Enpro Inc (NPO) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to this EnPro Industries fourth-quarter and year-end 2006 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. On the call this morning is Ernie Schaub, our President and CEO. He'll discuss our earnings for the quarter and for the full year of 2006 and talk a little bit about our outlook as we enter 2007. Bill Dries, our CFO, and Rick Magee, our General Counsel, are also hear and prepared to participate in the Q&A session.

In just a moment, I'll turn the call over to Ernie and he'll make his remarks and then will open the lines for your questions but first I want 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 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, 2005 and the 10-Q for the third quarter of 2006. We do not undertake to update any forward-looking statements made on this conference call to reflect any change in management's expectations or any change in assumptions or circumstances on which such statements are based.

The call is also being webcast this morning on enproindustries.com and a replay of the webcast will be available on our website shortly after the call is concluded. We will also have a telephone replay of the call and dial-in information for the telephone replay can be found in the earnings release. If your questions aren't answered on the call or if you have any follow-up questions after the call is over, please feel free to contact me at 704-731-1527.

And with that I'll turn the call over to Ernie.

Thank you, Don. Good morning, everyone, and thank you for joining us today. Our business had a great fourth quarter and a great year in 2006. In both periods, sales grew by double digits, segment profits reached record levels and segment profit margins exceeded 15%, the best margin we have had in any forth quarter or in fact for any year in our 4.5 years as an independent company.

We also had other notable accomplishments in 2006. We completed four acquisitions, the most we have completed in any year. We passed an important milestone in the modernization of Garlock's Palmyra facility with the opening the first new building there. We continued to benefit from our total customer value lean manufacturing initiative and we made progress on our goals for new product introductions and market expansion. Needless to say, we are very pleased with what we accomplished in 2006 and we're very comfortable on our outlook for 2007.

I'll go into more detail about our segment's performance and outlook shortly, but first I'd like to cover the adjustments to Garlock's asbestos liability and the resulting losses we reported in fourth quarter and the full year of 2006.

As we note in our earnings release, we reported a loss of $8.28 a share for the fourth quarter and a loss of $7.60 a share for the year. The losses are largely non-cash. They reflect pretax charges of about $305 million in the fourth quarter and about $359 million for the full year. The cash portions of those charges is about $6.5 million and $31 million respectively.

Overall you've probably seen that recent trends in asbestos have been positive. The number of new claims is declining. The number of cases of mesothelioma and other serious diseases are also going down. We continue to do well in the courtroom. Judicial and legislative reforms have made it more difficult for plaintiffs who are not sick to pursue claims. In that environment, increasing our asbestos liability would seem to run against these trends. However as we have consistently pointed out, the estimated liability recorded on the balance sheet has been at the low end of a broad range of possible liabilities over a ten-year period as developed by an outside expert. This range has been updated quarterly.

But because we have been at the low end, the liability has been very sensitive to changes in assumptions about the future. These assumptions include settlement values for mesothelioma claims; rates of filings and plaintiff friendly jurisdictions; and the impact on settlement costs on the amount of timing of payments by bankruptcy trusts. As the experts assumptions have changed, the low end of the range has increased in every quarter since the fourth quarter 2004.

Through the first quarter of 2006, we offset these increases in liability with corresponding increases in our insurance receivable. But in the second quarter of 2006, our insurance became fully allocated. Subsequent increases in the liability have been recorded as charges to income. The level of asbestos-related expense and the quarter-to-quarter variability in the expense has increased right along with the liability.

Separately from the experts' model of liability, we have long used an internal model to set targets for our asbestos claims in management strategy and asbestos-related cash flow. We have consistently evaluated the accuracy of the experts' estimates compared to the accuracy of our own estimates. Based on our evaluation, we concluded and the expert has agreed that our own model is a more accurate predictor and provides a better estimate for the liability.

As a result, we adopted our internal estimate at December 31, 2006, and increased the total liability to $568 million, which result in the pretax charge to income of $305 million for the fourth quarter.

