Enpro Inc (NPO) 2005 Q4 法說會逐字稿

Good day and welcome to this EnPro Industries fourth-quarter 2005 financial results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Don Washington. Please go ahead, sir.

Good morning, everyone, and welcome to EnPro Industries quarterly earnings conference call. We've got Ernie Schaub, our President and CEO, with us this morning, and Ernie will discuss our fourth-quarter earnings and our earnings for the full year 2005 and give you a little insight into what we are expecting for 2006. We also have Bill Dries, our CFO, and Rick Magee, our General Counsel, in the room, and they are prepared to participate in the Q&A session after Ernie's remarks. I will turn the floor over to Ernie in just a moment, and he will make his remarks. Then, we will open the lines for your questions.

But first, I need to remind you that you may hear statements during the course of this call that express a belief, expectation or intention as well as those that are not historical fact. These statements are forward-looking and involve a number of risks and uncertainties that may cause actual events and results to differ materially from such forward-looking statements. These risks and uncertainties are referenced in the Safe Harbor statement included in our press release and are described in more detail along with other risks and uncertainties in our filings with the SEC, including the Form 10-K for the year ended December 31, 2004 and the Form 10-Q for the quarter ended September 30, 2005.

We do not undertake to update any forward-looking statement made on this conference call to reflect any changes in management's expectations or any changes in assumptions of circumstances on which such statements are based.

The call is being Webcast this morning on our Website, EnProIndustries.com, and a replay will be available on the Website and also by telephone. If you're interested in the telephone replay, the dial-in information is contained in our earnings release. If you have any questions that we're not able to answer on this morning or if you have any follow-up questions, please give me a call after we complete the conference call at 704-731-1527. Now, I will turn the call over to Ernie.

Thank you, Don, and welcome, everyone. We're glad you joined us this morning. By now, I hope you've all seen the press release and are aware that 2005 ended on a very high note for us. On the bottom line to you was a significant improvement over 2004 and we believe clearly demonstrates the effectiveness of our strategies.

Sales, profits, profit margins and net income have improved steadily in each of the 4 years we have reported our results as an independent public company. Cash flows have remained strong, and net cash outflows for asbestos have declined sharply since 2002. We're comfortable with the track we're on, and we intend to maintain our focus on the fundamental improvements in our businesses that will increase value.

Now, let's look at our results for the fourth quarter and for the full year of 2005. Sales in the fourth quarter increased only by about 1% from 2004. The increase is modest because Fairbanks Morse shipped fewer engines than a year ago. In our other operations, order sales were up to a total of about 3% or between 5 and 6% if you account for the effect of the weaker euro in 2005. The improvement reflects the effects of continued strength in industrial, automotive and other markets served by the Company.

In regard to Fairbanks Morse, sales were lower but backlog is a more meaningful measure of their outlook and backlog is high with new engine orders -- should remain strong over the next several years thanks to Navy shipbuilding programs. Engines are built and shipped according to installation schedules set by shipbuilders. So, the stream of shipments can be uneven, and sales can fluctuate significantly from year to year. However, the long-term outlook for Fairbanks Morse is very good.

Moving from the top line to the bottom line for the fourth quarter, net income was $17.5 million compared to $3.9 million last year. That equates to $0.82 a share on a diluted basis compared to $0.18. The improvement reflects a number of factors, including the significant items we mentioned in the press release. Those items improved earnings in the fourth quarter by about $0.19 and reduced earnings last year by about $0.15. So, on a comparable basis ignoring these significant items, we still had a sharp improvement in earnings.

I won't reiterate the significant items since they are detailed in the table included in the press release. But I would like to call your attention to several other measures to help you understand the comparisons to last year. First, asbestos-related expenses declined by about $5 million due to increased recoveries from insolvent insurers, which more than offset higher legal fees. In addition, corporate expenses were about $2 million less than last year in part because of lower expenses for stock-based compensation. Finally, a combination of higher volume, more favorable sales mix and better pricing provided a benefit of about $2 million at the segment level.

