, pre-announced build rates. It tends to come, "I'm selling engines. I need parts. I need them now." So I think, is the opportunity there to go up? Absolutely. Do we have the capacity to go up? Yes, we have plenty capacity to go up.

Operator

And next I'll move to Joe Nadol with JP Morgan.

Joseph Nadol - JP Morgan Chase & Co, Research Division

So Mark, your wrapping up Primus in the Fastener segment. I guess my understanding was that, that was going to be stood up separately. What's your intent there?

Mark Donegan

It will be. At some point in time it will be a separate. It's just a matter of when, but again based on what we want to do, the acquisitions we want to do, the move we want to make, I would say -- you don't want to give a time because I look at the person at my right, she dictates when and how it becomes another segment. But I think that as we move forward, it will be a reported segment at some point in the future.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Okay. Well, maybe if you're willing to provide a little bit of detail on what it contributed, it might help us think through the core business sales and margin contribution, your sales and op income contribution in the quarter from Primus?

Mark Donegan

Well, I appreciate you trying to ask that question. But at this point in time, we're going to kind of leave it in the way it is. But I -- again what I think I do owe you and I have to come out with is what we expect Primus on its own. And again we have some other operations now in Aerostructures. So in kind of that sub group, there are businesses that we and our -- so if I look, we had in our Aerostructures business 2 plants over in England. They're now in that business. We have Abbey Bank, [ph] which makes latches and struts and holes [ph] open rods, that's going to be in that business. So we have China that makes Aerostructures' part so there's a number of pieces that will go in there. But again, what I think I owe you is kind of what we expect Primus on its own incrementally to do as we get the synergies moving. But again, like I said that's a number in the tens of millions of dollars that's out there for us to get.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Okay. Well maybe what I'm trying to get at is to make sure that the core Fastener business didn't suffer some sort of margin degradation in the quarter.

Mark Donegan

No, I think that's a fair question to ask. I think in general, Fasteners was very consistent to what it had done. We kind of said last quarter that we're looking at flat. I think it performed damn right on target, exactly what we thought it was going to do. So I think that's a very fair question to ask and I -- the answer is no. It was very consistent with what it had done.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Okay. And then just one more nit on that topic before I move on about picking the scab. The -- were there any transaction costs that were expensed in the quarter? Or was it pretty clean in that segment?

Mark Donegan

Well, there were. I mean it's not going to be a major -- I mean do we have a $1 million worth of...

Shawn R. Hagel

We probably had somewhere around in the range of $1 million associated with legal fees and other stuff that we were closing out. But we've had those running over the last several quarters as we've been working on all these acquisitions.

Mark Donegan

Yes, I mean these -- a lot of these have been going on for quite a while. And if you look at PB, we'll I haven't phoned PB now for 6 months? And so, but $1 million-ish.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Okay. Moving on. Pipes and sales, and I appreciate the breakout that oil and gas is now 16% of the total. Can you help us what the total was? And I know it will be in the Q but maybe a preview?

Mark Donegan

It was -- hold on one second. Yes, it was, let me think of that. I don't think I want to answer the question to you. It kind of -- what I'm looking at it, I...

Shawn R. Hagel

As percentage of the total or as on sales. So we don't generally have broken that out...

Mark Donegan

Yes, I don't typically break that pipe sales out on its own so...

Joseph Nadol - JP Morgan Chase & Co, Research Division

Okay. Well, is it growing?

Mark Donegan

Yes, I think so. It wouldn't be growth this quarter. I think with the shutdowns and everything we went through, again that's an area that we -- so no. I wouldn't expect to see growth in a Q. Typically, if I look at the whole forging world, no, it wouldn't have grown. If I look as we move into Q3, where we see a full quarter and not bringing presses down, I mean our pipe comes out of 2 facilities. It comes out of Livingston, Lincoln, it comes out of Houston, and we have to bring both of those down. So no, we lost 2 weeks of output on that. If I look at to is the market itself growing? Is our sales growing? Yes. But did we grow Q2 to Q -- no, we did not. We came up against shutdowns and maybe that's -- I don't know if that gave you a little more...

Joseph Nadol - JP Morgan Chase & Co, Research Division

I meant year-on-year more because your shutdowns are usually kind of seasonal...

Mark Donegan

If I look at that base business, no, there wasn't a whole lot of growth in there over year-on-year.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Okay. And then just finally you got the nice Aramco order a few weeks ago. Can you talk a little bit about what the pipeline of oil and gas deals looks like as...

Mark Donegan

Yes, I think that if I look at it as -- again I think we're going to see the interconnect pipe is going to continue to grow at a gradual rate. Gradual means low to mid-single digits. If I take that and then say what percentage of the oil and gas, we're about 16%. I think over the next 3 or 4 quarters, we should be migrating our way closer to 35% to 40% of the pipe sales. So...

Joseph Nadol - JP Morgan Chase & Co, Research Division

Are you announcing all the deals you get or is it only going to be kind of the big ones?

