Enpro Inc (NPO) 2008 Q4 法說會逐字稿

Good morning. My name is Kevin. I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

At this time, I would like to turn the call over to Mr. Don Washington. Mr. Washington, you may begin your conference.

Thank you, Kevin, and good morning, everyone. Welcome to EnPro Industries quarterly earnings conference call. This morning Steve Macadam, our President and CEO, and Bill Dries, our Senior Vice President and CFO, will review the events of the fourth quarter and full year of 2008 and our financial results in those periods.

They will also discuss the current condition of our markets and how that affects our expectations for 2009. Following their comments, we will open the line for a question-and-answer session. In addition to Steve and Bill, Rick Magee, our General Counsel, is also here to participate in that part of the call.

Before Steve and Bill make their remarks, I would like 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 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, 2007, and the Form 10-Q for the third quarter of 2008.

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 statements are based.

This call is also being webcast on enproindustries.com and a replay of the call will be available on the website. If your questions aren't answered on the call or if you have any follow-up questions, contact me after the call at 704-731-1527. And now I will turn the call over to Steve.

Thank you, Don, and good morning, everyone. Thanks for joining us today. When we look back at 2008 and look forward to 2009, it is clear we are at a very significant juncture. For 2008, we reported record results, made a number of important accomplishments to improve our Company and support our growth.

But clearly in 2009, we are dealing with demand contractions in a broad segment of our markets. We expect these conditions will result in declining sales and income in 2009. Nevertheless, we enter the year on sound footing because of the operational improvements we've achieved over the past several years and the current strength of our balance sheet. These factors allow us to remain focused on our long-term goals of achieving operational excellence and significant growth, while exercising judicious cash management.

At the same time, we are taking aggressive steps to effectively deal with the current economic environment. I'll have more to say about those steps later in the call, after Bill has given you a review of the fourth quarter and before we open the lines for your questions.

But before I turn the call over to Bill, I will make a quick review of our results in 2008. It was our sixth consecutive year of improvement in sales and segment earnings. We got off to a very strong start in 2008, and despite sharp deceleration in demand during the fourth quarter, we recorded record results for the year.

Our sales were up 13% over 2007, organic growth was 5%, even though our heavy-duty truck and automotive markets were under pressure throughout the year and a number of our industrial markets weakened sharply late in the year. The declines in these markets were more than balanced by strong oil and gas markets, steady demand from our power generation markets and growth in our engine business.

Acquisitions contributed growth of 6%. The primary contributors were the Compressor Products International operations acquired in the third quarter of 2007, and both Kaiser Engineering and Air Perfection, which we acquired in the first half of 2008. Favorable or foreign exchange rates contributed growth of about 2%. Gross margins for the year were just under 35%, and almost the same as in 2007, which I think is notable, given the weakening markets we encountered in the last few months of the year.

On a GAAP basis, we recorded a 33% improvement in net income and a 41% improvement in earnings per share. GAAP EPS improved to $2.54 from $1.80. About $0.11 of that improvement was a result of the share repurchases during 2008.

After adjusting our results for asbestos-related expenses and other selected items, income improved about 8%. On an adjusted basis, earnings per share were up 14% to $4.29 from $3.75 a share. The lower share count contributed about 22% of that improvement.

Our 2008 cash flows gave us sufficient liquidity to use about $69 million to repurchase 1.95 million shares, close nine acquisitions at a net cost of about $43 million, make $37 million of net asbestos payments and invest $49 million on capital projects. After those expenditures, which totaled about $200 million, we ended the year with $76 million in cash compared to $129 million at the beginning of the year.

Much of our cash was invested in our future. Our acquisitions expand product lines and introduce us to new industries and geographic markets. They generate about $45 million of annualized sales and give us a larger platform from which to grow. We closed four of these acquisitions in the fourth quarter and we've already closed one more deal in 2009.

Our capital expenditures were focused on efficiency programs that will benefit cost and productivity. The programs include the modernization of Garlock's Palmyra, New York manufacturing center, where in 2008 we opened the second of two new facilities we've built on that site.

Overall, 2008 it was a good year. We continued to grow and to invest, and we believe our accomplishments during the year will serve us well in the future. Now I will turn the call over to Bill to cover our results in the fourth quarter.