Looking at our segments' performance in the quarter fourth quarter, certain of our Sealing Products' markets improved over a year ago and sales increased about 4% before the effect of foreign exchange. The improvement was led by the continued strength of Stemco's heavy-duty truck markets, followed by stronger power generation markets in upstream oil and gas markets. Those strengths were somewhat offset by weakness in Gulf Coast refining chemical and petrochemical markets served by Garlock and France Compressor markets due to the effect of hurricanes last summer. We saw a decline in profits and profit margins in this segment because of expenses associated with Garlock facilities' modernization project and because of the weakness in the Gulf Coast markets.

In the Engineered Products segment, sales were up about 7% before foreign exchange. The segment benefited from very strong industrial markets in the United States, which gave Quincy Compressor a significant boost in sales. GGB's U.S. sales benefited from those same conditions, but its European markets remained a little soft. Profits in the Engineered Products segment benefited from volume and mix at Quincy, better pricing at all operations and reduced restructuring expenses at GGB and France compressor.

The Fairbanks Morse profits improved by about 60%, as the business benefited from the aftermarket and service-related activity, which helped boost margins to 12.9% in the quarter. That's the best they've seen in at least 4 years. As I mentioned, the business shipped fewer engines, resulting in a drop of sales of about 8% and Engine Products service segment overall.

Now let's turn to the full year. For the year, sales improved only by about 1%, primarily as a result of lower engine shipments at Fairbanks Morse and the divestiture that we made in 2004. The divestiture -- the divested business contributed about $11 million in sales in 2004 and of course no sales in 2005. Without the impact of the engine business and the divestiture that we noted, the increase over 2004 sales would've been about 5%.

Net income for the year was $58.6 million compared to $33.8 million in 2004. On a per-share basis, those figures equaled $2.75 a share compared to $1.60 a share. The significant items described in the press release benefited this year's earnings by about $0.55 a share and decreased last year's earnings by about $0.17 a share. Again, I won't go through reiterating them, since they are detailed in the table accompanying the earnings release. But, it's important to note that even without their effect, the improvement over 2004 was strong. Net income benefited from lower corporate and net interest expense in 2005 and from our improved operating performance, which resulted from efficiency improvements, the volume increases, stronger mix and better pricing recovery.

Turning to our segments' performance during the year, the Sealing Products segment had a 5% increase in sales, led by Stemco again and their strong heavy-duty truck market. Other sealing markets were relatively flat; although, we did see strength during the year in upstream oil and gas markets as commodity prices rose. This segment also benefited from better pricing. This pricing coupled with higher volume, product line rationalization and cost reductions helped the segment's margins increase to 16.8%, a 120 basis point improvement over 2004.

In the Engineered Products segment, sales were up 5% after eliminating the effect of sales that were divested in 2004 and foreign exchange. Our compressor and compressor parts market showed the most significant increases in sales, as they benefited from the good conditions in the U.S. industrial markets. Sales also benefited from strong U.S. bearings markets; although, Europe as I said remained a bit weak.

Of the $12.8 million increase in Engineered Products segment's profits, reduced restructuring expenses contributed about $8.5 million. The remainder of the increase reflects the performance by Quincy Compressor in North America's industrial markets throughout the year and by France Compressor Products in oil and gas markets during the first half of the year.

I've discussed the Engine Products and Service segment and the impact of lower engine shipments. And I have little else to add except to say that we believe it's on the right track to sustain higher levels of performance in 2006 than it has in the past. The problems that led to contract losses in 2004 and 2005 are now behind us, and we believe this segment is poised to show continued improvement in 2006 and beyond.

We ended 2005 with our balance sheet in very good condition. We had almost $110 million in unrestricted cash at the end of the year. Long-term debt increased by about $20 million over year-end 2004. The change reflects the issuance of new convertible debenture and the retirement of our TIDES securities in the fourth quarter plus the repayment of a promissory note.

As we noted, our annual interest expense will be reduced by the lower rates on the debenture, and we eliminated future earnings volatility caused by adjustments to the value of Goodrich call options we held as a hedge against the conversion of the TIDES. We sold the call options in the fourth quarter.