Mark Donegan

No, no, no. No, we announced the Saudi Aramco because for us, it was kind of the lynchpin for getting qualifications. We had talked about it for a period of time. It kind of was the leading job for us. So the fact that we've been talking about it for so long, we felt as though we needed to announce it. Are we winning? Yes, we're winning consistently. We're whittling out of work right now, but we -- if we win a major, major job, $200 million, $250 million share, we'll probably announce that. But as an ongoing basis, $50 million here, $20 million there, $10 million, no, we won't announce those. And we will also report quarter-over-quarter kind of what the percent of oil and gas. I think the way we're kind of showing it now is how we'll show it in the future too. Because it is a component we still want to move our way to 50-50 and I think we're heading down that road very well.

Operator

And our next caller, we'll hear from Ron Epstein with Bank of America Merrill Lynch.

Elizabeth Grenfell - BofA Merrill Lynch, Research Division

It's Elizabeth in for Ron. Could you just give us the organic growth in revenue for the quarter and operating profit?

Mark Donegan

No.

Elizabeth Grenfell - BofA Merrill Lynch, Research Division

All right. And then can you give us some color on the Boeing fastener contract, what it means for you all, is it a typical deal with price escalators?

Mark Donegan

Yes. What the Boeing contract afforded, and I know there's a lot of conversation kind of out there. I think that it is, the Boeing deal I think was very good for Boeing. I think the deal is very good for Precision Castparts. So from that standpoint, it's kind of mirror what a lot of our contracts look like. I don't think -- we're not going to have a lot of exposure in terms of materials and runaway inflation from that standpoint. It's going to have guaranteed share, not guaranteed volume, guaranteed share, so very similar with the rest of our contracts. They get, we get. We did grow share in terms of the overall contract. So again, I think it's a contract that fits very consistently with the contracts we've established across the engine world. And again, I think Boeing will get a benefit from it and I think we get a benefit from it.

Elizabeth Grenfell - BofA Merrill Lynch, Research Division

Okay and then just one more. What are you seeing on an M&A front? I mean, I think it's fair to say UTX paid up for Goodrich, right? And what do you think is available and then affordable?

Mark Donegan

Well, I mean I think UTX saw some value and saw a company, saw -- I don't know if it's necessarily right for me to make a comment on the Goodrich job. But if I look at what's available to us, I think that there are a lot of assets that make great sense for Precision Castparts. I think, I don't see any runaway type of multiples or numbers. A lot of what we look for and we go after are properties that we've kind of established a relationship. I've talked frequently about our gestation period of time for us is probably 2 years. So if I look at it from the first time we make a contact to when we finally get a job done it tends to be fairly long. Now again the properties that are for sale are the properties that typically again, we establish relationships. So I think the fact that in most cases that we do establish a relationship so we arrive at a point that's not an auction type of number. So from our standpoint, we try to find things that are not in an auction, try to find things that in general are not usually up for sale and then we establish when we do that. I think we do very well in that world.

Operator

And next I'll move to Robert Stallard with Royal Bank of Canada.

Robert Stallard - RBC Capital Markets, LLC, Research Division

Mark, I want to kick off with the incrementals. If you stripped out the acquisitions and you stripped out the pass-throughs, what was the base business contributing in the quarter in terms of your increment margins?

Mark Donegan

It would be again, Forgings and Castings were doing greater than 45% -- I think I actually calculated that out. It's going to be a number for the company and you strip that out at the higher end of the range of what we typically say we want to get. So I think it was the company in total, it was kind of in that sweet spot.

Robert Stallard - RBC Capital Markets, LLC, Research Division

You said 30% and 35% in the past, right?

Mark Donegan

Yes, we're over that.

Robert Stallard - RBC Capital Markets, LLC, Research Division

You're pretty comfortable about it, though. You still feel comfortable with 30% or 35% for the longer term?

Mark Donegan

Well, again, I mean we will move in and out. I think if you look at Castings, Castings has certainly averaged well north of that for a period of time. Forging has kind of entered above that. We kind of said they did better than 45% and I would expect to see those to continue. I think Fasteners certainly has been the one we haven't seen anything yet because we've been down, so that brings the company down. But if fasteners starts coming in and the base business, do I assume that stops at this point in time? No, I don't. I think that that's kind of where we're running right now is that we grow. It should hold for a while. Now if we see a rapid acceleration or you have to start hiring quickly or overtime has to run to 25%, 30% or -- those are the things that tend to drive your costs out of the ordinary.

Robert Stallard - RBC Capital Markets, LLC, Research Division

Right, which leads into the second question on the Fasteners. As the industry starts to pick up in the second half and this Boeing fastener contract kicks in, what sort of organic growth can we be expecting? Are we looking at sort of low double-digit growth or maybe something better than that?

Mark Donegan

Well, I think that it looks -- I think it's kind of an -- sort of an acceleration to it but I think you start with high-single digits. And then as the de-stocking of 787 goes away, you'll probably get into the low-single digits. So I think there are components to it. But if I wasn't still de-stocking and the 787 is going up, I think you'd get into double digits.

Operator

And next we'll move to Eric Hugel with Stephens Inc.

Eric Hugel - Stephens Inc., Research Division

Mark, can you talk about in the Fastener business sort of today versus let's say, last quarter. I mean in terms of sort of how you were looking at the recovery going, would you say that things are on track versus where you were looking at 3 months ago? Or is it sort of lagging behind where you thought it would be?