I want to point out that this in no way is a signal that we think conditions are deteriorating or that our settlement strategy is ineffective. In fact trends are quite to the contrary, as I mentioned earlier. By making this adjustment, we're simply acknowledging our belief that our internal estimate is likely a better predictor of what the liability will ultimately be.

We will maintain a ten-year estimate of the liability by updating our model each quarter to include a new quarter in the tenth year. This will result in quarterly charges to income. We will also continue to record charges to income for legal fees and administrative expenses not included in the liability. The recent average run rate for these expenses and for charges to maintain ten-year estimate of liability total about $60 million a year. Because we will be recording a higher liability, we believe the estimate will be less volatile and the effective changes to it will be significantly less than they have been previously.

To summarize, we now believe our internal model is the best predictor of Garlock's asbestos liability. To reflect the current ten-year estimate produced by our model, we increased the size of the total liability recorded on our balance sheet to $568 million. As a result, we took a charge to income of $305 million in the fourth quarter. However, the liability and related charges should be less volatile in the future.

Adjusting liability does not alter our strategy for managing asbestos settlements and our insurance assets. We will continue to focus on controlling the effects of asbestos claims on our cash flow.

The adjustment to the asbestos liability should not overshadow what was an excellent quarter and an excellent year. To gain that perspective, we can look at our results before the effect of asbestos and other selected items. On that basis in the fourth quarter we earned $17.6 million or $0.81 a share. That is a 41% improvement over the fourth quarter 2005, when we earned $12.5 million or $0.59 a share on the same basis.

For the year, we earned $66.6 million or $3.09 a share before asbestos and other significant items. That is a 27% increase over the $51.9 million or $2.43 a share we earned a year ago on a comparable basis. Our earnings release includes a table that reconciles these non-GAAP numbers to our GAAP earnings.

The primary driver behind the improvements was the performance of our Sealing Products and our engineered products segments, both of which had strong sales growth and significant increases in profits in the fourth quarter and the full year. In the fourth quarter, Sealing Products segment sales grew 16% with about 5 percentage points coming from an acquisition and favorable foreign exchange. Within this segment, Garlock's sales increased over 20% compared to the fourth quarter of 2005. The most significant factors in Garlock's sales growth was stronger markets in North America and Europe and especially high demand from upstream oil and gas markets.

Stemco sales about the same as year ago although the OEM sales increased as the aftermarket sales decreased. Plastomer Technologies had organic sales growth in line with Garlock's but also benefited substantially from the acquisition of Amicon Plastics in the midyear.

Operating income in the segment was a 53% over the fourth quarter of 2005 and operating margins increased by more than 4 percentage points to 17.4%. In 2005, the segment's margins were 13.2%. The improvement in profits and margins came primarily at Garlock, which benefited from improved efficiencies and increased demand for high margin products for oil and gas markets.

Profits and margins of Plastomer Technologies also benefited from strong market conditions as well as productivity gains and the Amicon acquisition. At Stemco, however, the increased mix of low margin OEM business reduced profits slightly and also reduced margins. Nevertheless, margins remain very strong and the business contributes significantly to the segment's profits and margins.

For the full year, all operations in the Sealing Products segment reported increased activity and higher sales, leading to revenue growth of 10%. About 2 percentage point of the increase was contributed by the acquisition. Profits improved about 16% for the year and margins improved almost a full percentage point to 17.7%.

Looking at engineered products segments, we saw sales in the fourth quarter improve by 17% with foreign exchange and acquisitions contributing about 6 points of that improvement. Sales increased at both GGB and Quincy. Quincy benefited from strong U.S. markets, the contribution of its China operations, and the sales of new products. GGB sales improved on stronger industrial markets in Western Europe, higher sales to North American automotive markets, and favorable foreign exchange.

France Compressor Products, the smallest operation in this segment, reported a significant sales increase as it benefited from the acquisitions made earlier in 2006 and improving markets in Europe.

Profits in the engineered products segments improved by 31% and margins grew almost 1.5 percentage points to 13.9% compared to 12.5% a year ago. Foreign exchange and acquisitions added about 5 points to the increase of segments profits.