Cash flow from operating activities increased about $35 million in 2005. Net outflows for asbestos claims and expenses declined just under $22 million in 2005 or nearly $18 million less than 2004. The improvement reflects increases in collections from insolvent insurers and the collection of the delinquent insurance. Net outflows in 2005 were less than one-third of the net outflows at their peak in 2002, as we've continually focused on minimizing the effect of asbestos claims and expenses on our cash flows.

As we noted in the earnings release, new asbestos claims continue to be filed at significantly lower rates than just a few years ago. We have a sizable amount of insurance remaining for the payments of those claims, and we're confident that the insurance combined with our settlement strategy and declining number of new claims will enable us to effectively manage the situation regardless of what happens in Washington this year.

Speaking of Washington, we have to tell you that the outcome of Tuesday's procedural vote in the Senate disappointed us. We also want to point out that it will have no effect on the way we operate going forward. We are in favor of the effective national solution, and we always have been. We're encouraged by an increasing number of state reforms. But, we've never managed our settlements expecting a legislative cure-all at any level. We've proven our settlement process minimizes the effect of asbestos claims in EnPro, and we're not going to change that process.

As I've said, we have a sizable amount of asbestos insurance remaining. At the end of 2005, we had about $570 million of coverage that we expect to collect under the terms of our agreements with our insurers. About $222 million of that coverage is the net amount due to us for claims we paid but that we have not yet been reimbursed for. That amount constitutes a portion of the asbestos insurance receivables on our balance sheet.

Additionally, about $271 million is allocated to claims that our valuation expert estimates will be paid over the next 10 years; that leaves about $77 million of uncommitted coverage. We expect the amount of uncommitted coverage will diminish as it's allocated to claims and as we incur expenses covered by insurance. At the point our insurance is fully committed, we'll begin to record a charge to income to cover future claims. The charge will be non-cash. Our asbestos-related cash flows would be no different than they would be otherwise. Our settlement strategy won't change.

Before I turn to our outlook, I would like to review a few other significant events that occurred in 2005. In May, as you know, our Board approved the modernization of Garlock's Palmyra, New York facility. In December, we broke ground for the first new building to be built on that site in 50 years.

We took steps to maintain the strength in our corporate capabilities with the addition of John Smith, who will assume Dick Driscoll's responsibility for human resources and administration when Dick retires in May of this year. We also added Milt Childress to oversee our strategic planning and business development activities. Milt will bring greater focus to these activities, which are especially important as we look for opportunities to strengthen our Company and increase its value.

Now, let's talk a little bit about what we see for the year ahead. We believe our markets should continue to grow in 2006 at a pace similar to that which we saw in 2005. We expect growth in the United States to be stronger than it is in Europe, and we expect the U.S. Gulf Coast markets to begin to recover from the effects of the hurricanes. Fairbanks Morse should increase sales as it ships more engines in U.S. Navy shipbuilding programs.

As a result of these items, we expect and anticipate EnPro's sales in 2006 will increase compared to 2005. These higher volumes, a better mix of business, new product introductions and benefits of the cost efficiencies that we have undertaken should combine to improve our performance of our segments and increase both segment profit and segment profit margins over those reported in 2005. Based on these factors, we believe our performance will continue to improve in 2006 just as it has each year of our life as an independent public company.

Thank you for your attention. Now, we will open the lines for questions.

(Operator Instructions). Debra Fiakas, Crystal Equity Research.

I am new in learning about EnPro Industries, and I wondered if you could elaborate on a comment you made in your opening remarks about new products in this next year -- if you had something particular in mind or if not a particular product -- if you could describe what your direction might be.

I don't have any particular one product in mind. But one of the four initiatives that we have is to develop new products and enter new markets. And to that end, last year in fact beginning in 2004, we undertook to strengthen our engineering and marketing resources at all of our divisions. Those activities have been focused on customer needs, customer desires and opportunities to grow as well as enhancing and developing new products. We had a target of trying to obtain 20% of sales on products introduced within a 5-year time period.