Mark Donegan

Well, I think the overall lag, so if I go back further than that, I think we've probably been 6 months or 2 full quarters beyond when I thought the events would occur. If I kind of look at going out Q4, Q1, Q2, I think it's beginning to occur the way I had hoped it was going to occur 2 or 3 quarters ago. So I think that it's coming back to some degree the way we expected looking forward. But it certainly was 2 or 3 quarters way behind where we thought it was going to go. And I kind of look at what our customers tell us, go back a year, I would have told you it would've come sooner. But I think it is now starting to come on the future the way we had expected to come.

Eric Hugel - Stephens Inc., Research Division

But from outside just like last quarter, things are pretty much on track incrementally with what you thought?

Mark Donegan

Yes, I would say that the out quarters Q4, Q1, Q2 are starting to fill in as good or a little better than we'd thought looking back last quarter.

Eric Hugel - Stephens Inc., Research Division

Great. With regards to the Pipe business, you talked about the backlog being stable. Could you maybe talk about the backlog with us maybe sort of throw out a level and maybe talk about when you would expect to see it building.

Mark Donegan

Well I don't think it has a need to build right now. What typically builds it is when -- if I go back to where we were in the boom days, it built because customers are getting in their order 2 years out. So right now, the customers aren't in the need to do that so we're seeing a much more reasonable period of time, 6 months. So I think that what makes a build -- if I look at where it is, last time we said it's about 450 or 5, it's kind of hovering in around that particular area. But if -- and I don't see it changing a whole lot from there until the world starts to get a lot of traction, I mean when people start placing out a year or 2 years. So right now, there's just not a need to go out and place out as far as it was.

Eric Hugel - Stephens Inc., Research Division

Okay. Fair enough. I guess lastly maybe just in terms of PB kicking in. I mean, is PB a needle mover in any way shape or form with regards to fasteners? How do you sort of think about...

Mark Donegan

In terms of Fasteners, I think it is a really nice additive in terms of the 787 platform. So if you kind of look at the way the market has been divided, if Jenkintown had one set of sleeve bolts, which as you know, is a kind of a key piece of the lightning-strike puzzle for the 787. And PB had the other one. One is flat -- one's flush mount, one is not flush mount. I do not remember which one is which. But Jenkintown -- or PCC had one and PB had the other one, so now, we have the whole portfolio of sleeve bolt. So I think from that standpoint the 787, yes, it is a really, really nice add. In terms of the whole, group, no. It's not going to be a needle-mover.

Operator

And Noah Poponak from Goldman Sachs will have our next question.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Mark, you mentioned in the press release pulling forward some capital investment. Can you specify where that is? And does it change or not change your thinking about the amount of free cash you would generate in the back half of this year and next? And maybe you could quantify what kind of free cash you do see in that period of time.

Mark Donegan

I can answer quite a few of the questions you have. If I look at kind of where -- you got to go back to 2007, 2008, we spent a huge investment in terms of Wyman-Gordon Forging, we put a brand new isothermal press in. We put about $25 million into structural castings and we brought in a number of DS, single crystal furnaces and airflows and at the time that was to handle a particular rate. Now we also saw the need to do more. The market rolled over. If I look at as we entered the beginning of this calendar year in airflows, we thought that we had enough capacity based on the schedules we saw to handle all through calendar year '12 and calendar year '13. The schedules that are coming in with the forecast our customer had given us, we run out of -- we're very, very tight today on air flow capacity and we really run out of capacity in mid-calendar year '12. We kicked off 6 DS, same goes to furnaces, 2 dip lines and that's about $10 million. So it's not a big number but it gives us quite a bit of capacity. That will carry us through '13. Right now, it says we have to do it again in mid-'12, so we are holding off to see what happens and in mid-'12, we probably have to do another step-up very comparable to that in DS, almost exact same number of furnaces and dip lines to handle 2014 volumes. So we actually are pulling -- we have had to pull everything to the left of the year in our airflows and we have also had to add x-ray cabinets and large structures. Again, you're looking at about a $4 million investment. So not big investments but big in terms of output capability.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay and...

Mark Donegan

And the free cash flow -- I mean, I think last quarter, typically the low quarter for us. There's nothing that should specifically change. I think we should have strong Q3, Q4 quarters and I don't think there's anything drastically to change that. I think we -- Shawn kind of went over the inventory. We've got some inventory we had tied up for the maintenance and the strength contingency, that's going to come out. So again, I think we should be looking at a much more normal Q3, Q4 than necessarily Q2 was.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. So it sounds like the investments you've highlighted don't really change your thinking?

Mark Donegan

No, no. I've told pretty much everybody, for all intents and purposes, we have to do it inside the existing budget as was, so that's the starting point.

Noah Poponak - Goldman Sachs Group Inc., Research Division

So if I look at that cash flow through the balance sheet, you will be back to above $1 billion of net cash pretty early next fiscal year. Back to the M&A question, with what you see out there, is it something at the lower end of the range you've discussed in the past, $200 million, or something at the higher end, $900 million, or likely is the next thing we see?

