Enpro Inc (NPO) 2007 Q1 法說會逐字稿

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

Good morning, everyone, and welcome to EnPro Industries quarterly earnings conference call. Ernie Schaub, our President and CEO is on the call this morning to discuss our results for the first quarter of 2007, and give you a little insight into our outlook for the remainder of the year. Bill Dries, our CFO, and Rick Magee our general counsel are also present and prepared to participate in the Q&A session. In just a moment Ernie will make his remarks, and then we will open the lines for questions.

But first I would like to remind you that you may hear statements during the course of this call that express 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 risk and uncertainties are referenced in the Safe Harbor statement included in our press release and are described in more detail along with other risk and uncertainties in our filings with the SEC, including the form 10-K for the year ended December 31, 2006.

We do not undertake to update any forward-looking statement 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 being webcast on our website, EnProIndustries.com, and a replay will be available on the website, as well as by telephone. Dial in information for the telephone replay is available in our press release.

If your questions aren't answered on the call or if you have any follow-up questions after the call please feel free to give me a call at 704-731-1527. With that, I will turn the call over to Ernie.

Thank you, Don, and good morning everyone. We are glad to have you join us today. We are very pleased to report that 2007 is off to a very good start as our performance in the first quarter indicates. In terms of sales, segment profits and segment profit margins, it was our strongest quarterly performance since we became a public company almost five years ago.

Our performance in this past quarter exceeded the records we set in the first quarter of 2006, which at that point was our best quarter ever. We believe the results point to the effectiveness of our strategies for operational improvement and growth, as well as to the continued health of our markets. With a solid first quarter now behind us, we are on track for another year of growth in 2007.

Sales in the first quarter of the year increased by 8% over 2006 to $247 million as all three of our segments reported topline improvements. Organic growth and acquisition is responsible for about 6 percentage points of the improvement, while the stronger euro is responsible for about 2 points. Segment profits were $42 million in the first quarter or about 10% better than a year ago. Margins improved to 17.1% from 16.8% last year as all units except Stemco improved.

The benefit we receive from a stronger euro offset some of the restructuring costs we experienced in the quarter, and acquisitions provided a slight benefit to segment profits. All in all, segment margins were our best ever and both the Sealing products and engineered product segments reported margins well in excess of 15% as they have in four of the past five quarters.

Corporate expense was up from the first quarter of 2006 but the increase was because of higher stock price and the effect of the price on stock-based compensation. Asbestos-related expenses were about $13 million in the first quarter compared to about $5 million a year ago. The expense in 2007 includes $6.1 million for legal fees and expenses incurred in the quarter, and a $6.8 million non-cash charge to update the liability so that we maintain a rolling ten-year estimate. The increase in asbestos expenses reflects the full allocation of asbestos insurance. A year ago when our insurance was not fully allocated we recorded a receivable on our balance sheet for insured fees and expenses and for changes to the liability. Now that the insurance is fully allocated both fees and expenses and changes to the liability are recorded as charges to income.

We currently expect quarterly charges for fees and expenses to total about $30 million each year. We expect a similar amount of non-cash charges each year for adjustments to the liability. Over time we expect these quarterly charges to decline. After the $8 million increase in asbestos-related expense, net income was $12.3 million or $0.56 a share compared to $14.8 million $0.69 a share a year ago. All references of course to per share amounts are on a diluted basis.

Before asbestos expenses and restructuring expense net income improved 15% to $21 million or $0.95 a share compared to $18.2 million or $0.85 a share last year. On that basis, which we believe is a more accurate indication of the performance of our operations, we had a very healthy increase in earnings over 2006.

Let's take a minute to look at our segment results in some detail beginning with the Sealing Products segment. In Sealing Products sales were up about 7% to $115.6 million, about 5 percentage points of the improvement were the results of favorable exchange rates for the euro, and a benefit of the Amicon acquisition, which was completed in midyear last year. Sales of Garlock were up over 10%, as operational improvements benefited shipments in Europe and Garlock's upstream oil and gas markets remain strong. Garlock also benefited from pricing improvements and foreign exchange.

