Enpro Inc (NPO) 2010 Q4 法說會逐字稿

Good morning. My name is Felicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industries fourth-quarter and year-end results 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).

Thank you. Mr. Washington, you may begin your conference.

Thank you Felicia, and good morning, everyone. Welcome to EnPro Industries' quarterly earnings conference call. In just a moment, Steve Macadam, our President and CEO, and Bill Dries, Senior Vice President and CFO, will review the results for the fourth quarter and full year of 2010.

Before we begin, I will remind you that our call is being webcast at EnProIndustries.com, where you will also find the slides accompanying the call this morning. You can access the presentation through the webcast link on our home page. A replay of the call will also be available on the website, as will the slides.

You may hear statements during the course of this call that express a belief, expectation or intention, as well as those that are not historical fact. These statements are forward-looking and involve a number of risks and uncertainties that may cause actual events and results to differ materially from such forward-looking statements. These risks and uncertainties are referenced in the Safe Harbor statement included in our press release and are described in more detail, along with other risks and uncertainties, in our filings with the SEC, including the Form 10-K for the year ended December 31, 2009 and the Form 10-Q for the quarter ended September 30, 2010.

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.

You should also note that EnPro owns a number of direct and indirect subsidiaries. From time to time, we may refer collectively to EnPro and one or more of its subsidiaries as we, or to the businesses, assets, debts or affairs of EnPro or a subsidiary as ours. These and similar references are for convenience only, and should not be construed to change the fact that EnPro and each subsidiary is an independent entity, with separate management, operations, obligations and affairs.

Finally, I want to remind you that comparisons of our financial results for the fourth quarter and full year of 2010 to the comparable periods of 2009 reflect the deconsolidation of Garlock Sealing Technologies LLC, Garrison Litigation Management and their subsidiaries, effective June 5, 2010. GST will be deconsolidated from EnPro's results during the pendency of the Chapter 11 legal proceedings to resolve asbestos claims against it. We refer to this as the Asbestos Claims Resolution Process, or ACRP, and you will hear us use that acronym during the call today.

Accounting rules don't permit the restatement of prior periods to reflect the deconsolidation. However, our earnings release and the slide accompanying today's call contain information that we believe will help you to understand the effect of the deconsolidation on our results.

We will conclude the call with a question-and-answer session after Steve and Bill make their remarks. If your questions aren't answered on the call or if you have follow-up questions, please contact me at 704-731-1527. And with that, I will turn the call over to Steve.

Thank you, Don, and good morning, everyone. The fourth quarter was a nice conclusion to a successful year in which we were able to take advantage of recovering markets and take significant strategic actions that we are confident will benefit the future of our Company. I will spend a few minutes summarizing our progress during the year and then turn the call over to Bill for a detailed review of our financial performance.

A number of important developments occurred during 2010, beginning with the recovery of our markets. As our earnings report indicates, our consolidated sales in 2010 increased by 8% to $865 million, despite the deconsolidation of $105 million of GST sales over the last seven months of the year and flat sales at Fairbanks Morse Engine. About 3 percentage points of the growth came from acquisitions, so the largest portion was a result of steady strengthening across most of our markets and our commercial excellence initiatives, which are well underway and bearing fruit.

Most of our operations, including the deconsolidated operations of GST, reported strong double-digit growth, which was a nice recovery from 2009 and is a very encouraging sign going into 2011. The only exception was Fairbanks Morse, and even though sales didn't grow, the business turned in record profit in 2010 and won some important contracts that secured new engine business for the future.

The profitability of our segments also improved, increasing by 67%. About 25 points of that improvement was from the combination of lower restructuring expenses and acquisitions, so the majority of it came in from increased volumes, our continuous improvement programs and the ongoing benefits of cost reductions we implemented in 2009.

Early in 2010, when we divested Quincy Compressor, we explained our intention to invest the proceeds and acquisitions that would provide opportunities for better returns. In 2010, we closed four such acquisitions, and we've closed two more in 2011, with another one announced yesterday and expecting to close shortly.

When the pending transaction is completed, we will have fully redeployed the proceeds from the Quincy sale to acquire companies at an average multiple of EBITDA more favorable than the multiple we received for Quincy, and we will have increased our presence in markets where we are confident our opportunities for growth and increasing value are much improved.

Certainly the event of 2010 that has the most potential significance to the Company was the decision by GST to pursue the ACRP in order to fund a trust to permanently resolve all current and future asbestos claims against it. We believe a fairly-valued trust can be established through the federal court system and funded with the assets available to GST at a cost that will be less than the cost to GST of resolving claims in the civil court systems of the individual states.