Thanks, Steve. Although 2008 got off to a very strong start, conditions changed dramatically late in the year as the global economic slowdown picked up steam. However, despite the slowdown, our sales in the fourth quarter still grew by 5% over the fourth quarter of 2007 to $289 million. Before the effect of foreign exchange, sales actually grew 9%, with 5 points of organic growth and 4 points of growth from acquisitions.

Gross margins were 31.1% in the fourth quarter, down from almost 33% in 2007. A weaker performance in our Engineered Products segment, which I will discuss shortly, was the primary driver behind the decline.

Total SG&A spending was flat in the fourth quarter of 2007, and as a percent of sales, it dropped by 80 basis points to 21.1%.

Net asbestos expenses of $14.8 million declined by half compared to 2007, when we took a significant charge as a result of adjustments to the assumptions we used to estimate the liability.

Operating income was $12 million, an improvement of over $16 million from last year, when we reported an operating loss in the fourth quarter, largely because of the effect of the asbestos charge in 2007.

Our tax rate of 34.5% was in line with our expectations after the third quarter. As we mentioned last quarter, the lower rate comes from the benefit of reductions in foreign statutory tax rates of certain European countries and the reversal of tax reserves following the settlement of an audit. The lower rate translates to an earning benefit of about $0.10 per share.

On the subject of the tax rate, recent structural and organizational changes we've made in our European operations should reduce our effective tax rate for 2009 to less than 30%. In the years that follow, these changes should help drive our effective rate below our historical rate of 35% to 37%, but the rate is not likely to go below 30% again. Of course, the actual rate will depend on a lot of factors, including the level and mix of our domestic and foreign earnings.

Interest expense was the same as a year ago, but interest income declined because of lower investable cash balances in 2008. New accounting rules for convertible debt will increase our annual interest expense in 2009 by about $5 million, although our cash interest payments won't change. A full discussion of the effects of the new rules is contained in our third quarter 10-Q, and will be included in our 2008 10-K when it is filed later this month. We expect the effect of this change in accounting to reduce our 2009 earnings by about $0.15 a share.

Net earnings in the fourth quarter were about $6.1 million, which translated to $0.30 per share fully diluted. That compares to only $0.08 in 2007.

Before asbestos-related expenses and other selected items, we earned about $0.80 a share in the fourth quarter, with a benefit of about $0.05 from our share repurchases. Earnings on this basis were down 14% from the $0.93 we reported last year. The primary factor in the decline is lower earnings in the Engineered Products segment, largely due to its exposure to the OEM markets.

We generated $98 million in cash flows from operating activities in 2008. That was about $7 million less than in 2007. Earnings before interest, taxes, depreciation, amortization, asbestos-related expenses and other selected items improved by about 10% in 2008 to almost $190 million. But the improvement was largely offset by higher working capital levels, which increased on a higher revenue base, and [$12 million] more in net asbestos outflows.

Total payments for asbestos settlements and expenses declined by about $5 million to $110 million in 2008. However, insurance collections also declined, falling to $73 million from $90 million last year. As a result, net asbestos outflows increased $12 million to $37 million.

While we believe total payments will continue to decline, insurance collections will also decline. We estimate the combined effect of lower total payments and reduced insurance collections in 2009 will produce net outflows for asbestos about equal to those we experienced in 2008.

Looking at the balance sheet, you will see that our shareholders' equity declined to just under $400 million at the end of the year. Beside our share repurchase, two other items significantly impacted equity. One was foreign exchange. Foreign currencies weakened considerably relative to the US dollar last year, particularly in the fourth quarter, and the equivalent value of our foreign net assets decreased by about $32 million.

The second item relates to pensions. It will come as no surprise to you that we've experienced a significant deterioration in the funded status of our pension plans in 2008. The combined deficit in our US plans has increased from $12 million at the beginning of the year to $74 million at the end of the year. As a result, we adjusted our balance sheet at year-end to reflect the increase in the deficit for the corresponding charge to equity. Net of tax, that charge amounted to $36 million. You may remember that we closed the US defined benefit plans to most new participants a couple years ago.

Because of the decrease in the funded status of our US pension plan, we currently expect to make a cash contribution to the plan of about $6 million in 2009, and to record between $14 million and $15 million of pension expense for the year. Pension expense in 2008 was $4.8 million. We expect the additional expense to reduce our earnings by about $0.30 a share in 2009.