We have some divisions that are already at that pace; I have to tell you that. But several of our divisions are not there. So, it's a mixed bag. We are at about the 10% level right now. But we expect to continue introducing new products, as these engineering and marketing folks have an impact on the divisions.

Do you have a specific budget for them? Is it a line item, or is it embedded in each division?

Each and every division has it, and it will be different at each and every division.

Andrea Sharkey, Sidoti & Company.

Just a few I guess numbers questions. You were talking about -- the big surprise it seems with your numbers this quarter was certainly on the margin side. And so, I was wondering, it looks like your cost of goods sales increased sequentially for the quarter and declined only slightly since the prior year. I was wondering what that increase is from and if that's more of a good run rate going forward or if it's more of an anomaly just for this quarter.

Andrea, this is Bill. Are you talking about the quarter or the year?

I am talking about the quarter.

Our margins were actually slight. When you say that margins were a surprise, I'm not sure I understand what you're saying.

Yes, I know.

They weren't a surprise to us. Needing to expand on that, our margins are up year over year.

No, that's what I do mean. I guess I should have said, the margins in general were much better -- surprised -- they were the upside to my estimate. So, we will get to -- I guess that was more on the SG&A side. And so I just wanted to first talk about the cost of goods sold, and then I will ask about the SG&A.

Our gross margins were up slightly year over year for the quarter. Part of that -- and we're not used to saying this because it normally has quite the opposite effect of Fairbanks Morse. Fairbanks Morse because of the decline in its engine shipments had a much higher proportion of sales parts and service, which carries a higher margin. And so that contributed -- the Engine Products and Services margins -- gross margins were also improved primarily due to high volumes and the leverage on those volumes at Quincy.

The only unit -- or the only segment that really showed any decline in margins year over year was the Sealing Products Group, and it was a combination of both the charges at Garlock and the weakness in the Gulf Coast in the fourth quarter. That impacted us as well as the higher mix at Stemco of the lower margin OEM -- the original equipment and buy/sell products versus their aftermarket.

Then I guess in terms of the improvements that you have made on those margins in engineering and in the engine products. Is that something that can continue into the future, or is there any kind of one-time items in there that maybe we should be considering when looking at our estimates for '06?

No. We've shown steady progress since the day we were spun out. We've shown year-over-year improvement every year, and this year when you back out the impact of all those items that you refer to, we don't have that significant of a growth in margin as it would show because of the contract write-downs and the structuring expenses.

But if you look at our segment margins on an adjusted basis, we were up 120 basis points to 14.5%. That's nice. That's up from 10.5% 4 years ago. We expect to continue to show improvement going forward as well.

This is Ernie. All along, one of our strategic initiatives as I mentioned to Debra just before about growing in new products and new markets, one of our strategic initiatives has been to improve the operating efficiency of our divisions. We've made a point of it that we believe these operations, as Bill said which were in mid-teens before Goodrich acquired them, we believe we could get them back to mid-teens levels if not even better. We've made steady progress since we've been -- since we spun off, we are about 10.5% with the spin. As Bill points out, we are at some higher levels now and we continue on a target to get to mid-teens level.

2 more quick questions -- corporate expenses were down this quarter because of lower stock options expense. Is that something that is sustainable, or is that just kind of a year-end -- maybe you accrued more than you thought and then in the fourth quarter that came down or--?

Well, it actually wasn't stock option expense. We don't issue stock options. They were -- I think they were -- it was share-based compensation. We issue pension shares and performance shares. So to the extent our stock price moved, there will be some impact on that. But, that was only part of it. In fact, it was less than -- it was not -- it was the most significant but it was less than half of the total. We just had reductions in a number of other expenses as well overall.

But going forward, I would just point out to you that corporate expenses, we don't see that kind of drop. We expect to see some modest increases going forward based upon some activities initiatives that we've undertaken.

The last question was, you mentioned about the asbestos that if -- once the 77 million that you have left unallocated, once that does become completely allocated that you would have a charge to net income. I was wondering if you could just maybe expand on that a little bit more.