All three operations in the segments reported profit increases as efficiencies improved and that they benefited from favorable market conditions. Margins were higher at Quincy and GGB on higher volumes, increased productivity, and improved prices for certain products.

For the full year, the engineered products segments reported 13% increase in sales, which includes 2 percentage points from the acquisitions. Quincy Compressor benefited from strong market conditions and better pricing, while France Compressor Products benefited from acquisition and improvements in the European operations. Sales at GGB also increased modestly. The segments' profits improved 35% for the year and margins increased over 2.5 percentage points to 15.7% as all operations benefited from healthy market conditions and productivity improvements.

Quincy's performance made the most significant contribution to the improvement in the segments' profits and margins but GGB and France Compressor Products also reported better profits and better margins. Acquisitions added about 2 percentage points to the increase in this segment's profits.

Looking at the Engine Products and Services market segment, they also turned in a strong fourth quarter especially in light of their performance in the third quarter of 2006. Segment sales grew 27% over 2005 as a shipment of engines and associated items increased. Profits improved by 25% and segment margins reached 12.7%, which were comparable to 2005's 12.9%.

For the full year, the Engine Products and Services segment had a 4% increase in sales. The number of engines sold in each year was about the same, but the value of the engines shipped during 2006 was higher. Profits and profit margins in the segments were down due to the mix of more profitable parts and service work in 2005. In both years the segment recorded loss provision contracts of relatively similar amounts.

Overall cash flows were strong in 2006 and our balance sheet remains in excellent condition. Cash flows from operations were $75.8 million, about the same as 2005 even though net outflows for asbestos increased by $16 million.

Our operations generated cash during the year sufficient enough for us to invest over $40 million in our businesses in the form of capital expenditures and restructuring costs. In addition, we were able to spend over $27 million on acquisitions that are already contributing to our results.

We ended the year with a cash balance of about $160 million, which gives us the flexibility to continue to strengthen our company through acquisitions and investments in our operations.

Capital expenditures increased to about $41 million in 2006 compared to $32 million last year. The increase is primarily the result of spending on Garlock's Palmyra modernization project. As I mentioned, the first new building of the project is completed and the production of Garlock's Klozure productline is underway there today. The next step in the modernization will be the demolition of buildings to make way for the construction of the next new building, which is scheduled to begin late this year.

Turning to asbestos, we see the total spending for claims and expenses was about $126 million in 2006, compared to about $129 million in 2005. However, net asbestos-related cash outflows increased about $16 million in 2006 to $38 million. The increase in net outflows is a result of about $15 million paid in 2006 for verdicts from previous years and a sizable delinquent insurance collection in 2005, which reduced the net outflow that year.

As I mentioned, asbestos claims continue to come in at the lowest rates we've seen in almost 20 years. At the end of the year, 7700 new claims have been filed in 2006, compared to 15,300 in 2005. That is a decline of 50% from year-to-year. At the end of the year, we had $468 million of solvent insurance coverage that we expect to collect in the future.

Last quarter we mentioned that we'd reach an agreement in principle that would resolve a dispute with a group of insurers. We finalized that agreement in the fourth quarter and glad to say that we will receive the entire amount of insurance in annual payments in various amounts over 11 years, beginning this year. We also finished up the year with great success in the courtroom, receiving three defense verdicts in the fourth quarter.

Turning to our outlook, the overall condition of our markets continues to be good. North American industrial markets are healthy. Oil and gas markets are strong. We are seeing improvements in Europe. We also expect Fairbanks Morse Engine to build upon the results of the fourth quarter and continue to improve its performance as we move into 2007. All of these factors should contribute to continued growth in sales and profits at the segment level in 2007.

As I noted earlier, we will continue to book asbestos-related charges as we accrue expenses and update the liability although the liability shouldn't be subject to the consistent volatility that we witnessed previously. We will present their impact clearly to you to help you understand our performance both with and without these charges. As always, we will continue to focus our attention on managing both the settlement of claims and the collection of insurance to minimize the effect on our cash flows.