Sales of Plastomer Technology increased substantially over a year ago as a result of the Amicon acquisition. Heavy-duty truck and trailer markets served by Stemco softened from the high levels of a year ago, and sales there were down about 10% as we saw lower demand from both the OEM side and the aftermarket customers. Despite these decreased sales of Stemco and the higher restructuring (technical difficulty) the segment's profits increased modestly over the first quarter of last year. Garlock's profits were up about 15% even after the increased restructuring costs associated with the Palmyra Modernization Project. Those costs totaled about $1 million in the quarter.

The improvement in Garlock reflected higher volumes, selected price increases and cost reduction initiatives. Profits in the Sealing Products segment overall also benefited from the Amicon acquisition. However, the benefits of Garlock's performance and the Amicon acquisition were mostly offset by the softness at Stemco. Profits there were below the levels of last year, reflecting the lower demand from heavy-duty truck markets and some higher operating costs.

The low profits at Stemco and the increased restructuring costs led to a one percentage point decline in segment profit margins. I should point out, however, that even with this decline margin in the segments had been higher only once before, and that was in the first quarter of last year. If we look at the segment's performance before restructuring costs we see that profits improved about 5%, and margins were about 19.4%.

Turing to engineered products side, their sales improved to $106.3 million, a 9% increase over last year. Favorable exchange rates for the euro and the acquisition of Allwest Compressor Products combined to contribute about 6 percentage points to this increase. GGB sales increased about in line with the segment increase overall. The bearings business benefited from higher volumes in its European operations, better pricing and a stronger euro. Sales at Quincy Compressor increased on higher aftermarket activity and selected price improvements, although the increase was less than at GGB. France Compressor Products benefited from the Allwest acquisition, as well as from increased activity in both the United States and Europe.

The segment's profits reached $18.8 million, a 13% improvement over last year. About 3 percentage points of the improvement came from foreign exchange. All operations in the segments reported higher profits reflecting the higher volumes of GGB and France Compressor, selected price increases, the benefit of the Allwest acquisition and a more profitable mix at Quincy Compressor where aftermarket activity increased.

Profit margins in engineered products segments reached 17.7% and were the highest the segment has ever reported. A year ago that segment's margins were 17.1%. In the engine products and service segments Fairbanks Morse reported a 10% increase in sales which grew to $25.6 million. Higher shipments of aftermarket parts, engines and associated equipment, as well as an increased service revenue led to the higher sales.

Profits improved substantially to $2 million from $600,000 last year, and margins also improved to 7.8% from 2.6% last year. The segment's performance in the quarter reflects the benefits of the recent operation improvements and a stronger mix of aftermarket work which generally is more profitable and carries higher margins.

Turning to cash flows, operations provided about $20 million in cash in the first quarter compared to the use of about $11 million of cash in the first quarter last year. The difference primarily reflects lower working capital requirements and a reduction in the net asbestos cash outflows. Working capital increased by over $16 million in the first quarter as seasonal activity picked up. However, the increase was about $9 million less than the increase in the first quarter of 2006.

Capital expenditures were about $9 million in the first quarter, an increase of about 30% over the first quarter of last year. The additional spending was primarily related to Garlock's Palmyra Modernization Project. Total asbestos payments for judgments, settlements, fees and expenses declined from the first quarter of 2006 from over $43 million a year ago, to $34.5 million this year. After insurance receipts, net cash outflows for asbestos were about $3 million in the first quarter of 2007 compared to over $21 million a year ago.

The decline in net outflows reflects lower settlement payments and legal fees and increased collections in insurance. As we disclosed last quarter, we reached a settlement with a group of U.S. insurers late 2006. The settlement resulted in a $12 million insurance payment in the first quarter of 2007. New asbestos claim filings continue to decline. We received 1900 new claims in the first quarter this year or 35% fewer claims in the first quarter last year. Over the past twelve months 6700 new claims are filed. That is about 85% fewer claims than were filed in the peak year of 2003 and reflects a rate of new filings as low as we've seen in 20 years.