We also believe the ACRP will provide a final and permanent solution to a situation that has drained resources from GST for more than 25 years and would have continued to hamstring GST's growth in the future.

We are pleased that GST's employees, suppliers and customers have been supportive of the decision to embark on the ACRP process, thereby enabling GST to be profitable as it continues to operate its business as usual. We are also pleased that our shareholders have demonstrated confidence and support this decision, and we appreciate the patience and long-term vision that support demonstrates.

While we would prefer that the ACRP could move more quickly and be less expensive to litigate, we do see some progress in the case. We note that the stay of prosecution of asbestos claims has enabled GST to improve its cash position by more than $60 million since the ACRP began. We are confident that GST will continue to build cash as it works its way through the process, and that we will eventually reconsolidate the business with considerable equity impact, although of course there can be no assurance of that outcome.

With that, I will turn the call over to Bill to address our fourth-quarter results.

Thanks, Steve. As Steve said, fourth quarter was a nice conclusion to the year. Our results in the quarter compare more favorably to the fourth quarter of last year than the numbers would seem to indicate. The comparison is obviously impacted by the deconsolidation of GST, but it is also against the strongest quarter of 2009, when our markets had begun to recover and when sales and profits at Fairbanks Morse benefited from substantially higher engine shipments.

We reported sales of $192 million in the quarter, while GST reported additional third-party sales of $45 million. Last year, our consolidated sales of $223 million not only included GST, but also, as I said before, the benefit of much higher engine shipments at Fairbanks Morse, which I will explain later. The effects of foreign exchange and acquisitions on sales were negligible in the comparisons to last year.

In summary, the fourth quarter actually continued the trend of strong year-over-year improvements in sales and earnings we've experienced all year. We saw nice organic growth and increased unit volumes across all of our operations except Fairbanks Morse. I will talk about the segments individually in a moment.

Looking at gross margins, we reported 36.8% in the fourth quarter of 2010, which is a point higher than the fourth quarter of 2009. Adjusted gross margins at GST, which aren't included because of the deconsolidation, were above 40% in the quarter. With the benefit of higher volumes and our continuous improvement programs, we expect to see continued improvement in gross margins in 2011.

Consistent with what we've experienced all year, gross margins benefited from the positive volume leverage on fixed costs at GGB. They also benefited from a more favorable product mix at Fairbanks Morse, as aftermarket activity accounted for a higher proportion of its sales.

Our reported SG&A spending increased by about $3 million to $63.4 million in the fourth quarter of 2010. The increase in spending was tempered by the deconsolidation of GST. SG&A increased across most of our operations and at corporate, as business conditions and activity levels improved. Corporate costs were higher due to a variety of factors, including increased employee compensation-related expenses, largely driven by our improved operating results, and acquisition expenses.

Now turning to our segments. Sealing Products segment sales were down 16%, but again, the comparison is impacted by the deconsolidation of GST. The segment reported just over $88 million in sales, down about $16 million from the fourth quarter of 2009. However, third-party sales at our Sealing Products businesses that were consolidated in both periods actually increased by 25%. GST had more than $45 million of deconsolidated third-party sales in the 2010 fourth quarter as compared to less than $40 million in the fourth quarter of 2009.

Despite the deconsolidation, Sealing Products segment profits improved by 15% to almost $16 million, and the segment's margins improved to 17.9% from 13.1%. The increase was due to significant improvements across the board in the profitability of our operations, as well as to lower restructuring costs in 2010.

The Garlock companies that are included in our consolidated results in both periods experienced increased activity in their aerospace markets, where acquisitions have made a nice contribution, and oil and gas markets, which have been active due to the high level of oil prices. Sales in those companies were up 19% compared to last year and profits increased by almost 50%.

At Stemco, activity in heavy-duty truck markets has continued to increase. Sales there were up over 30% compared to the fourth quarter of 2009, and profits doubled. Sales of Stemco's core products to OEM markets were up almost 50%, while aftermarket sales were up to a lesser extent. Brake Products also made a meaningful contribution to the increase in sales in the quarter.

We remain bullish on the outlook for Stemco, based in part on the current forecast of trailer builds, which continues to rise, and consistent monthly increases in revenue miles over the past 10 months.

The deconsolidated GST operations experienced a 14% increase in third-party sales and an increase of almost 20% in operating profits. Improving markets in the United States, particularly in the steel industry, were the primary drivers of the improvement. A slide in the appendix of this morning's presentation compares GST's performance in the fourth quarter of 2010 to the same period in 2009.