Sure. You know we have 570 million of insurance. As Ernie went through, 222 million of that has really already been spent by us and we've billed the insurance companies and we will collect that over time. In conjunction with our experts, we've estimated future claims of 270 million. So that leaves the 77 million. As those adjustments are revised and they are revised on a quarterly basis, as new claims come in, as claims come in that differ from the estimates that we have embedded in our numbers, as we incur legal fees that are covered by insurance that are not included in any of those forecasts -- that will in essence diminish that 77 million. So we would expect that based at the current rates that that will likely be exhausted by the end of this year, the early part of 2007. So, we would expect to begin to record those charges to income sometime next year.

Do you have any sense of maybe how large those charges would be, how significant?

It all depends on all those factors I just listed. It all depends on how significant or insignificant they are. There's no realistic way to estimate. We've been running -- our annual expenses have been running in the 10 to $15 million range, which primarily represents uninsured legal fees as well as the occasional insolvent layer of insurance we hit. It will be higher than that, but it's just very difficult to really estimate how much higher.

Would we estimate it to be closer to 15 to 20, not the 10 to 15 on an ongoing basis?

Yes, I mean 15 million has been the number we have been using for the uninsured.

Jack Howard, Steel Partners.

Could you comment on where Fairbanks backlog is now, more or less?

I think it's about $60 million.

I think it's higher than 60(multiple speakers). Fairbanks is most of our backlog. We used to get a backlog report by division weekly to tell you the truth. Jack, I don't know; it's most of our backlog right now because as you know many of our products are 24-hour, 48-hour deliveries. 130 million is what Wayne is telling me. Is that what you said, Wayne, roughly 130 million?

We've got a little over $200 million backlog right now, and two-thirds of that is Fairbanks Morse.

It's significant.

I didn't see that mentioned in the press release, but maybe it's in there somewhere.

No, we don't usually (multiple speakers) --

No, you generally don't. Backlog is not one of the major drivers for us with the exception of Fairbanks Morse. All our other businesses run from anywhere from a week to a month's worth of backlog. It's not really a good predictor. Fairbanks Morse is the only one that really --

Well, just to the Company, two-thirds of the backlog in one operation. I mean that will tell you how significant backlog is a meaning to us really.

In the cash flow statement, you had a big deferred tax -- income tax item this year. Did that come about from the refinancing with the converts, or where did that come from?

You've got to stop reading these in so much detail. No, that's a good question. We paid significantly less in taxes in 2005 than we provided. Our income statement reflects a $33 million provision, but we paid significantly less than that -- close to 13. So, in essence, you've got to add back taxes to negate the amount that is reflected in that income number, and we will end up reporting a loss for U.S. tax purposes for 2005 despite the fact that we will show on a book basis a considerable amount of income. That's primarily because of expenses we have either already recorded on our books or will record in the future that we will be able to take on a tax return this year. Probably the two biggest items are asbestos. For tax purposes, we actually deduct the amount of cash flow as opposed to the expense.

The other item, you remember the privilege call options. We recognized significant losses in prior years associated with that. Those have been booked losses. We finally get to take that deduction this year because we sold the options.

Then a little further down, the purchase of call options, those are the call options on your own stock to get the exercise price higher? Is that--?

That's right. That's the gross number. Obviously, we also recorded about $21 million worth of tax benefits as well. So the net costs to us and therefore the net charge to our equity was about 5 million.

That's on top of the debt issue in its cost that's the next line down or--?

Oh, the 21 million is the non-cash -- it's the associated tax benefit that we've recorded as well on the books. So it's non-cash so that the net cost was about 5 million. That's the net charge to our equity as a result of this was 5 million.

That's for the call options, and then the next line the debt issuance cost is the fees for that deal.

Yes, that's right. I'm sorry.

I just wanted to clarify. At past conferences, you guys have talked about -- you mean you've got this great balance sheet and any comment on what the acquisition front looks like at this point?

Well as you know, we just put Milt on at the end of the year. Right now, we're going through doing some background checks on things we've been working on, seeing what's viable with -- in discussions with a couple of small people. So, it's a little bit early to expect I think any results. But I assure you that there has been a lot of activities. We were in a competition at the end of the year that we came pretty close, but we just didn't get. So we keep working at them.