Now let's take a look at segment results, beginning with the Sealing Products segment. Before the impact of foreign exchange, sales in the segment were up 10% for the quarter. However, weaker foreign exchange rates reduced that by half to give us a net increase of 5%. Segment EBITDA improved by about $3 million, and EBITDA margins improved almost two full points to 17.8%.

Looking at the businesses in this segment, Garlock continued to benefit from activity in upstream oil and gas markets, primarily driven by project work. But activity was higher in other parts of Garlock, as well, and the business's sales, profits and margins were up strongly compared to the fourth quarter of 2007. Garlock also benefited from lower restructuring expenses.

The Kaiser acquisition contributed to the increase in Stemco sales and profits, while Stemco's core markets remain relatively weak. OEM truck and trailer builds and truck ton miles are well below recent historical levels. Having said that, we did see a small increase in Stemco's legacy sales in the fourth quarter.

Of the two smaller businesses in this segment, Garlock Rubber Technologies had a good quarter, with both sales and earnings up strongly. But Plastomer Technologies reported a weaker quarter, with lower sales and slight loss as the business dealt with the effects of a plant consolidation and soft conditions in its key markets.

The weakening global economy had a dramatic effect on results in our Engineered Products segment, especially at GGB Bearing Technology, and to a lesser degree, Quincy Compressor. Acquisitions contributed a small increase to sales, but not enough to offset the effects of foreign exchange and weaker markets. Segment sales were down 4%, while segment EBITDA was down 35%. As a result, EBITDA margins dropped to 11.7% from 17.3%.

GGB sales were off substantially. The automotive side of their business, which accounts for about a third of their sales, weakened considerably in November, when nearly every auto plant in Europe shut down for the rest of the year and when many plants in the US were on extended holiday shutdowns. GGB's industrial business also contracted sharply in the fourth quarter.

At Quincy, sales improved because of increased volume and the addition of Air Perfection, which was acquired late in the second quarter. However, profits and margins were down from a year ago, as material cost increases exceeded selling price increases.

At Compressor Products International, activity levels were about the same as last year, and with a small contribution from acquisitions, sales were up slightly before the negative effect of foreign exchange. However, CPI's markets have recently grown soft, as customers take a cautious approach to spending until they get a better handle on how the economic situation will pan out. That attitude is common across many of our markets.

In the Engine Products and Services segment, sales were 29% higher than in the fourth quarter of 2007, based on increased engine shipments and higher aftermarket parts and service sales. The engines shipped in 2008 were more profitable and segment EBITDA was 30% higher, and EBITDA margins improved to 18.4%.

I hope you will take note that it hasn't been that long since this segment was posting single-digit margins and even losses from time to time. In the fourth quarter of 2008, this segment had the best EBITDA margins in the Company, which is quite a turnaround. With that, I will turn the call back to Steve.

Thanks, Bill. As I mentioned in my opening comments, after several years of solid, stable growth, we are now facing deteriorating conditions across a number of our markets, and we expect both sales and earnings to decrease in 2009. However, our businesses have long histories. They've been through these cycles before. The fact that they remain market leaders, in some cases after more than a century, proves their resilience.

Six weeks into 2009, it is too early to speculate how the year will turn out in our markets. But industry forecasts indicate that most of them will decline, some by only a few percentage points, others as much as 25% or 30%. On a consolidated basis, we expect that will result in an 8% to 10% overall decline in the overall activity levels of our markets for the full year of 2009 compared to the full year of 2008.

Acquisitions we completed in 2008 will provide a small contribution to our full-year sales in 2009, but the larger acquisitions we made last year were included in our results for most of the year.

Lower foreign exchange rates will reduce both sales and earnings, as our foreign sales are translated to US dollars. About 48% of our sales last year were outside the US, mostly in Europe. The current exchange rate for the euro is about 15% below the average rate of 2008.

In light of these circumstances, we are taking aggressive steps to adjust our costs to the current level of demand. We've reduced employment levels, shortened work weeks, frozen salaries, reduced discretionary spending, implemented an aggressive sourcing initiative to control material costs and put other productivity improvements in place. The actions we are taking, most of which are already in place, will likely require $8 million to $10 million of restructuring costs, primarily in the first half of the year. But by the fourth quarter of 2009, we expect to be realizing approximately $15 million to $20 million in annualized savings from these actions.

Market conditions and other restructuring expenses should have the most dramatic affect on our 2009 results in the first half of the year, and especially in the first quarter. We expect a very weak comparison against the first two quarters of 2008, which were both two of the strongest quarters we have ever reported.