Total spending for asbestos claims and expenses should decline in 2007 while insurance collections should increase. As a result, our net outflows for asbestos claims and expenses should be lower in 2007 than they were in 2006.

In summary, we are very pleased with what we accomplished in 2006 and we are excited about the prospects for continued improvement in 2007. We expect sales to increase and our earnings to improve, whether they are measured before or after the impact of asbestos-related expenses. We will continue to generate strong cash flows in the managed asbestos settlements to contain their effect on our cash flows. We will look hard for acquisitions that will add value and we'll focus on expanding our product lines and market presence in ways that will improve our profitability and ensure our success for the future.

Thanks for your attention and now we'll open the lines for your questions.

(OPERATOR INSTRUCTIONS) Liam Burke, Ferris, Baker Watts.

On Garlock, you reported much better profitability. Was any of that the benefit of the Palmyra Plant upgrade?

Not specifically. We just started moving into the plant -- into the facility late in the year, piecemeal by piecemeal. But having said that, we are benefiting from the results of contractual changes that were made on the part of the union and the employees up there to help us make the investment in this facility. They put their names and their input on the line and gave something to help us make this facility a success. As you know, when we built this facility we needed their help and we needed the help of the state of New York, and they both chipped in and made it work. So we are able to get productivity improvements in that method.

Okay, and in terms of the project, how far are you along? Is it about one-third? Less than half -- but is it less than half now?

Oh yes, it is way less than half. It's a five-year project and we built the first building on an empty -- we took a parking lot away and built this building on the parking lot. Now that we are moved into it and in March we will be 100% up in operations in there and now that we have moved into it we will tear down the facility and actual several buildings that this vacated. That will enable us to start the next building and then once we do that we can tear down some other ancillary buildings as well. So we are probably maybe not even one-third -- I would say maybe 25% to 30% of the way.

Bill, I apologize. I should know the answer to this, but in fourth quarter of '05 in Sealing Products, margins, operating margin were about 13.2%, which is typically lower for the Sealing Products. Was there any one-time or something unusual to make that difference, that 400 basis point difference?

Actually the primary factor behind the improvement year-over-year is at Garlock. The other margins at the other units were about flat. Garlock alone was up about 7 points and it was a combination of all the things that Ernie mentioned before. We are realizing and reaping the benefits of modernization project. They had very strong activity in their oil and gas sector. They have taken hold of the TCB initiatives and have really improved their productivity fairly significantly. So there are a variety of reasons but they were the primary driver behind the year-over-year improvement.

Great, thank you.

Andrea Sharkey, Sidoti & Co.

Just wondering, you had very, very strong revenue growth this quarter. Obviously some of it from acquisition and some of it from foreign exchange. But overall very good organic. I was wondering if you could just maybe talk a little bit about what your expectation would be for '07. Is this sort of level something that is sustainable or do you expect to see it kind of continue to grow but maybe at a more modest pace?

Then on that, maybe talk a little bit more about your end market and where you might see pockets of strength or weakness.

It's a pretty broad question, Andrea. We have historically since we've become a public company grown at a pretty good rate and actually we had some wind at our back. But we have also started on a program several years ago as one of our strategic initiatives of developing new products and moving into new markets and we are starting to see a little bit of that. As I mentioned in the call here, we saw a little bit of help from China this year at Quincy. We expect to see even further growth in China and as you know or probably don't know, we're going to putting a plant in China for GGB this year.

So we are expecting that kind of help from new markets and these are not to serve domestic markets. They are to serve those markets in those countries. We're not making product overseas to bring back in the United States, in other words. So that's one thing.

The second is we've been able to develop a lot of new products and some of these products are just small in nature. But for example, Garlock has in the two years in a row now been selected by a leading industrial magazine as having the product of the year in the sealing markets. Those are little signs of the new products and new markets that are helping us move along.

Having said that, we expect 2007 to be fairly strong again. We expect to grow at a pace that is better than GDP, as we have in the past. Overall our productivity gains are helping us. We're trying to keep our prices down so that we can continue to expand on our markets. Only increasing prices when we have to buy material costs and our productivity gains and our employees have enabled us to be successful in that respect.