Mark Donegan

No, there -- and we have them on both sides of the spectrum. I mean we're active in the $200 million and we're active in that $800 million to $1 billion. So it's not -- we're not selective over size, we're selective over complementary, cost takeout, market shares, consolidation. It can range -- again I think the low side would be $200 million and we could spend $1 billion on the upside.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Got it. Just one other quick thing on the fastener topic. You were asked about the Boeing disintermediation process. How much has disruption from that been what's impacted the slower pick up in fasteners? Or has it really just been other factors?

Mark Donegan

No, I -- well, that's an interesting question. I think that to date, there really was just a whole stream getting just overstock. So I think up through Q -- I don't know what, probably up through March, April, May, I don't think it had anything to do with Boeing. I think what's happened to that was Boeing kind of goes through its contracts and looking to how they were going to align their product buys, they kind of took a pause. I think what will happen now is we'll work closely with Boeing and figure out how to feather in kind of our new requirements and new volume to overlap whatever inventory they have. I think once you get to that, that's when you kind of get a pop. So I think there's going to be a couple of quarters with that Boeing contract that will be, maybe in some cases, doing things that are short cycles, some things we'll do in maybe a little bit under. I think by the time you get to mid-calendar year '12, that's all worked out. But I think up until the last -- up until May or June, it was strictly just the oversupply throughout the entire stream. I mean, Boeing was shipping that -- we got a lot of positions in 787 that were kind of on a particular price, we were the only one out there. We just haven't seen any demand. So that really -- and we kept all that moving forward, so it's -- that's a pretty clean line of sight, we had to know how much inventory they had on hand with 787.

Operator

And next we'll hear from Rob Spingarn from Credit Suisse.

Robert Spingarn - Crédit Suisse AG, Research Division

Mark, you talked about aftermarket before. There's been a lot of questions on fasteners, most of them relating to OE. What do you see on the fastener aftermarket?

Mark Donegan

Well, again fastener -- as difficult as aftermarket typically is to airflows, it takes on a whole lot of complexity. We assume that 50% of our volume in general, in Fasteners is coming out of aftermarket. Now again, we don't know because we ship it into the exact same spots, so whether it's going to an aftermarket or not, the over inventory would get absorbed by both. It's going to get absorbed by the aftermarket. It's going to get absorbed by the OEM bill rates. So I think in total, they're all kind of moving hand-in-hand so I don't think there was a disproportionate amount of aftermarket for OEM or vice versa. I think that it is the all-in was overstocked and now the overstock seems to have come to an end.

Robert Spingarn - Crédit Suisse AG, Research Division

Yes, and I wanted to foot this with what Carpenter has been talking about, with significant growth last couple of quarters for the underlying nickel and stainless for fasteners?

Mark Donegan

Yes, I mean, Carpenter is a significant supplier to us and their lead times are going out. If I look at the volume we have coming in -- if I look at the volume we're doing today and the volume we have coming at us, certainly there's a heck of a lot more that's going to come our way so that's why we made sure that our customers clearly understand that, the fact that the overall volume has been down, you've been taking out inventory, you need to understand that our lead times are going out. So yes, Carpenter is extending lead times. But...

Robert Spingarn - Crédit Suisse AG, Research Division

Just to finish, what's the -- Mark, what's the latest on China?

Mark Donegan

In terms of Chengde?

Robert Spingarn - Crédit Suisse AG, Research Division

Yes, and moving work there for Wyman, et cetera.

Mark Donegan

It's very consistent with pretty much what we've said over the course of the last couple of quarters. There are -- it was bought for us from a standpoint of being able to handle all the work we're walking away, back when we were booked up for 2 years. Right now, we are not overbooked in that particular world. So it's kind of just performing the same quarter after quarter, and I think when the volume continues to go as we get into next year when we do start running out of capacity, we will be needing China. At that point in time, it will start to grow. But it really was a situation that we needed the capacity. Either we built new forge complex or we bought, and we bought Chengde. And unfortunately, the markets imploded and the volume we needed, we don't need right now. Are we going to need it in the future? Absolutely. Do we need it today? Not really.

Operator

Next we'll hear from Myles Walton with Deutsche Bank.

Myles A. Walton - Deutsche Bank AG, Research Division

On the Strike contingency inventory, will you be shipping from the inventory and so did that work to your benefit on absorption in the first half and maybe to your detriment in the second half? Is it material enough?

Mark Donegan

No, I don't think it's good from that standpoint because we also have incremental volume we have to get out. So if I look at -- if the rates weren't going up, I'd say, 'Yes, what you're saying is true." But the fact that the rates are going up, we're going to have to -- we would have to build more. So if I look at our standard hours, which is the way we kind of measure our volumes to the shop, they are continuing to increase. Without the inventory they would increase by more. But at this point in time, we still will be going up in that absorption.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay, that makes sense. And then metal prices and other pass-through here lags, but when do you think that actually turn sequentially?

Mark Donegan

I don't have the data in front of me but we're typically overlaid a year out. So I'd say...

Shawn R. Hagel

Quarterly increments.

Mark Donegan

Yes, in quarterly increments. So I -- you kind of have to back your way to what material was. We bought a lot of -- beginning of calendar year '12 at $10.25, $10.50, something in that range, so there's still a long time. Now we've also bought, the end of '12 and the beginning of '13, at $8.50 but it's going to -- it'll take time to purge out. It will probably take through at least our fiscal year before we start seeing anything move significantly in the other direction.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay and then the last one. GE on their conference call downplayed higher Gen X deliveries in 2012 versus 2011. This is kind of surprising to me given where the build rates are going. Is that in any way tempering your growth? Can you explain that in any way?