This year, facilities shutdowns in a number of industries and delays in spending by many of our customers as they destock inventories and take a wait and see attitude about the economy lead us to expect very low volumes early in the year. However, we believe our circumstances should improve as the year progresses. Activity in our markets is likely to remain low, but we expect demand for our products to increase over the course of the year as our customers begin buying in order to stabilize their inventory levels. We also expect to realize savings from our restructuring programs and cost control as the year progresses.

Our actions and modest growth in demand during 2009 should allow us to maintain gross margins in a rate similar to what we've reported in recent years, although they will likely be below the levels of 2007 and 2008 as a result of the competitive intensity we are experiencing in the market.

As I mentioned in my opening comments, we are fortunate to be standing on solid ground as we deal with the current environment. Our new product programs and the businesses we've acquired in the past couple of years should benefit us. We believe our balance sheet will allow us to take advantage of acquisition opportunities that are likely to occur in the current economy.

Our aftermarket sales are less likely to be impacted to the same degree by the economic downturn than our OEM sales. Although our customers may delay or postpone some activities, we believe they will continue to maintain and repair their facilities and equipment.

Our oil and gas and power generation markets have been important contributors in recent quarters, and activity in those markets remains relatively stable. The outlook is good for our engine business, where the backlog is driven by defense spending rather than the general economic activity.

We have strong brand names, good market shares, and we expect there will be opportunities to gain share as markets soften and the competitive landscape changes. Finally, and perhaps most importantly, we have a strong balance sheet and liquidity sufficient to pursue opportunities to grow and improve our Company in 2009.

There is no doubt these are sobering times, but we are confident that we are on track to deal with them and deliver solid performance in 2009. Thank you for your attention. Now we will open the lines for your questions.

(Operator Instructions) Todd Vencil, Davenport.

Good morning, guys. So the big thing, I guess, that surprised us in this quarter was the margin in Engineered Products. And you talked a bit about, in general, the factors that were behind that, certainly on the demand side, also on the raw materials side.

Could you give us a little more color on sort of what is going on with raw materials and the price-cost balance and how you see that kind of playing out going forward?

Yes. I think late last year and certainly early this year we've seen a number of our raw materials turn south and start to fall in price, some of them significantly. In the Engineered Products segment, in the case of GGB, we actually had some contracts that were in place that played out through the year and into early 2009 that required us to pay higher prices that were bought ahead a couple of months.

But other than that, we've got pretty aggressive sourcing activities underway and we expect our input material costs to be going down throughout the year.

And how is pricing working out? I know you had raised some prices there late last year. Have you lost price, or are you just having trouble kind of getting prices in, or how do you think that is looking?

Well, we were pretty aggressive in the second half of last year in pricing in the market. And we have, for the most part, been able to hold those levels. Obviously, they are under a lot of pressure with the competitive intensity that is going on today.

But our expectation is, as I said in the prepared remarks, that our gross margin levels, we will be able to hold those this year through the combination of pricing discipline and some declining material costs.

Okay. And if you think about the operating margin there in that business, sort of fall into the 6ish percent level from what is a generally sort of mid-teens kind of number, how much of that is what we have just been talking about, which is price versus cost? And how much of it is maybe underutilization of plant, do you think, Steve?

It is tough to say. The Engineered Products segment is composed of GGB Bearing Technology and Quincy Compressor. And of all the businesses we have, GGB is predominately OEM. There is very, very little aftermarket to that business. And that is a business that has 71% or 72% of its activity in Western Europe. So -- and as I think everyone knows, it takes a little bit longer and it is a little bit harder -- actually, it's a lot harder to adjust your cost structure in Western Europe than it is in the United States.

So that business, because of its exposure to the OEM markets -- and also, by the way, a third of its sales are going into the automotive industry worldwide. So because of its automotive exposure, because of its OEM exposure and because of the Western European manufacturing base, that is one that where we have suffered the most on the operating margin line. And we've been working hard to get those costs in line.

And, quite frankly, that is where we've seen also probably the highest level of de-stocking in our customers, as well, because that is obviously polymer metal bearings, and typically our customers there can and have maintained a reasonable level of inventory. So for them to take that down is not that big of a struggle for them.

Now, there is a limit to what they can do, and we are hoping that will stabilize as we go forward in the year. Bill, do you want to add anything to that?