At the end of the quarter we had about $437 million in solvent insurance coverage that we expect to collect in connection with asbestos claims. At the end of the quarter the total estimated liability over the next ten years is about $547 million. That compares to $568 million at the end of December 2006. The change reflects payments made in the first quarter of 2007 and the inclusion of a new quarter in the 10th year to maintain our rolling ten-year estimate. The change is consistent with our internal estimates. We began to use our internal estimates in the fourth quarter of last year to record the estimated liability at the most likely point within a broad range of possible liabilities.

Now let's take a look at what we expect for the second quarter and the remainder of 2007. Based on the current levels of activity and our performance in the first quarter, we appear to be on track for another good quarter. Europe remains strong compared to where it was a year ago, which should benefit us. Our U.S. markets are healthy, and although the overall rate of growth is slower than last year, we expect to benefit from the diversity of our markets and our strong aftermarket sales.

Increased restructuring expenses will affect segment profits in the second quarter. Excluding these costs we expect our segments to perform better in the second quarter of 2007 than they did in the second quarter of 2006. Assuming current conditions hold true and continue, we expect improvements in our operating performance throughout the year, although we should see the seasonal reduction of activity in the second half of the year that is typical in our markets.

For the full-year, sales, segment profits and segment profit margins should improve slightly over 2006, specifically volume increases, our strength in business mix, product introductions, productivity improvements and the acquisitions we completed in 2006 should benefit us. Restructuring costs will increase this year as we begin the demolition of facilities at Palmyra and complete the consolidation of Plastomer Products. But they should not limit our ability to improve segment profits and segment profit margins for the year.

We anticipate our cash flows in 2007 will increase over 2006 and leave us in good position to pursue the acquisitions and other investments that we see building value. The businesses we acquired in 2006 have already begun to contribute to our results, and this year we will look at additional opportunities to grow value through acquisition.

Working capital levels should decline over the course of the year as seasonal activity decreases in the second half of the year. Our net cash flows, cash outflows for asbestos in 2007 benefited from the collection of delinquent insurance in the first quarter and should be significantly lower than last year when they totaled $38 million.

Finally, capital spending should be at least the level of 2006, and we spent $41 million. This year we will be spending to expand our presence in China and India to continue the modernization of Garlock's Palmyra facilities, to consolidate Plastomer operations and to take other steps to improve productivity. In summary, we are pleased by our performance in the first quarter. We are positioned to take advantage of the current operating and economic environment, and we expect our performance to continue to improve as we take steps to add value to our company throughout 2007.

Thanks for your attention this morning. That concludes my prepared remarks, and now we will open the lines for your questions.

(OPERATOR INSTRUCTIONS) Andrea Sharkey.

Good morning, everyone. First off just wanted to ask about the restructuring charges that you mentioned. They were $1 million in this quarter. Do you foresee them accelerating as the year progresses, or is that a decent run rate for the rest of the year?

They will actually vary by quarter, Andrea, because we are in the process of buying some equipment, and it depends on receipts of some of those things. And we also are in the midst right now of tearing down some buildings. So we will see a change a little bit quarter to quarter. I don't think there is an average run rate; I don't think so.

I think you will see an acceleration as the year goes on. The spending on the modernization project will be much more heavily geared toward demolition this year versus building new buildings like it was last year. So you will see a kind of a shift in spending from capital to expenses this year. So we would anticipate that accelerating as the year goes on.

If you recall last year, Andrea, we built a brand-new building, and now that we vacated the site where that building is on, we are tearing its old building down completely and putting another building on that site.

I do recall that. So I guess then going into '08 because a lot of that demolition would be completed then '08 would be lighter on the restructuring. Is that a fair assumption?

Yes, I think that is a fair assumption.

And then just in terms of the Sealing Products margin, obviously that coming down partially was the restructuring some of it was Stemco, because Stemco has your better margins I think overall, and so is that kind of a smaller proportion of sales could, can weight on that? Is that something that you expect to continue through the rest of the year that because of those two factors, the margin on the Sealing business will probably come out lower than it was a year ago?

I guess it depends on the rebound and Stemco's business to some degree. They've really seen a pretty good softening in the business, and I guess it is all markets in the heavy-duty truck market. Bill, do you have any thoughts on it?