Turning to the Engineered Products segment, sales were up 18% or about $11 million, as both GGB and Compressor Products International reported increases. Segment profits were $1.7 million, slightly higher than a year ago.

At GGB, sales were up 26% before the negative effect of foreign exchange. The growth reflected higher demand from almost all of GGB's markets and in all major regions of the world. With higher volumes, GGB reported a slight profit after losing money in the fourth quarter of 2009. We've seen a nice improvement at GGB over the past few quarters, and even though results are still far below the peaks it reached in 2008, GGB is clearly on the upswing. We are very encouraged by its steady improvement, and we look forward to continued progress in 2011.

At CPI, sales increased 19%, excluding foreign exchange, with acquisitions the primary driver of the business's growth. As we saw throughout the year, CPI's core petrochemical markets remain strong, but activity in their natural gas markets was weak. Profits at CPI were down compared to last year, primarily because of costs associated with the acquisitions, opening new service centers, implementing a global ERP system and spending on other growth initiatives which will enure to the long-term benefit of the business.

Acquisitions and service centers are key elements of CPI's growth strategy. As we integrate the acquisitions and open new service centers, they should bring us significant revenue and profit opportunities.

Turning to the Engine Products and Services segment, sales in the segment were down by 50%. The decline reflects the timing of engine shipments, but is in line with the expectations we shared with you earlier in the year. We shipped one engine in the fourth quarter of 2010 compared to six in the fourth quarter of 2009. As you know, most of Fairbanks's new engine customers are shipbuilders, and it is their schedules that determine when engines are shipped.

Because shipments are based on a timing of customers' needs, they can fluctuate significantly from quarter to quarter, as we saw in 2010, when we had customer requests during the course of the year to both accelerate and delay engine shipments that had originally been scheduled for the fourth quarter. With lower volumes in the fourth quarter, profits and margins declined at Fairbanks. The improvement in gross margins that I mentioned earlier resulted from a more favorable aftermarket mix, although the benefit was more negated by the fact that SG&A expenses did not decline to the same degree as sales.

It is important to look at Fairbanks Morse's performance over a longer period than a single quarter, so I want to call your attention to the full year of 2010. Sales for the year were comparable to the record levels of 2009, while profit margins were even higher than in 2009. Fairbanks Morse's backlog grew substantially, ending the year at almost $250 million, about $100 million higher than it was at the beginning of the year.

In addition, Fairbanks has received a couple of orders for new engines in 2011. One order is for two engines that will be completed in 2011 and used in a petroleum pumping system. The other is to supply two engines to the U.S. Navy's Littoral combat ship program. These engines are scheduled to be delivered in 2012 for installation in the first ship of a 10-ship series that specifies the use of Fairbanks Morse engines.

We reported a significant increase in net interest expense to $9.3 million from $2.7 million a year ago. The increase is principally the interest owed to GST on $227 million of intercompany notes. GST's results reflect the corresponding interest income from these notes. Both the notes and the interest were eliminated in consolidation before the implementation of the ACRP.

GAAP net income in the fourth quarter was $6.3 million compared to a loss of $38.6 million in the fourth quarter of 2009. The loss in 2009 was driven primarily by $94 million of pretax asbestos-related expenses, which included an adjustment to the 10-year estimate of GST's asbestos liability. Adjusted for intercompany interest and other selected items, our net income in the fourth quarter of 2010 was $6.4 million. GST's net income, adjusted for intercompany interest income, ACRP-related expenses and other selected items, was an additional $4.6 million.

In the fourth quarter of 2009, when GST was included in our consolidated results, adjusted net income of $12.3 million. However, Fairbanks Morse's after-tax contribution to adjusted net income in 2009 was about $3.5 million higher than it was in 2010.

Turning to cash flows, our cash balance grew to $219 million at the end of the year. As you know, we've announced three acquisitions so far in 2011, including two that have already closed, which will reduce the balance by about $155 million.

This slide depicts the cash flows for each of EnPro and GST, adjusted to eliminate the intercompany interest and loan payments. The increase in 2010 primarily reflected a combination of strong free cash flows, proceeds from the sale of Quincy, asbestos-related cash flows and outlays for acquisitions. Working capital levels increased in 2010 as we experienced higher activity levels in most of our businesses. Capital spending was roughly equivalent in both years.

Not included in our consolidated cash balance is $87 million of cash at GST. We expect the balance will continue to grow as GST generates cash during the course of the ACRP.

GST stopped paying to defend and settle asbestos claims on June 4, 2010, when the ACRP was initiated. As a result, and as you can see on this slide, it actually collected more insurance proceeds in 2010 than it spent during the year on claims, legal fees and ACRP expenses combined. Conversely, in 2009, GST spent about $40 million more on asbestos claims, fees and expenses than it collected from insurance carriers.