Sure. Let me just add, Todd, again, to give you some perspective. In the case of Quincy, we actually saw unit volume increases year-over-year in the quarter. Again, the issue there was primarily price-cost, and as Steve indicated, we generally will lock in most of our components a quarter to two quarters ahead. So when we saw the precipitous drop in the fourth quarter, we did not -- we aren't able to take advantage.

Having said that, now we are into the new year, we are beginning to see fairly significant benefits on the costing side, as we reprice and readjust it based on the new commodity prices.

On the BGG side, it was a combination of both lower volumes, as well as the price-cost issue. And in that case, we said -- Steve said in his earlier remarks about a third of GGB's business is automotive saleswise, but more than 50% of their production. So in terms of unit volumes. So when the automotive side slowed down as it did, it had a fairly dramatic impact, and you see that in terms of the overhead and the absorption on that side of the business.

So again, our anticipation is that that will recover as the year progresses. But in view of what has happened in the automotive industry, at this point, we are down.

Okay. And so looking at that margin recovery through the year, do you think it's possible to get back to kind of a double-digit margin for the year? Is that sort of in the outlook? Or is that asking you to look too closely into the crystal ball?

I'll give you my own view. Yes, I would hope to be able to get back into double-digit. It just -- a lot depends, as you can well imagine, on the recovery and how quick or soon we are able to realize that. But I would hope that we should be able to get back to double digits.

And this first quarter, do you think that will be more or less a repeat of the fourth quarter, or are you seeing enough price-cost there that is going to help you out with that, so that the first quarter maybe looks a bit better profitability -- or margin-wise?

For Engineered Products?

Yes.

It is going to be a tough quarter. Our volume levels are down. Most of those plants -- the automotive plants shut down in the middle of November and continued right on into 2009. So it is -- it will be a tough quarter.

Okay, and then final question for me. Switching gears to the Garlock business, you mentioned that most of the strength, I guess, or a lot of the strength that you are seeing in that business is on the project side. Can you kind of give some color? Are you talking about new construction in plants there and where are you seeing that?

Well, we have one product line within Garlock that we do quite well with that is selling the gaskets into new oilfield development around the world. And that was particularly robust in 2008, so we benefited from that.

We expect that will have some carryover, because it is not easy to shut those projects down. We -- they don't. They finish them. They just delay starting new ones. So that will probably exist through at least the early part of 2009. And then beyond, that we really don't have visibility to make an accurate forecast.

Great. Thanks for that.

Gary Farber, C.L. King.

I just wanted to confirm a couple things you threw out on the call. Are you saying as far as gross margins for fiscal '09 that they will be less than fiscal '08, but probably better than fiscal '06? Which would put you sort of in the 34% range?

We didn't say that, but that is a reasonable conclusion, Gary.

Okay, and then on cash asbestos, are you saying roughly $37 million is going to be the cash outlay for fiscal '09?

Yes, you got that right. That is about what we saw, because as we drive our total expenditure number down, we have, as I think everybody knows, a declining insurance program going forward. And so we've tried to marry those up so that we can maintain net cash outflows in the same ball park.

And does that mean that expenses will likely mirror -- the expense amount on the income statement will likely mirror what happened in fiscal '08?

Yes. You know, Gary, when we adopted the change in the way we accounted for the asbestos liability, one of the benefits we saw was bringing more stability and removing some of the volatility in the year to year. So the short answer is yes, we expect our expenses to be roughly in the same --.

Okay. And then can you quantify the aggregate amount of foreign currency dollar benefit that you felt in fiscal '08?

Yes, we -- it improved our sales by somewhere in the neighborhood of about -- somewhere between $50 million to $60 million. The euro was, on average for the year, up about 7%.

Right, and you are saying a tax rate of 30% for fiscal '09?

We should be a little bit below 30%. We will have some benefits associated with the change in the European tax structure on organization, so we should be a little bit below 30%.

Okay. And then just so I understand, pricing for your Company as a whole -- I don't know if you want to do it by operating segment -- on a net basis as you see fiscal '09, pricing will be a headwind or sort of neutral to your overall Company?

Our planning assumptions, Gary, going in -- and again, it is obviously a crapshoot -- but our planning assumptions are that we will be able to offset any inflationary cost increases with price increases. So we kind of don't plan a plus or a minus. We plan that we should be able to at least neutralize it. We hope (technical difficulty) better than that, but for planning purposes we assume that will be neutral.