Mark Donegan

Well, yes, again, since you and I kind of talked about this a couple weeks ago. I mean we, GE's kind of -- some of us [ph], we're in the same boat. We all are going to be waiting for what is Boeing's rate. So are we -- can we go to 10 months by the end of '12, sure, we can. I don't know what GE's capabilities are. But yes, I think until Boeing becomes really clear as to what they're going to -- their expectations are and what their build rate is, is that going to hinder our upside? Sure. Because they're the ones who are going to determine what is the rate. Now I will say that from a GE standpoint, we get schedules off from GE that go out -- we get to look at 6 months out. So we're -- we've been seeing rates from General Electric for quite a while. Would I love to see Boeing build 10 a month during this afternoon [ph] ?

Myles A. Walton - Deutsche Bank AG, Research Division

Yes, I was just wondering if it was more of an inventory stocking issue or if it was more of a...

Mark Donegan

No, no, no. No, I do not think it's an inventory issue. I do not. I think it is -- I think that we've been through that. The engine side has been pretty clean. We've seen very little pushes and pulls especially from General Electric. It's been a fairly consistent signal. So no, I don't think it's an inventory. I think it's just -- it's trying to figure out what rate of -- if you kind of look at we were going to be to 3, then we were going to be at 2, then we were going to be up at 5 a month, I think it's just trying to get a grip over what is that number going to be. But no, I think that, like I said I think GE especially has been extremely solid and clear with their schedules. We're not seeing a lot of pushes and pulls.

Operator

And we'll move on to Carter Copeland with Barclays Capital.

Carter Copeland - Barclays Capital, Research Division

Just one quick one in the interest of time. Just with respect to the Boeing contract and this initiative, it seems to be that Boeing is allowing their subcontractors to buy under this big contract. But it's -- I'm wondering for you, is this -- who do you ship the product to? Is it -- are these -- under this new arrangement, does it go to Boeing? Or is pricing negotiated under this contract with Boeing so that the ultimately the fastener shipments go to Boeing subcontractors?

Mark Donegan

We have got a number of contracts that Boeing is a contract. We also have contracts with subs or partners that stand on their own merit. So at this point in time, the contracts we will adhere to are the contracts we have with each group. So the Boeing contracts certainly carry what we ship to Boeing, we have other contracts that exist and are in place to carry on for a period of time with other people in the airframe manufacturer, which we'll adhere those contracts.

Carter Copeland - Barclays Capital, Research Division

But with respect to this newest one that's gotten all the attention, I'm just wondering is the nature of that contract somehow different in terms of you agree to pricing with Boeing and you get guaranteed share in return and the nature of...

Mark Donegan

We always have a contract with Boeing. So if I look -- we've owned SBS now since 2003. So 90% of the time, we've had a contract with Boeing. I think the thing that makes us different is we ship a percentage of Boeing work to Boeing and we ship a percentage of Boeing work to distribution. I think Boeing's contract goes broader in more parts that will be going into Boeing and less parts through distribution. I think that's kind of the goal of the contract. So from that standpoint, what -- where we would've shipped x part numbers into Boeing and x part numbers to distribution, we're going to be shipping more underneath the Boeing contract to Boeing as it stands today. Did that answer your question?

Operator

And J. B. Groh with D.A. Davidson will have our next question.

J. B. Groh - D.A. Davidson & Co., Research Division

Just got a couple left. You mentioned sort of a reset point on fastener margins. I don't mean to beat this thing to death, but should we infer from that, that the additional month of Primus and PB won't have a dilutive effect sequentially? Or is it still going to come down a little bit in Q3 once you get to the point...

Mark Donegan

No, I mean they're going to pick up an extra month. If it is, it's going to be miniscule. I got a guy to take to task who's saying, "I got to figure out a way to drive the base business." So I mean PB is not material enough it's going to impact us from that standpoint, but I don't think you're looking at anything that's going to be a significant step. We will pick up one more month of Primus. But at the same time, we should get some improvement out of Primus. But anything that's going to -- if it does do anything, it's not going to be significant to any stretch, to any major degree.

J. B. Groh - D.A. Davidson & Co., Research Division

And it sounds like you have a pretty decent lift on Primus in terms of your ability to drive some cost savings there fairly rapidly instead of...

Mark Donegan

I think we have a great list. If you look -- so we have to -- somehow we can move fast on, certainly the raw material we get. We got -- in terms of chips we got that, that's already in play. Forging, supplying the forgings is going to be longer because we have to get the forgings qualified and get them in. It's not -- some of them, it's certainly not years. I mean, I still think we get -- start getting traction 6 to 8 months I think is a fair number and then they accelerate from there but it's not going to be year after year after year.

Operator

We'll move on to Jason Gursky with Citi.