Okay, great. Actually just a follow-up. You mentioned the plant in China for GGB. Just wondering if maybe you could talk a little bit more specifically about the timing of that and maybe the size of that operation.

It will initially be a modest operation. We will put one or two production lines in there for a variety of -- a small variety of bearings and we are right now in the process of working out a lease arrangement for facility probably as we speak. They may be doing it today. I don't know, but we are that close to it because the Board approved it last year and we're moving along in that respect. Bill, do you want to add anything to that?

Sure, just in terms of timing, Andrea, we would not expect to be up and running until late in the year, well into the fourth quarter. So we will not really see any benefit in that at all in 2007. It is a startup operation.

But what it will allow us to do is sell more product in there with people knowing that we are coming. I think that's the start. People won't -- not that they won't -- they are reluctant to buy it from you unless you're going to be a local source. And as we tell them we will be a local source, we have a sales team in their already and we tell them we're going to be a local source, they will start selecting us.

That's great news. I guess the only other question was maybe talking about going back to the Palmyra question. It seems like you are saying this year it's going to be a lot of demolition. So I guess I would just make the assumption that the charges this year would be more heavily weighted toward restructuring versus CapEx? And is that accurate? Then do you have any sense of maybe what that restructuring might be this year?

Yes, you are absolutely right. It will be mostly destruction charges, not construction charges. Those will all be -- they won't be CapEx. They will be expenses that will absorb in the year and they will be quite a bit larger than they had been this year. Bill, is that --?

Without giving you an exact number, that is a pretty good answer. We said it would cost us $30 million to $35 million over a five-year period. We have probably spent maybe 20% to 25% of that so far. I think you're going to see that start to ramp up in 2007.

Okay, and if I recall correctly that $30 million to $35 million, you had said maybe half would be restructuring, half would be CapEx, in that region?

Yes, although that was the original plan. It seems to -- it has shifted some. We will probably end up -- it will be less weighted toward demolition and more weighted toward capital now. Maybe it is 45 to 55 now, not 50-50, but roughly speaking that's still about right.

Okay and then I don't know if you can give a type of number on what you think your CapEx will be this year?

Yes, we would expect our numbers to be up even without the impact on the switch in the demolition versus spending. We've got a number of other initiatives ongoing as well not only in Palmyra associated with our high-pressure sheet line and building up that line in both Palmyra and Mexico, but both GGB and Quincy will step up their spending as well. GGB we talked about the China initiative before. We are also looking to establish a presence in India as well.

And Quincy is putting the final touches on modernizing its Illinois plant and looking at some capacity expansion in its Alabama plant, so I would say that it will be somewhat higher than we spent this year.

Okay, just last question. Congratulations on hitting that 15% segment margin that was your goal, but of course we are always looking for the next one, so --.

Andrea, are you on our Board of Directors or what?

Yes, just wondering if you started talking about maybe what the next goal is and how you might be able to get there?

You're exactly right, Andrea. We are pleased to be able to get there. We've hit many -- all of our strategic initiatives from a couple of years ago. We reevaluated them and started a series of new initiatives and now it is a bit of a balancing act to not drive margins too high so that you are at a competitive disadvantage in the marketplace, but yet you're able to grow.

And we expect that we will be able to improve margins because our employees have been helping us with the TCB program and we are accelerating some of the training in that area. So we think we will be able to get margins a little bit better to your point. I think that's a reasonable expectation.

Okay, great. Thanks for answering my questions.

Joshua Sharf, Wm Smith.

Congratulations on a great quarter. Quick question about -- most of my questions have been answered, but a quick question about the remaining insurance. You have 468 remaining total. How much of that is for future claims?

Rick?

217.

$217 million is the number for the future, right?

$217 million left, okay. Then also --

Joshua, just to make sure you know, the $217 million is for the future claims. The rest is still to be collected, but it is allocated to claims that have been paid in the past for which we have not yet collected the insurance.

Got it. You had talked a little bit about entry into India. Do you have anything you can talk about with that?