Yes, I think as a result of this step up in the restructuring charges that we just talked about, and at this point I don't think our outlook for Stemco is not for any significant improvement this year. So I think the combination of those two will likely result in a lower margin there this year.

Okay, good. Fair enough. Yes, I have heard the heavy-duty truck market just across the board seems to be pretty soft. And I guess other than that, though, it sounds like your market has been pretty healthy. Is there anything other than that segment that you are seeing in terms of strength or weakness that is different than what you have been seeing over the last quarter or so?

We're seeing pockets here and there on occasion, Andrea. Nothing really sustaining right now. Quincy is seeing a little softness. Even within Garlock we are seeing here and there some pockets of some. But I don't think there is any overall trend that we're seeing heavily. Quincy was doing a lot of work in the oil and gas recovery markets, and we are seeing that a little bit soften surprisingly; and the results of the Katrina area work and so on. But that is about the only one I'd say that's had really evident -- Bill, anything to say?

I agree I think those are the couple of areas that we've seen some softening; by and large most of the other businesses are -- their markets are still relatively strong.

Okay, great. And last question and then I will let somebody else have a chance. On the engine segment that improved pretty significantly this quarter and I guess I'm just wondering in terms of the profit improvement, how much of that would you attribute to the operational improvement that you guys have put through versus just the impact of a better mix? More aftermarket, because those get higher margins? I guess what I am trying to get at is how much of that improvement is sustainable versus not dependent on mix?

First let me go back to your other question you asked about markets. As I think about it a little bit more here, what we are saying is that there is no real obvious real soft pockets. Overall markets are not this strong. I think everybody is seeing they are not as strong as they were a year ago. I think that is pretty evident. But we are still seeing reasonable growth numbers. Now let me go onto what's happening in engine products and services.

We've been saying for a long time now, longer than we'd like to say it but we believe this business should be able to be a reasonable profit contributor to the Company, and there have been some problems in the Company. As you know, we took some significant write-downs, loss provisions for engines and so on a while ago. And over the course of about a year and a half I guess, huh Bill, something in that ballpark, we put some management changes in. We finally got a good operating guy in there and managing that business. And he is seeing it through what we believe is a sustainable turnaround this time, and we believe the business will return to its ongoing -- the profit levels we believe it can get to. Bill, have you seen (multiple speakers).

Yes, I think as you look at the improvements it is probably -- again the mix will change as we go through the quarters and we have higher engine shipments in later quarters which we anticipate this year. You will see a mix shift but by and large I think on a year-over-year basis it is probably half from the operational improvements that we've put in place and half from the mix change.

That's very helpful. Thanks a lot.

Joshua Sharf.

Congratulations on a real nice quarter. Could you talk a little bit more about the higher operating costs at Stemco?

Stemco's -- you know the volume affected them some, so you experienced some operating costs there associated with the volume decline. And while overall volume was down, there was also surges if you want to call it of needs from different suppliers, and we had some overtime surges here and there. They were not dramatic, but they were just -- and something that was in a declining market we shouldn't have seen them, to be honest with you.

I think that Josh the volume impact was much more significant on their operating results than the operating costs.

Okay.

We expected that market -- we knew the OE market was going to decline from last year they had a great big surge. But we expected the aftermarket would continue fairly strong. But the whole market is seeing as Andrea just noted, the whole market is seeing a softness. We didn't want to take a step of reducing manning and so on and so forth only to be caught flat-footed, but we saw movement as it was.

That makes sense. Of the asbestos claims, of the 1900 new claims how many of those were malignant claims?

Boy, Rick, I don't even know how to answer.

Josh, you know there is a lag time there before our information catches up for sure. So it is -- what we've been seeing now for about three years or so is an average of about 1400 to 1500 malignant claims every year. There is not any information that that average has changed dramatically. So I would say approximately 350 to 400 of them were probably malignant claims. That information develops over time, though. That is not always obvious when the claim is first filed what the disease mix is.