Oh, the last thing on the court schedules with this 41 million that's in restricted cash, are those going to go to trial -- whatever is going to happen this year? Or is that a 2007 or 8 timeframe?

This is Rick. That's a good question. Most of that is a bond that supports one appeal in California, and it's very difficult to call what that schedule will be because the appeals court doesn't provide an advanced docket that goes very far out.

We anticipate based on what happens in other cases that it could be late this year or it may be early in 2007. But, that can be wrong by 0.5 year. So it's just -- our best guess is late in this year or early next year when that appeal will finally be decided.

Ted Wheeler, Buckingham Research.

I wondered if you had a handle on your commodity cost, raw material costs and pricing that you've been able to implement, where you stand on that. Are you kind of in line with costs, or do you still have some net costs that you haven't been able to pass along?

Overall, Ted, I think we're still a little bit behind. But it goes by division by division. As you know, we had some very diverse businesses. Copper costs have been high and affecting our bearings business. PTFE costs, we've been able to negotiate some reasonable things with our suppliers there. Steel costs have come down a little bit. So we see for some of our stampings and things of that nature -- we've seen a little bit of a flattening in there, so the pricing that we put in that they would hold. But I will tell you what also is increasing is transportation costs. As you can expect, fuel and things along with that have increased (multiple speakers) --

As you look at it, do you think you'll need to raise prices in '06 by the same amount, more or less than '05 to address this?

We have budgeted very modest price increases, looking at little bit slower growth in the economy in 2006 and a little bit of abatement in price in raw materials across-the-board. So we've had pretty modest price increases in our plan.

Will that kind of keep you in line with where you are in terms of the spreads so to speak?

If we don't see any surge in prices you know like the steel surge we had and as we had in the copper pricing this year, it will keep us in line.

Just one other one on Fairbanks Morse, it looks like that's beginning to turn in terms of -- will the schedule for the projects or platforms you're on continue for some years? Or what does that delivery curve look like as you go out a few years?

It's a gradually, steadily increasing sales basis. But, to tell you the truth, while that's the outlook and that's the current Navy schedules and builds, you and I know that the Navy and Congress never actually build what they plan on going out 3 or 4 years from now, so --

Okay, but that's a bit of a difference from the past, where the schedule didn't have that.

But you are right. It's a very strong order book. As Bill said, we've got 120, $130 million of engine orders on the books right now.

Great performance.

Bill Cram, RCB Investment Management.

A couple of my questions already got answer. But I guess on the asbestos front, I just had a quick general question for you and whether you've ever looked at this before. But USG obviously made a big settlement here just past quarter in regards to asbestos. And I wondered in the past or going forward if you've ever looked at possibly doing some sort of settlement to kind of get this asbestos litigation -- I guess get it gone. Now, as you kind of would have expected, the asbestos reform didn't happen in the Senate. So I just kind of was wondering what your thoughts were on that.

Well, let me start by saying we continually look at every option quarterly at least. Rick and his team look at all the options we have in terms of our cash position, our settlements and our opportunities with legislation and other things. But, I'd best turn it over to Rick and let him answer specifically the questions that regard the USG and how we look at that one.

Thanks, Ernie. Bill, as Ernie said, we look at every option and follow everything that's going on throughout the country on a regular basis. Obviously, we've looked at that alternative. As you can see pretty clearly from the USG settlement, that alternative is very, very extensive. It's the expensive alternative.

Unlike a lot of companies that have chosen that alternative, we have had good relationships with our insurers. So we've had good inflow from our insurers. Many of the companies, who have chosen that route, have been litigating not only with their plaintiffs but also with their insurers.

So from a cash perspective, that's been what they've determined as their best choice. Obviously, we don't see it as our best choice. We were hopeful on the legislative front. Obviously, we haven't given up on the legislative front. As Ernie said, we were disappointed with the outcome of the procedural vote, but we are real encouraged. We got 59 votes our way on that procedural measure. We have well over the majority if the Fair Act ever was considered on its merits.