We've also, as Steve alluded to, we've instituted a number of programs and actions already. So we anticipate some actual cost reductions as we go through the year. So on that basis, we would anticipate the price-cost ratio would be positive.

You are quantifying the net savings as $15 million to $20 million in operating expenses in Q4?

No, that is on an annualized basis.

Annualized, okay.

Annualized savings. By the time we get to Q4, that is what the annualized savings ought to be.

Okay. And then just lastly on oil and gas, you are saying that that business sounds relatively stable. Is that a greater than 10% of revenue business for you?

In aggregate. It cuts across a number of our businesses selling into that industry.

It's about 12% or 13% of our total revenue.

If you go to the investor presentation that we have consistently used with all the meetings with you guys and conferences we do and what not, the pie chart in there that indicates the end-use markets that we sell into is relatively stable and accurate year-to-year. It doesn't move that much. So our expectation for '09 will look a lot like it did in '08. So that is out there, Gary, if you want to --.

Right, right. Okay. And then just lastly, organic growth in first half of last year would have been what, like in the 5% range? 5%, 6% range?

Actually, it probably was a little higher than that. I think overall for the year, we were in the 5% to 6% range. We were obviously stronger in the first half of the year than the second half. So it is probably a little higher than that.

Right, okay. All right. Thanks again.

(Multiple speakers) digits, but a little bit higher than that.

Okay. All right. Thank you.

(Operator Instructions) Joe Mondillo, Sidoti & Company.

First off, could you give us a little more color in terms of how the fourth quarter played out through the three months? And then going into the first quarter, a lot of your products are short lead times, and with the severe downturn, I was expecting a little more of a -- for you guys to see a little more in the downturn faster. How is that playing out into the first quarter, and how did you see it play out in the fourth quarter?

Well, I think the best way to answer that is just first of all, you've got to look at it by aftermarket and OEM. If you remember that our Company is about 50-50 OEM and aftermarket, and then there is a slice of the OEM piece that is the engines. Now the Engine segment also has an aftermarket component to it, which did quite well in the fourth quarter and continues to do just fine. So if you take the half of the Company that is OEM and you take the engine piece out of that, that is the part of the business that we felt the brunt of the economic downturn.

Now, you've got to remember part of that -- a small part of that OEM sales is also from our Stemco business, which sells seals into the commercial truck industry. And that sector has been extremely weak from an OEM perspective for now going on a year and a half. It did weaken further in the fourth quarter, but we have already been dealing with extremely weak markets there.

So I think as you think about the whole Company, that is kind of how you got to remember. We've got this pretty strong -- this pretty strong moderating force that is the aftermarket. And while that can and has weakened a little bit, it is nowhere near what we see in the automotive industry and other industrial segments that we are selling OEM business -- to OEM customers.

Do you see that aftermarket business weakening further sequentially? Or is that holding up?

I think with the exception of what Bill indicated earlier, because we had a very strange period of time, I think, broadly in the industrial economy, both in the US and in Europe, where over the holiday period of time, we had many, many of our industrial customers -- and us -- we took extended downtime. Folks -- a lot of the auto guys, they literally shut down late November, early December, and many of them didn't come back up until mid-January. Usually they come up right after the holidays. And we saw other equipment manufacturers and other industrial OEM customers that weren't quite as extreme as the auto guys, but they took a fair bit of downtime over the holidays.

And so we are just -- it is just too early in the year. We are going to have to kind of wait and see how demand shakes out, because during that time period it was just a really difficult time. There was a lot of uncertainty, destocking was happening, folks were just kind of on the sidelines waiting to see what to expect from others.

So I think it was a bit of -- for us, anyway, it was a hard time to try to make any forecasts or views on what even the first half of the year is going to look like. I'm sorry I can't give you a better answer, but that is just what we were dealing with.

Sure. No problem. Secondly, how is your backlog looking in the Engine Products and Services segment?

It is solid for the year.

Do you continue to expect growth in '09 for that segment?

I think -- well, part of it depends on what the aftermarket ends up doing. So far, the aftermarket has held in their relatively well. Our backlog going into the year is $160 million, which is about $20 million higher than it was a year ago.

For that segment?

Yes.

All right. And then lastly -- just one more question. The $0.30 per share of pension expense, do you expect that to be spread evenly over '09, or how is that going to look?