Sure, sure. And I guess one of the things that I don't guess there is any seasonality to the claims, but it seems as though they have somewhat leveled off over the last year after having dropped from Q1 to Q2. It seems like they have leveled off a little bit. Is that -- am I reading that correctly?

That's right, it looks like we've settled into an approximate new 600 to 700 claims a month kind of run rate. There has been some seasonality in years, there have tended to be more claims filed in the first quarter than any other quarter of a year and fewer in the fourth quarter. I think that is just courthouse schedules and people wanting to get their claims in as early in the year to try to get them paid during the year as possible. But whether that is going to be reflected as this year goes on, or whether we are seeing this as sort of new flat 600 a month kind of rate is yet to be seen. We do expect the claims to continue to decline somewhat, not as dramatically as they have over the past two or three years.

All right. Thank you very much.

[Henry Schadt]

Good morning. Cash levels are currently over 20% of your market cap. Can you comment on that in general and also what level in aggregate or relatively would cause you to reevaluate the dividend policy or institute a fairly significant share repurchase? Thanks.

Henry, let me take the last part first. At our Board meetings we regularly consider, look at dividend cash buyback alternative use of cash policies, in line with our strategies for the Company and where we're going. And what opportunities are in front of us. So it is not like it is a onetime view of that issue because it is an important one to the Board, as well as to shareholders. And there is no preset level, by the way, that we have assigned as a cash reserve. It depends on what kind of cases that we have out there, where the cases are in their cycle and jurisdictions with locations. And what activity we have on the asbestos front, as well as what we have going in the acquisition and capital needs to build our business. So there is a balance between them, and you are certainly right, we are certainly fortunate enough to be building cash, and that is really getting a closer look at now than ever before. Bill, do you have any thoughts?

I agree. I can tell you that 20% is not our target. It's probably a little higher than most of us would care to see. We, as Ernie indicated in his prepared remarks, we are actively looking for a number of acquisitions. We believe that we can build value through the right opportunities. But at the end of the day we will continue to look at our cash position, our capital structure and evaluate any and all options and make the appropriate choice.

It's a first class problem to have for sure.

When we first came out as a public company that was not one of our problems.

I have been here ever since that day, and I am happy to see it, it is just that some of us would be very happy to own more EnPro or see a dividend or some of both. So put me in that column. Thank you.

Tom Brinkmann.

Just wondering if you could break out the -- you talked about the sales increase being about 3% organic and 5% acquisitions and currency effects. Can you break out the currency effects from the acquisitions?

I think we can.

It is roughly about 2% FX, 3% acquisitions and 3% organic.

Okay, and also you made reference in your press release to this late 2006 insurance settlement, and I went on the website and I tired to go back to where that press release was but I didn't see it there. Can you briefly sort of just explain what the cash -- talk about what the allocated insurance and unallocated insurance, the difference this quarter versus the year ago?

That is a complex -- do you want that or you want Bill to do it?

I will be glad to try. Let's take it one at a time. The insurance settlement was with a large group of U.S. insurers, and it resulted in our agreeing to a payment schedule for $194 million in insurance. And that $194 million of insurance is included in the total amount of insurance that we regularly disclose. There is about a paragraph about that settlement in our 10-K, so you can get the details from that.

But again, there was a long-standing dispute with those insurers, not about the amount of insurance that they owed us, but over what the schedule of the payments of those -- of that insurance should be. And so we resolved that in the fourth quarter. They had been withholding payments for about two years pending resolution of that dispute. We resolved the dispute and set up a payment schedule for the payments of the whole $194 million over the next ten years or so. And once that was resolved they began paying, and the first quarter collections included a partial catch-up of some of the delinquent payments from those insurers. So that is the answer. The first half of that -- let me make sure I understand the second part of your question again. What do you want me to do with that one?

You mentioned a lot of the difference was due to unallocated (multiple speakers) insurance versus allocated this year.