But moreover, there's just a new sense and there's a new understanding among senators, among congressmen about the nature and the extent of the problem that we've got out there. I think efforts will continue to improve that at the legislative level. In addition to the laws we already have -- new laws in Texas, Mississippi, Ohio and Florida on state levels -- in the last couple of months, new legislative initiatives have begun in Illinois, Virginia and South Carolina.

So I guess the message from us at least is the reform efforts are underway, and they are not going to stop. We may have a respite on the national level, given that it's an election year. But there's a real understanding out there that's a problem. We think that ultimately the problem will be fixed. But as Ernie said, even if it's not fixed legislatively, we are committed to our management and our ability to manage the claims as we have. We will continue to look at this alternative. But, at this point, as the USG settlement shows clearly, it's way more expensive than other alternatives. At this point, it's not the alternative that we've chosen.

Would you agree kind of with what they are saying out there right now on tort reform that it's just a dead issue here for the next year?

No. We're not ready to throw in the towel yet. I don't know if you saw Senator Specter's comment late day before yesterday that he had not yet begun to fight steel in I think the words of John Paul Jones. But we believe that very likely next week, there may be a reconsideration of the vote.

We do acknowledge that it is a long shot because of the procedural necessity of getting 60 votes to go forward. We think it's now a long shot for the Fair Act. But there's amazing dynamics in the Senate. I don't know how closely you followed it, but Senator Reid and Senator Durbin, who have been two of the staunchest opponents, made statements on the floor day before yesterday about how they are ready to consider a medical criteria, Bill. I think that got lost in a lot of the press, but that was just a shocking statement from the two of them. That's not something that either of them have ever said before.

So, again, we don't think reform is dead by any means. We do acknowledge that this is an election year, and this is a difficult issue in an election year. So, as we get closer and closer to the elections, it's very likely to be delayed.

I know you -- a previous question -- you kind of spoke a little bit about acquisitions. And it sounds like you are kind of in the early stages of looking at that, but you said you almost did get one. How are you seeing prices out there right now? Obviously, everything we're still hearing is that the prices are still very high. I kind of wanted to see what you guys are thinking.

Yes, we are in that same boat, and that's probably why we bought a lot more. We're seeing prices high, and we are about creating value and being judicious. We are a conservative group by nature. So, we are not anxious to do anything foolish, and that's just taking a little bit longer. You're right; prices have been high moolas and pretty hefty.

Let me just make one clarification too. You indicate we're just starting. We've actually -- we've been fairly active for quite some time. We decided to bring on some additional resources, sir, and he mentioned that we had brought on Milt Childress. But we've been looking for quite some time, and we've come close on a number of occasions. But as Ernie said, we are very judicious with our resources and we are just not going to do anything foolish and we're not going to overpay.

(Operator Instructions). [Todd Solomon], Halcyon.

Would you please comment on the economic conditions that you're seeing? Are order cycles getting longer or shorter?

Give me some more help. Are you talking general economics (multiple speakers)?

I think that your customers are the bread and butter of our industrial economy. So I'm curious what you're seeing from your customers from an order cycle basis. Are order cycles getting longer between reorders? Are they getting shorter?

Generally, what we're seeing and we've been able to take advantage of it I think better than most is the need for fast response times. Either they are not planning as well or they are expecting other people to carry inventory. I don't know. But, you know we mentioned that two of our operations have had -- actually three of our operations had some pretty good years -- Stemco, Quincy, and France Compressor Products. And each of those operations has had good years. Well, Stemco has had a good year because the industry has been strong. But at least Quincy and France Compressor had good years because of their ability to respond to short lead-times. That's been a measure of their success right now.

Quincy can get you a compressor in sometime a matter of days, whereas most companies unless you order something that is a stock standard, you have to order it months. France Compressor is getting parts to the oilpatch and gas industry in days every time. And so they've been able to capture some sales and use their better profit margins as you might expect. That has helped us in the process. But overall, I think that the short lead-times are getting to be the order of the day.

Are there particular customers that you're seeing that are having increasing orders or customer segments that are -- you see kind of falling off a little bit?