Jason M. Gursky - Citigroup Inc, Research Division

Mark, just a couple of targeted questions. First, the market share. You said that you grew share with this building contract. Can you give us a flavor of how much share you gained there? Second question is, the 787 de-stocking, you said that we still have that in front of us. Do you have a sense of when that might come to an end? And then the last question is a follow-up to Carter's. I think the gist of his question that would be helpful for all of us is that you suggested that you're going to be shipping more to Boeing through this new contract and less to distribution. Are you also going to be shipping more to Boeing's Tier 1 and Tier 2 suppliers and last to distribution as a result of this deal?

Mark Donegan

Let me start with your last question because that's the one that sticks to my brain the quickest. As a result, we already have a lot of contracts in place with their sub-tiers that -- those will keep going. So at this point in time, I don't see a significant change in those. Where I do see the change is in what's going directly into Boeing. So I look at the Japanese contracts we have, and all that, they're already place and we have been shipping and we'll continue to ship to those particulars. So no, I don't see anything more going into those at this point in time. I'm not really going to get in, we don't discuss share, really in any of our contracts. But it is a meaningful number in terms of what we're gaining as we move into next year. So it is a meaningful number. We just don't share with our -- on our contracts.

Jason M. Gursky - Citigroup Inc, Research Division

Why do you think you were successful on that? What were the key contributors to your success in gaining that share?

Mark Donegan

Well, I think that a lot of it goes back to our strategy. I think we've put in a set of assets together that are pretty important in the aerospace industry. So I think that if I look at all the business that we bought, it provides a pretty complete solution into a company like a Boeing or any other airframe manufacturers. I think that we're comfortable in contracts. If you kind of look at our world in terms of the cast and forgings, we've been doing long-term deals for quite a period of time. So kind of knowing what they look like, what they feel like, how we can find common ground. I think that's a piece of the puzzle. I hope Boeing sees us as somebody that's helped them solve solutions. If I kind of go back to some of the heart of the 787 fasteners, I think we tried to turn our shops upside down and we did. I would hope that they would tell you that there's kind of a recognition that, that's kind of what we'll do. And I think we in some cases, we're willing to sit with Boeing and engage in conversations differently than we had in the past. So I think it's kind of a blend of all of those.

Jason M. Gursky - Citigroup Inc, Research Division

So it wasn't price from your perspective?

Mark Donegan

No, but again our contracts, there's -- this is kind of one of the things that I thought was interesting is this whole dilemma of how can you win, how can Boeing win? Well, because there's a lot of people that buy our product and mark it up and ship it to Boeing. So I mean there's a fair amount of price that sits in that model and you know that model is there for a reason. And we'll see, but is it possible that Boeing could get price improvement and we can get an improvement? Sure, of course, it is. Because all that somebody's doing is taking our box and re-labeling them and shipping it back out.

Jason M. Gursky - Citigroup Inc, Research Division

Great. And then just the 787 de-stocking question, then I'll turn it over.

Mark Donegan

Yes, I think we are probably, if I look at our fasteners, I think we probably start seeing in our Q4 where that de-stocking is going away on the 787.

Operator

And Heidi Wood with Morgan Stanley will have our next question.

Heidi R. Wood - Morgan Stanley, Research Division

A couple of questions. Mark, on the seamless pipe I want to go back to a question that Joe asked earlier and I want to expand a little bit about it. As you talk about going from 16% to 35% to 40% over the next couple of quarters, can you talk to us a little bit of what drives your confidence? Did the Aramco announcement accelerate further discussions? Are you adding to your sales force? What's bolstering this strength in the pipeline?

Mark Donegan

The value of the Saudi Aramco, and again Saudi Aramco order itself really went -- dragged on for about at least a year. But what was involved in that was getting a qualification process, so we first had to qualify SMC, then we had to qualify Houston and then we have to qualify Chengde, which kind of didn't go through and then we had to get Rollmet and qualify for that. So the value of the Saudi Aramco order is it got us qualifications. And as we're nibbling off those qualifications, that opened up our ability to go and quote work. So from the past we had decided Aramco, we now have got 12 qualifications. So we've got all the large Saudi Aramco, Mobile, Chevron, BP, Sinopec, so we got all of the approval. So what's really opened up the door for us is getting all the approvals. We have been winning, as that Saudi Aramco order was waiting to come through, since we have the qualifications, we have been winning those orders. So really it was getting, I'd say number one, getting the qualifications. Number two, we brought in an individual who comes from that oil and gas world so that's a change for us. In the past, who ran our Houston seamless through pipe was a interconnect person. Who runs it now, is a oil and gas person. So this whole infrastructure around him is certainly more balanced towards interconnect pipe and oil and gas. In the past, we were strictly interconnect pipe. So I think that we did enhance our leadership and we did enhance our sales force. And I think once we get traction, it kind of feeds on itself. So I think it's a combination of all of those things. But certainly, the qualifications were huge.

Heidi R. Wood - Morgan Stanley, Research Division

That's really helpful. And then on IGT when you talk about it getting big quick, can you again, I just want to parse it to the next level, can you break it out by OEM aftermarket and geography so again, we can see in the matrix kind of where we ought to be watching for if it does -- is getting big quick?