No, Bill slipped that in there somehow. We are in the process of putting together a plan for that. We have discussed it with the Board and conceptually they are supportive of it. We will be finalizing that pretty soon and moving forward on that this year though. We will do it this year, Joshua.

So that would be the sort of thing that would show up late in the year and then there's really a plan for '08?

I think that is reasonable, yes.

All right, thanks very much.

Randy Laughlin, Imperial Capital.

Great quarter. A question on the engine product segment. Obviously fourth quarter was much better than the third quarter. I'm wondering if you could just comment a little bit more on the conditions in that segment and the outlook. Last conference call we talked about six engines being expected to be shipped during the fourth quarter. How many were shipped during the quarter? If you could comment on the next quarter.

We shipped five in the quarter. Off the top of my head I don't know how many is in the next quarter. I think the important thing here, Randy, is that we believe we actually have turned the corner on this business. We had a nice quarter here in the fourth quarter. We have a management team that is really focused on what we're trying to do with this business. We -- the pricing situation with regard to engines is now getting better, so we're driving more revenue from each engine than we did in the past and of course this will generate to not having losses and some degree of profitability as well.

So do you think double-digit segment profit margin is sustainable in this segment going forward?

Is it sustainable? Yes, but I do know if we're going to get there right away this year. We just turned the corner right now. We are trying to get there on a sustaining basis, yes. That is our target obviously.

Great, next question is just going back to the asbestos and I think you mentioned that the total net outflows, cash outflows for the year was about $38 million and we've talked about a more reasonable level going forward as being around $25 million. I was wondering if that is still a level you see as being normalized going forward?

Yes, Randy, I'm going to turn it to Rick, but let me explain it. The 38 we said was an unusual circumstance. It is because we did not receive some money and we had to pay for some cases of prior years and that double whammy drove that up quite a bit. I'll let Rick talk about the outlook for ongoing spending, but this past year was an unusual one for us in that respect.

As Ernie said, the $38 million included about $15 million that we paid out for verdicts that we settled or resolved that occurred back earlier in the 2000s and that we finally resolved this quarter. But for resolving those, we would have been at a more normal level. For instance going into the year we had more than $45 million of old verdicts outstanding against us that were on appeal. Going into this year we have less than or right approximately $7 million of prior year verdicts going into the year.

So we have gotten most of that out of the backlog, if you will, and are moving forward on that. It is hard to say what our usual amount is going to be because our insurance going forward is going to decline over the years. This year we should expect some good insurance and good improvement, but because of the agreements that we worked out with the carriers who were delinquent, we spread the payment of insurance over the next 11 years and in some of that out years we will see lower insurance payments in total.

So it's going to be hard to predict with accuracy what a normal level is going to be. But we would hope that we won't have a year where the number will be any worse, the cash outflow be any worse than what it was this year and we hope for a significant improvement in 2007.

Great. Thanks a lot. Again, great quarter.

Rob Norfleet, Davenport.

Great quarter by the way. I just have a real quick question and part of it was just answered by the last question, but I guess it gets to kind of a larger issue in the asbestos. We clearly continue to see over the last two years the claims rates declining and declining at a very rapid rate. And on top of that as we've talked about there's clearly a lot of potential bankrupt trust money that's going to come into the market from USG and others that when into bankruptcy and obviously that money (indiscernible) will become a tapped resource for those that are filing claims.

But at what point should these lower claim rates and again additional liquidity in the market to deal with this start resulting in lower payments from EnPro? When should we start potentially seeing this trend reverse because you would think that should have anecdotally already happened.

Let me try both parts of that one at a time. The first thing is the declining number of claims. As you stated, the number of claims has declined dramatically since the height in 2003, but most of that decline has been in the nonmalignant cases, the folks who are not sick, the cases that you've seen more and more in the press about how they were manufactured and a lot of them were fraudulent. Most of the decline has been in those cases.

In fact we finally saw in 2006 a real decline in the number of mesothelioma claims filed against our subsidiary, which is the most important thing because that is where most of the money goes to pay those claims. And so with a decline in those claims and a decline predicted by the science to be ongoing in those claims and to be over time to the annual declines in those rates. We will see a decline in the amount of money that we have to actually pay for the serious disease cases.