Automotive is about the only one that's fallen off a little bit. As you know, the automotive industry has been in a little bit of a decline, not a significant one but both domestic and international.

Europe in general, I think has been a little bit slower. You know as I said in my comments, we expect the U.S. economy to continue about its growth rate. But we expect Europe to be about half that going forward.

But no -- we have almost 60,000 customers. We have a very, very large customer base, and no one customer makes up more than 3% of our sales or so, except for the U.S. Navy. So you've got that we don't have a strong dominant customer type of an activity. Did I answer your question all right, Todd?

Yes, I think you answered it very well. One follow-up question -- the auto segment -- if my memory doesn't fail me -- a good portion of your business goes to aftermarket for trucks?

Well, the truck market and auto we relate as two separate markets. In the auto industry per se, we tend to be more OE in the sense that -- and we're not a prime supplier, first year supplier. We supply a lot of bearings to the automotive industry. And you know, bearings don't replace -- you don't go in and tell them to replace the bearings on your convertible top or your seat very often. You don't get your shock absorber bearings replaced; you replace the whole shock absorber.

But on the truck market, truck and trailer market, Stemco has had a strong year. As Bill mentioned, the OE was particularly strong. Because the trucks in the U.S. are moving toward a change in engine emissions in 2007 and they were particularly strong. But, the aftermarket has been pretty good at Stemco as well.

The difference we're seeing in the aftermarket is that our product -- we engineer our product for specific applications more often than not, and they are lasting longer now. The good news is it enables us to track more customers. The bad news is that the replacement cycle is not as frequent as it was several years ago (multiple speakers) --

Let me just one added item first for some perspective as well just again to give you a sense. Our total automotive sales is in the single digit percentage of our sales. We're probably in the 6 to 7% range -- is automotive. So it's not that significant.

And truck is -- trailer is the same thing.

It's probably twice that. It's in the low teens.

Low teens, yes. Okay, Todd?

Yes, that's great.

[John Balzer], Goldman Sachs.

Congratulations on a nice quarter. Just a question, Rick, could you give any additional color on the 40 million disputed investment-grade policy that is out there that you guys have talked about in your filings?

You know because that one -- that's in litigation -- in fact there are -- there is an arbitration in New York. There is litigation in New York, and there's litigation in Pennsylvania all over that $40 million insurance dispute. Because it's in litigation, I have to hesitate on what I can and can't say about it. But, suffice it to say that we believe that the insurance is owed, and the insurer disputes both whether it's owed and if it is owed how it should be paid.

So it's the one significant remaining disputed piece of insurance that we have. It's very expensive to arbitrate and litigate on three fronts. We're trying hard to settle that and get it behind us, and hopefully they will come around and we will get that done sometime this year.

So just all the activity, would that at least suggest that it probably will be resolved in some way or another during '06? I'm sorry.

It would certainly suggest it to me. But, at this point, I'm not sure of the other side shares my optimism about our ability to get it done.

Thanks for the color. Bill, through '06, will you guys be continuing to record receivables against that if that is still hanging out there?

Yes, we will. But again, that's just one part. When the receivable is recorded, it's recorded against a pool of insurance. That's just one element of it.

Remember, it's important to know that we've got a lot of insurance already allocated to claims that will be paid over the next 10 years. So, as we pay, that's what we're obviously first allocating to.

Jack Howard, Steel Partners.

I don't remember all the details on this California one. Was that one case?

Yes, there was the [tragget] verdict in late 2003. Because California's requirements are that you post a bond in 150% of the amount of the verdict, and our bonding for that type thing requires 100% collateral, we have $35 million supporting that bond within that restricted cash number. So, that was a -- I would be glad if you want offline to give you more of that detail or you probably have it back in your files. But, that was a late 2003 verdict.

Is that an insured claim?

Yes.

There are no further questions at this time. I would like to turn the conference back over to Mr. Don Washington for any closing remarks.

Well, thank you for joining in this morning and listening to our call. We appreciate your questions and your interest. If you have any other questions or any follow-up questions, please give me a call at 704-731-1527. Thank you.

That does conclude today's call. We appreciate your participation. You may now disconnect.