Mark Donegan

Yes, I'd say that in -- I don't know if I'm answering your question. Let me try to answer what I thought you said. So if I look at over the next 12 months certainly, getting increasing is coming outside the United States. Japan is playing a big role so certainly a lot of the IGTs going into that. So if I look at kind of that mix shift we talked about, there's no doubt about that mix shift is coming kind of from that Japan. Where would I expect to see accelerate? I think that North America. There's a lot of angst. I don't know if that's the right word to be using but there's the decision on the coal power plants that have to be made. There is a decision on the pipeline that's going to go through. So there's a lot of pending decisions that could put the switch pretty quick into natural gas IGT being the real sure alternative. I mean if they were to say, we're going to shut down those 27 coal plants, obviously, we're putting a quick need on the IGT. So I think there's a lot of kind of decisions that are out there pending that will get that going and then certainly, there's still a light hangover or a lag from the Japan nuclear crisis. I think we're seeing work from Europe that shut some of their nuclear plants down. So that's -- I would expect to see it in the short, all that's coming outside the United States. And anything after that, will come from hopefully from inside the United States.

Heidi R. Wood - Morgan Stanley, Research Division

That's helpful. And then I want to -- I know it's a little early to be talking about it but I just wanted to get an early beat on how you're conceptualizing what's ahead, but as we think about the trends on the engines for both the 737 MAX and the Neo, how do we start to think about PCP content? There's obviously a lot of debate in the aero community about the technical capabilities of GE engines and their promises. But does this higher engine efficiency you're talking about mean significantly more costly PCP parts?

Mark Donegan

I mean as again if you kind of look at the step up from the ADC to the GEnx-2B, which is more or less the same mission statement, if I look at what's in there, there is obviously a much higher content for us because it's just a heck of a lot more technology that's been driven in there from Ti Aluminides to complex cooling schemes to DS, single crystal. So to date, higher efficiency through technology has been a big benefit for Precision. And again, we work very, very closely with GE and hopefully, we can continue to provide value to them. But I think the leap from a layman's point of view certainly appears to be going after a lot more technology and taking a pretty big step in terms of going after that efficiency. So that typically bodes fairly well for Precision.

Heidi R. Wood - Morgan Stanley, Research Division

But that's the point I guess I was reaching for. Is it the same order of magnitude, Mark?

Mark Donegan

I think if you kind of look at the ADC to the GEnx and you look at the 737 to Elite, yes, it should be directionally the same. Does that answer your question Heidi?

Operator

And next I'll move to Cai von Rumohr with Cowen and Company.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

You said seamless pipe was flat sequentially, was that including oil and gas?

Mark Donegan

That would be in total.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

In total. That would say year-over-year, there was essentially not much gain?

Mark Donegan

That's what...

Cai Von Rumohr - Cowen and Company, LLC, Research Division

In the interlock. Okay, and then so right now Oil & Gas has to be on order of $55 million to $60 million run rate something...

Mark Donegan

I gave you the data. I'm not going to...

Cai Von Rumohr - Cowen and Company, LLC, Research Division

But let me just -- within earshot, I'm not -- it's got to be -- it's not substantially different from that number. I think you've told some folks that you think the total addressable market is $1.2 billion. You would hope to get close to 50%. That's like 10x your current run rate more or less.

Mark Donegan

I've said a lot of different things over that trend. What we basically said is yes, the market is out there, it's $1 billion dollar market. What I said is we think a good stop-off point is trying to address the $500 million. What I've also said is if I get 4 or 5 years down the road and we are not in a $250 million to $300 million range, I'll consider that not good.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Okay. Well, I'm just interested in kind of the slope given that you're now qualified with 10 folks, what's kind of the potential ramp rate of this business?

Mark Donegan

Again I think that if I go 4 quarters now, if we're not sitting at roughly, I think I said earlier, 35% to 40% of our seamless pipe is not coming out of oil and gas, I think that's a good range.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Terrific. And last one, you usually break out in your Qs how much acquisitions contributed to sales. Would you give us those numbers?

Mark Donegan

I think we'll do it -- we'll do it in the Q, we'll put that out.

Operator

Next we'll move on to Howard Rubel with Jefferies.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Actually I have a question for Shawn, sort of -- it's kind of a fun one. As you've started to move more of the business internationally, when do you see opportunities to help the tax rate?

Shawn R. Hagel

We're obviously constantly looking for that. We did see some benefits this last quarter as the U.K. tax rate came down and we do have a fairly significant presence there, so it did help. We do continuously look though, to see what we can do. But again, a lot of our businesses is here in the States for a reason, so I don't see a lot of that moving. So we'll still have to contend with whatever the government here wants to do with regards to taxes.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

No, I saw that but I also saw the change and I figured it was something along that order. That makes sense. And then just 2 small items. Mark, you talked about lead time stretching out at bill, can you give -- how many...

Mark Donegan

No, Howard, at the wires. Yes. Yes, so it's really more of the wire rod.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

And then last, you did allude to nickel falling fairly sharply at the end of the quarter. Were you able to take advantage of that? And...

Mark Donegan

Well, we -- to answer your question, we did obviously with our customers as the nickel was going down, we did go out much longer. So do we have positions for our customers out in the future that took advantage of the $8.25, $8.50 nickel? Yes, we did. We went and bought. But those positions will be overlaid probably starting, gosh, maybe Q2 calendar year '12 going through Q1 of calendar year '13 is when those positions will go in because we already had an order -- we ordered 6, 7, 8 months ago at $10 for Q3 and Q4.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Got it. Now, I mean I just thought you were going to -- I mean it was a remarkable last 2 weeks of the quarter and it looked like they were giving it away so that's why I asked.