In the second quarter of last year we fully allocated our remaining insurance which is now $437 million to both current claims that we have and to future anticipated claims that we accrue the liability for, which at that time we were accruing at the low end of the base wide estimate of our liability. At that point the estimated liability for the next ten years plus the -- was equal to at some point during that quarter was equal to the amount of our remaining insurance. And obviously as we continue to accrue that liability now there is a gap where we have a higher liability than we have remaining insurance. At the end of the year that was $100 million. That is now about $110 million as a result of the addition of the new quarter onto the liability.

Okay, and I guess in 2006 it was just a real reversal of the trend of you guys have had lower and lower cash outflows due to asbestos claims and expenses. But I guess that is the biggest question I get from investors, and I just want to get kind of a comfort level in terms of the timing of that. I understand that you guys had sort of had an ability to -- had an opportunity to settle some claims, and you did so. But can you speak to about that? How you go about trying to settle the claims or your strategy towards it I guess?

Let me try, Tom, first let me explain again about last year. We did pay out a little more last year than we had the year before, but again as we explain in some detail in the 10-K, we spent approximately $15 million last year to resolve and settle verdicts that had been rendered against us earlier in 2000 -- earlier in the 2000's mostly in 2003 and 2004. In fact, going into 2006 we had over $41 million of verdicts against us pending, and when we came out of 2006 that number was down to about $5 million. So that is what happened during 2006 is we lowered the amount of verdicts pending against us. And we took the opportunity to settle those pretty favorably as a result of where they stood in the appellate process. So that is what happened last year. Overall our settlements of new claims and our new commitments were down in line with the trends that we hope to see and that we hope to continue. Obviously we won't have those kind of verdict payments this year.

Okay, I got you. Good quarter, guys. Thanks for taking my questions.

Randy Laufman.

Good morning, guys. Congratulations on a very nice quarter. Just a couple quick questions, one follow-up on Stemco. I was wondering if you could comment on the aftermarket versus OE mix there and also in the past we've talked about some new products that you have been looking to introduce there, possibly radio frequency products and so forth that would be aftermarket type products.

Let's start with the aftermarket and OE mix. Most of our business is trailer related. Let's start with that. Last year we had a very strong truck business because there was a lot of trucks being bought because of engine emission changes. And so we had a stronger business there. That is usually at lower margins. The mix is mostly aftermarket. It's a strong aftermarket business. As I said, it is mostly a trailer business. What my understanding is from trucking statistics is that haulage is down a little bit. Evidently there is a rebalancing, if you want to call it after the first of the year consumer goods and the housing market has not been so strong. So the haulage markets have been down a little bit overall. And this is where our aftermarket content comes in.

So we are seeing a little bit decline in that. But let me tell you something about Stemco. Even with this decline Stemco is still one of our strongest businesses, and we would love to have all of our businesses be as strong Stemco has been historically overall. And is today, by the way. We don't see this as a permanent decline. It is certainly not a market share loss, and it is no operational type of issue that we see.

Going through the FIS situation, fleet information system, we introduced that about, I'm guessing maybe three years ago, Randy, as a user driven shift in our product mix. Most of our products have been wear and usage rate items, this is an information system, as you know, and we were trying to bring Stemco to a different level, and we spent a lot of money. It's our largest single investment R&D project in the Company. And when we did that, we were successful early on with a device that first started reading mileage in hub odometers and gradually moved into tire pressure and other information. And they were passive devices.

And what we see now is as users have seen the capabilities of these devices they are seeking more active devices. And that is instead of you going to ask the truck for information, the truck would automatically send the signal information out to a receiver somewhere. And this is a bit of a shift for us. We think it expands the market and gives us greater opportunity so we are now working with that and expect to be introducing that product in conjunction with the passive devices sometime this year. We still believe it is a great potential and a great market opportunity for Stemco. There is a great demand and request from users for it. Anything else?

No, I think you answered the question pretty well.

Did I answer that question adequately?

That was great. Just to clarify, though, the passive devices are they currently being sold in the market, or are you waiting until you can roll out the active devices, as well?

Passive devices are still being sold. In fact, we had two large orders last year for school buses. Because school buses, it happened to be here in North Carolina, in fact. See these as great potential to get accurate mileage readings. They are much more accurate than the old mechanical hub odometer, and also the great thing about the electronic type is that you can very quickly change them to different tire sizes where as the old mechanical hub odometer was sensitive to tire size and wheel size. So we are still selling (inaudible) the sales are still going good. We are making money on them. They just haven't been the big surge that we were hoping for and looking for.