Yes.

Yes, it is pretty much -- yes.

Yes, okay. All right. Thanks a lot, guys.

(Operator Instructions) Rob Young, WM Smith.

Good morning, guys. I was hoping you could just talk a little bit about the oil and gas market. I know there has been --you talked about it in a couple questions. But how reliant that is on the spot commodity prices.

I'm sorry, Rob, could you say that again a little louder?

Definitely. I was hoping that you could comment on the oil and gas market in relation to the spot price for those commodities.

In other words, how our demand varies based on price of oil?

Correct. I mean, I think the last time -- last call you spoke about $40 is kind of a break point in terms of when you actually expect that demand to possibly decline. Is that something that you are still seeing or at the current price, are you still seeing some sufficient demand?

I didn't mean to imply that it kind of made it -- there was any kind of discontinuity at the $40 level. What I meant to -- what I meant to communicate was what we hear from our customers is that in that $40 range number is when new project development starts to lose some economics. And so obviously, if it dips under $40 for a short period of time, it doesn't, but if it stays -- what is it today -- $35 or something? If it stays in that range for an extended period of time, then I think it is only natural to assume that exploration and project development, upstream project development will slow. And we serve that market, so we would feel that.

But again, a big part of our Sealing Products business is aftermarket in both upstream and downstream oil and gas. So it doesn't -- it is not like we see it dry up completely.

Right. Do you actually have the specific numbers on that, on how much there is aftermarket in that particular sector?

In just oil and gas?

Yes.

No, we don't. But in Sealing Products --

Sealing Products in total was about 70 to 30 at the market -- actually, it's larger than that -- it's probably 80/20.

Oh. Okay, great.

That's Sealing Products overall.

Right. Okay, perfect. And then in terms of the Engine Sales segment, how do you see that evolving throughout fiscal year '09? I know it is a typical lumpy business. Is that expected to continue, or will the aftermarket sales in that segment as well tend to smooth it out over the longer period?

Well, let's be clear. The reason it is a lumpy is because of new engine sales and deliveries. And that is a very difficult thing for us to predict quarter-to-quarter, as we've mentioned in previous calls. Because it is not uncommon literally a month before an engine delivery is scheduled for a customer to call and say move that two weeks later or two weeks earlier -- which would put it out of the quarter. It is not like they come back and say we want to delay it six months. But it could easily push it from one quarter -- from late one quarter into early the next quarter. That is why the business is lumpy. The aftermarket is relatively stable throughout the year.

The aftermarket is stable. And on the engine, the pattern seems to have developed over the course of the last two or three years, we've been shipping on average 15, 16 engines a year. For the last two or three years, about half of those have happened in the fourth quarter. That is just the way the Navy had set up their schedule. And it can move quarter to quarter, but that seems to have been the pattern that has developed.

Okay. So relative to last quarter in Q3, when I believe there were actually no physical engine sales, and I think you came in at around $21 million in revenue for that segment, is that a reasonable run rate for the aftermarket portion?

Yes. Generally speaking -- well, you can see the numbers. That is about $150 million business in total, and generally speaking, in a normal year, annualized over the year, it is about 50-50 parts and service and engines. So if you divide that in half, you get $75 million, $80 million, which is four times 20. So the answer is yes.

Okay, great. And then just a couple more relative to the cost reductions that you had. You detailed that on your prepared remarks, and I was just hoping if you could talk about some of the -- just the morale of the employees as a result of your cost-cutting initiatives.

Well, the good news is we've got most of what we are planning to do done. It is only where we have to negotiate different arrangements, primarily in Europe, that we are still working on some of that. And of course in Europe, we have gone to short work in a number of locations.

So I think our employee base, for the most part, has seen what has happened. And I think, quite frankly, guys, when -- I mean, you live in the same world we do. You are watching the news and reading the paper and everything else. I think the people that are still working in our facilities, quite frankly, feel good about having a job. And so we are okay.

There is obviously some unrest in these times in any employee base. But overall, I think at most of our locations, I think our employees understand that we've gotten certainly the vast majority and lion's share of our personnel eliminations behind us. And we are moving on, trying to figure out how we can take share and continue to improve the Company and do the things that have made us successful over the last few years.