The amount of money that we are paying for the nondisease cases has declined dramatically and that has been a result of all the reform efforts and that is what has resulted in the big decrease in the claims.

At the same time, now going to what we pay, at the same time because of the bankruptcies you've mentioned over the last several years, the amount that we have had to pay for the serious disease cases has gone up. Our share of the payments has gone up simply because the number of people paying for those claims declined as the companies filed bankruptcies in the early 2000s.

Well, the good news, as you say, is those bankruptcies are finally being resolved and we expect a significant number of them to have their bankruptcy trusts on line beginning to make payments beginning this year. We should be able to get some benefit from those payments and it should decline the amount that we have to pay for those claims because obviously there are other sources of payment for those claims.

One thing we are working on now is the tort system doesn't give a very good ability to give credit for those claims. You've probably seen recent articles were courts are reacting to that and we are getting some positive developments in that area and hopefully soon we will be able to get credit for those significant payments that are going to come from the bankruptcy trusts.

That one factor has been the biggest reason for the big gap and the wide range, the broad range in our expert's estimate -- is it's hard to predict what our benefit is going to be from the payment of those bankruptcy trusts to the claimants, because they are two different systems that do not work very well together. Efforts are underway by other defendants, by insurers, and by us to ensure that we get significant credit for those payments and it's going to be the success of those efforts is going to determine where in that range we ultimately come out.

We think we're going to make progress. Our estimate is that that progress is going to be gradual year by year and that is why we are estimating that it will be somewhere up in the upper half of that range. But you've hit the right spot. The question is going to be what is the impact of those things going to be? We hope they will be significant over time.

Those payments will finally begin to be made by some of those bigger trusts this year and then there will be other trusts coming on in future years. The challenge for us is to try to get credit in the courtroom for those payments.

Great, thanks for the very thorough answer.

Joshua Sharf, William Smith.

Quick question -- sorry about this guys -- but a quick question about the engineered products margin. Year-over-year it was up significantly, but looks like on the same revenues it was down somewhat sequentially from earlier in the year. Is there a particular -- is something particular to the quarter for that?

No, I don't think so. I think maybe Quincy slowed a little bit in forth quarter but still on a year-over-year basis showed nice gain. But there is really nothing to be read into that. The fourth quarter has typically been our slowest quarter of the year.

Okay, because it looks as though it's only about $400,000 less from Q3 -- a little bit of seasonal drop from Q3 to Q4, but in Q3 it looks like it had a 15.4% operating margin and in Q4 it's dropped to slightly under 14%. So I was wondering if that came from one of the specific businesses or is that product mix or what the reason might have been for that?

I don't have a clue. Overall each of our businesses are making nice, steady improvements and while there will be some seasonal differences occasionally, we do not see a declining trend overall. In fact we see just the opposite. Margins have steadily improved and markets have steadily grown with them.

Also would it be possible, the total number of cases that you referred to dropping from 15,300 to 7700, was that total cases or malignant cases?

That is total cases filed in the quarter.

Do you have a number for the malignant cases?

We have an approximate number, Joshua, but a lot of the filings get made without an indication of what the disease is, so sometimes it takes several quarters for that information to develop to know exactly what the mix of cases was during a particular quarter. We do know that they have dropped and it's somewhere -- the mesothelioma cases somewhere in approximately 1500 of those cases, which is down from what it has been in past years.

So for '06 the mesothelioma cases are about 1500 of the 7700?

That is correct.

And then do you have an estimate for what that number was in '05?

In the '05, that was approximately 1600 to 1700, somewhere in that range, about 1650.

All right, great. Thanks a lot.

That does conclude today's question-and-answer session. Mr. Washington, we'll turn the conference back over to you.

Thank you very much for listening in this morning. Again if you have any other questions or anything that you'd like to follow up on, feel free to call me at 704-731-1527 and we'll look forward to talking to you in the future. Thanks.

That does conclude today's conference. Again, thank you for your participation.