Great. Thanks for the detailed answer. Just a couple other questions. On the engine product side you talked a lot about the strength in the aftermarket and I was wondering if there is some trends to that we can take from that, if there is going to be more aftermarket business in engine products going forward. And whether it is some seasonality or if it is just kind of an overall trend.

There are several factors affecting the aftermarket. One is that some of the products that we make aftermarket components for can be made by other people as well as us. So we have to compete aggressively for them, and that is we don't have the only license to manufacture them. And that is a little bit of seasonality or spur type buying. For example, we make products for engines that are on railroads in places like India and Pakistan, and places like that. And those orders come sporadically, so there may be some seasonality sporadic to that.

But there is also orders for parts and services from the U.S. Navy and other users of our engines that we have fairly good exclusivity on. Some of those will depend on Navy usage and what is happening. There had been a recent significant move in Navy deployments, and this required a little bit of a surge in aftermarket parts. And additionally the last one is parts that are in engines in other applications that require letters of credit and things of that nature. And we've seen a little bit of that in South America, particularly in Venezuela and places like that. So there is a mixture of components that go into the aftermarket but it has usually been a fairly around a band around a pretty consistent volume, I'd say. I know that was a pretty broad answer, but there is not a straightforward thing I can tell you that one item affects it or not.

I think that is a good point. We've got a total population of engines out there around 5000 in total, and that population does not vary significantly because you don't make that many engines in a year. So I think the business itself is relatively stable, as Ernie said.

Great. Thank you. And just my last question is turning to the asbestos liability. And now that we have an exact estimate and we've seen it over one quarter and we've seen the change in the liability I'm trying to understand it better. And maybe if you could just explain a little bit more of how that liability was reduced by $20 million. You said that it was a combination of the additional month being at 10 years and the liability that you've settled. And maybe if you could clarify how much was due to the settlements and how much is the additional quarter at the end of the 10 years; just trying to understand what that might look like going forward.

Okay, Randy. I've tried to do that in my comments. I guess I didn't make it clear. I'll let Rick do that but before he does I have to make something pretty clear here. This is not an exact estimate. If we thought this was an exact estimate we would really be able to fix some things. But that is one of the risks associated with the asbestos situation; it's a very imprecise estimate. We believe it has never been able to be precisely estimated. With that, I will turn it to Rick.

Randy, you will remember that we have been before last quarter we were booking to the low-end of the Bates White estimate, and they are an expert at this, and their estimate was changing significantly quarter to quarter. And we used our own model to find a point estimate within their range that we thought was the best estimate into the range. But as Ernie said, it is by no means exact. It is the best estimate of lots of estimates in a large range that we believe is the best. And we will continue to review that every quarter. We did not change our estimate this quarter, just the liability change like it would with any other liability.

We spent $27 million during the quarter on indemnity payments. So the liability came down by the $27 million we spent on the liability. The liability then went out by about $7 million because we added a quarter at the end of the estimate to keep that estimate at 10 years. We keep that as Ernie said as a rolling ten-year estimate so each quarter we will add an additional quarter on the back end of the estimate to keep the estimate at a full 10 years. So we will be paying liability every quarter that will bring the estimate down, and we will be adding on a quarter; hopefully every quarter that will be much less than what we are paying down that will offset some of that decline. So that is where the 20 comes from, 27 -7.

You got to remember this is still an estimate, and the only thing we can tell you about this estimate is that we know it's wrong.

As a matter of policy here we never use the words precise and exact in the same sentence.

That's great. Thank you, guys, and congratulations again on a great quarter.

At this time we have no further questions.

All right. We thank everybody for dialing in this morning and listening to the call. As I said earlier, if you have any other questions or want to follow-up please give me a call at 704-731-1527. Thank you very much.

Thank you, everyone, for joining today's EnPro Industries first quarter earnings conference call. This call has concluded. You may now disconnect.