That is really what we are focused on at this point. We've got a strong enough balance sheet. We don't have a lot of cash commitments for the Company. So we are still a strong generator of cash flow, and it's our intention to continue to invest in strategic deals that we find. We've already done one, as I mentioned, this year. It is our intent to continue to invest in new product development where it makes sense, and geographic expansion. Obviously, we've got to protect our liquidity.

But we are fine. I mean, we've got our cost position -- cost structure in the right position for the demand, and I am pretty optimistic we are going to be able to take some market share, because a lot of our competitors are a lot weaker than we are.

Let me throw out, Steve, that is a very good point. I think -- we are not shutting down. Conditions may be softening up, but we still see a lot of opportunity out there. To Steve's point, these businesses still remain very good cash generators, and we will continue to invest in, to grow the business. We will continue to look for opportunities that will arise out there on the acquisition front. So we don't plan on just stopping business. We see a lot of opportunity there.

I appreciate that. That's helpful. And then just lastly, really quick, did you comment at all on your CapEx expectations as well as your working capital for fiscal year '09?

Yes, we would expect our capital spending to come down. As we have said in the past, we've had a number of projects ongoing over the last two or three years; it has increased our spending into the kind of mid-to-high 40 range. We would expect next year to drop back down to something -- a more normal range, in the kind of mid-30s or so.

And we also would expect our working capital levels to come down, as well. Partly in response, obviously, to the drop-off inactivity, but we would expect to see some liquidation of working capital levels through -- minor, but some working capital levels come down as well.

Perfect. Thank you very much.

Todd Vencil, Davenport.

The prior questioner actually caught a lot of my questions. DD&A, Bill, do you think pretty similar to the fourth quarter? Is that a good run rate for next year?

Depreciation and amortization.

Oh, I'm sorry. Yes, we will be up a little bit, Todd, just based on some of the projects that we've put in place by the end of the year. But it should be generally in the same neighborhood, yes.

Okay. And not to beat a dead horse on the engines, but do you guys have, just for the first quarter, any comments on that relative to last year or relative to maybe a third of the -- I guess you said you ship 15 or 16 a year, with half of them coming in the fourth quarter. Is it penciling out reasonably to be kind of a third of the rest of that in the first quarter --?

Todd, in our relationship together, before it is all said and done, I am going to get you to think outside of one quarter in the future. All right, buddy?

Absolutely, that's fine.

I would rather not make a prediction on the first quarter of the engine business. I think we've laid it out throughout the year. Because honestly we really don't know on these engine deliveries. So I would rather just let you work with that.

Fair enough. Thanks a lot.

(Operator Instructions) Joe Mondillo, Sidoti & Company.

Just a couple of follow-up questions. First off, the restructuring charges that you are going to take in the first half, is that mostly severance payments?

Yes.

Okay. And then the Palmyra restructuring, are you going to see any benefit from that in '09, or is that a capacity --?

You are talking about the Palmyra modernization program, which --.

My second question, yes.

Yes, Bill really hinted at that. We have invested a lot of capital in Palmyra, really going now back three years, maybe a little more than three years. This year, we completed our second and final new facility on that site. We did a lot of demolition. There is still some demolition to happen and some internal moves to existing facilities. But the capital burn rate will go down substantially, because we've gotten the lion's share of that done.

Now, that has been basically phased in over time. So I don't think there will be any kind of step change noticeable financial. I mean, that has kind of been feathered in since we've started this project, quite frankly. And we opened that new facility kind of just past midyear this year -- or last year.

All right. And then use of cash, last conference call you guys were saying that you were going to use that mostly for acquisitions, and it looked like you did. Is that still the same case going forward?

Yes.

Okay. And then finally, competitors or businesses that you said are faltering that you expect to take market share from, what businesses of yours will you be taking market share -- or what competitors I guess?

I think that was a general statement. I think it, quite frankly, is across a number of segments. We are going into this period of time pretty strong relative to a lot of folks. And so those that might come for sale, I think we will be able to buy them and take overall market share.

Joe, I'm not sure we want to be telling right now which specific customers we plan to be going after.

Yes, right. True. All right. Thanks a lot, guys.

Gentlemen, there are no further questions in queue. We are ready for any closing comments.

Okay. Well, thanks, everyone, for dialing in, and we will talk to you next quarter.

Thank you, everyone. If you, as I said earlier, if you have questions, give me a call, 704-731-1527. And maybe I'll still have a voice. Thanks a lot.

Ladies and gentlemen, this concludes today's conference call. You may now all disconnect.