Mark Donegan

Well again, we went a little bit -- I think with our customers we went a lot longer. If I look at when it was $10 we were going in 6 months increments. And if I look at where we went, we went a year. So we did -- our customers did want us to go out much longer when it was at $8. So we did take advantage of it. We just have to overlay it as to when we had an opening to bring it in and then we overlaid from that point forward. We did go out much longer. We went out about a year.

Operator

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

David E. Strauss - UBS Investment Bank, Research Division

The -- Mark, the pipe backlog that you're implying is around $500 million or so still, can you split that between interconnect and oil and gas?

Mark Donegan

I actually can't. But the next -- that's a good question and I will the next time. I think it's a fair thing to be asked. So I -- that's a good question. I can't tell you off the top of my -- can Curtis do it? Yes, but I just don't know that at the top of my head.

David E. Strauss - UBS Investment Bank, Research Division

Okay. I'll follow-up with Dwight.

Mark Donegan

You ask Dwight. I'll be with Dwight. I mean I'll be with Curtis tomorrow. So I'll ask Curtis and you can get that back. You call Dwight and he can get you that info.

David E. Strauss - UBS Investment Bank, Research Division

This fastener margin question has been asked a couple different ways. I'll give it another shot. When -- so if we see the pickup that you expect in aerospace on the fastener side with the dilution from Primus and LPB to come, how long do you think it takes you to get back to the 30%, 31% margin rate that you've been at before?

Mark Donegan

I think if the fasteners, the core business comes back. And it's kind of the rate of it, just kind of playing it out in my head. I think it's in the, within a 4-quarter timeframe if the fasteners comes back the way we hope.

David E. Strauss - UBS Investment Bank, Research Division

Okay, that's helpful. PB, what held up the closing there? I think you expected that deal to close a lot sooner than it ended up closing. Was there market share concerns, or...?

Mark Donegan

Yes, it was. I mean kind of we talked about it is that we had a -- I don't want to say sole source because I can't guarantee it was sole source but certainly on the lone particular sleeve bolt, we were a major, major, major market share. And again, what's flush mount, what's not flush mount, I do not remember which one but flush is -- so PB is flush so we had non-flush. And I think we had majority share and then the market has been split where PB had flushed it and they pretty much had a 100% share. So it was a concern of bringing really the only sleeve bolt technology out there. Again, we had a license agreement with PB. So PB owned that whole market and then customers require that we be able to do one. So it was bringing that back together that we had to work through with the customers.

David E. Strauss - UBS Investment Bank, Research Division

Okay, so did you have to divest anything or not?

Mark Donegan

No, we do not. No, we did not.

David E. Strauss - UBS Investment Bank, Research Division

On the defense side of your business, I think correct me if from wrong, but I think roughly 8% to 10% of your sales are into defense markets. What are you seeing in that side of your business?

Mark Donegan

Stable. Again it's changing. Where if I go back to 4 or 5 years ago with C-17, F-22. Now it's more F-35, there's more, there's upgrades in the F-18. So for us to date, it's moved around. So when a new platform stops, more money gets diverted to overhaul and repair or retrofit or -- and the F-22 kind of got canceled. You'll see the engine makers come out and try to put something different in to get a little more thrust out of it. That typically goes back and forth between that, so I'd say we're stable.

David E. Strauss - UBS Investment Bank, Research Division

Okay. One or 2 more, if I can on...

Mark Donegan

I'll answer all your questions.

David E. Strauss - UBS Investment Bank, Research Division

For Forge, the 45% incremental margin you talked about pre-dilution and pre-pasture [ph] and all that. If I do the math on that, it looks like the acquisitions contributed virtually nothing to EBIT, is that right?

Mark Donegan

No, it contributed something. It just wasn't a significant amount.

David E. Strauss - UBS Investment Bank, Research Division

Okay. All right. The last one I have...

Mark Donegan

David, again on that. I think to be fair I think the one thing that Rollmet delivered not in the numbers, it delivered us approval to get the Saudi Aramco order. So without Rollmet, we still may be fooling around trying to get qualification for a coal draw.

David E. Strauss - UBS Investment Bank, Research Division

You talked about at IGT next year that you're expecting relatively flat overall volumes but it's a benefit from increased dollar content. Is there any way you can quantify how big of a positive that would be?

Mark Donegan

Yes. On the particular programs, they're not necessarily large build rates. You're looking at programs that we're probably building at 3 or 4 a quarter, maybe, probably 5 a quarter and we'll probably be going 8 to 10 a quarter. But the dollar content of those is probably 2x what it is on the smaller engines.

David E. Strauss - UBS Investment Bank, Research Division

Okay. That's very helpful. Last one I have maybe more for Shawn. It looks like your cash flow from ops was around $200 million or so in the quarter, is that right?.

Shawn R. Hagel

Yes, we're just finalizing that now with regards to all the acquisitions but that's probably in the ballpark.

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 have 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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