That concludes my review, so I will turn the call back over to Steve.

Thanks, Bill. Looking forward to 2011, we are encouraged by what we see. We expect markets served by our Sealing Products and Engineered Products segments will continue to grow in 2011, although not as quickly as in 2010, when they were recovering from the depths of the recession.

We expect to benefit from increased industrial production, higher auto builds in both the US and in Europe and stronger demand from the heavy-duty truck industry in North America, healthy energy markets worldwide and significant operational and commercial improvements from initiatives underway across the Company.

In our Engine Products and Services segment, we expect sales for the full year to be similar to the $166 million the segment reported in 2010. The current schedule calls for Fairbanks Morse to ship a total of 14 new engines in 2011 compared to 12 that we shipped in 2010, with these shipments occurring all in the first and third quarters. As a result, sales at Fairbank's Morse in those quarters are likely to be substantially higher than in the second and fourth quarters.

While we expect margins at Fairbanks Morse to remain attractive, we anticipate the higher engine shipments will result in a less favorable product mix. In addition, Fairbanks Morse's R&D spending is likely to increase as it ramps up the engineering and testing for technology upgrades designed to improve emissions and efficiency in the large installed base of its engines. The installed base is an attractive target, and we believe upgrade packages will provide significant future aftermarket opportunities for Fairbanks Morse.

We will benefit from acquisitions, as well. Those we've announced so far this year should add approximately $100 million in sales during the year, although the accretion to earnings will be modest, largely due to upfront integration costs. However, as the integration is completed, as we recognize the full benefits of synergies, we are confident their contribution to earnings will grow in the years beyond 2011. We hope to complete additional, albeit somewhat more modest, bolt-on transactions before the year is out.

Our continuous improvement programs are also important to our results. Those programs have enabled us to increase productivity, maintain and improve pricing and manage the supply chain to our advantage, and we are confident we will continue to do so throughout 2011.

We are excited about all that is underway across the Company, and we are optimistic that recovering markets and the improvements we've made in our businesses give us strong momentum for the years ahead. We are off to a very good start in 2011, and we are confident that the year will be continued growth and improvement in our results.

With that, we can open the lines to your questions.

(Operator Instructions) Ned Borland, Hudson Securities.

First question here is on the Engine segment. When you say that margins will reflect higher R&D spending, are we looking at a ballpark that is more like mid-teens despite the increased volume in Q1 and Q3, or are we looking at something else?

I think we should -- we came in for the year a little over 20. I mean, we will be down probably -- around 20 maybe on the high end, maybe high teens.

High teens, okay. All right, so it is not lower than the fourth-quarter level margins; it is just lower on a full-year basis?

Yes, right. That's right.

Okay. All right. I just wanted to clarify that.

Ned, just to caution, obviously, the schedule currently calls for all those engines to ship in the two quarters -- in the first and third quarter, but that may change. So -- in fact, we were supposed to originally ship four engines in the fourth quarter of last year, and one got pulled forward. We shipped one in Q4 and two shipped already this year.

So those can change even four to six weeks before we ship, and sometimes it will flop it from one quarter to the next.

Okay, understood. And then on SG&A, you called out some things that sort of inflated it a little bit in the quarter -- compensation expense, acquisition expense. I guess what were the contributions of those items?

Kind of the unusual -- we had a number of -- they were actually a host of items. There were some kind of end-of-the-year true-ups and a variety of other things. It probably -- we were at $63 million of SG&A for the quarter. We should have been in the mid to higher 50s; so probably $5 million, $6 million.

Okay, and does any of that $5 million to $6 million, does that also include some of the service center opening and the ERP investment that you made for CPI?

Yes. We should -- just kind of to help frame it, our SG&A, in terms of a run rate, we would be -- this is pre the acquisitions -- probably in the mid-50s. And the recent acquisitions we've announced, because they are heavily loaded particularly with amortization -- as you know, there are tangibles and we make conscious decisions to accelerate the write-off of some of these benefits for tax reasons. They probably ought to add in the $5 million to $6 million range.

So I would think that on kind of a normalized quarterly run rate going forward, with the impact of the acquisitions, we should be in the low 60s.

Okay, that is definitely helpful. And then on the organic growth in CPI, it seems like it slowed a little bit sequentially 3Q to 4Q. I seem to remember it was about half of the unit top-line growth in 3Q, and now it was mostly acquisition-driven top-line growth. I guess is it all just the natural gas markets? Is there something going on there?

No, Ned, it's two things. One, that business is always a little bit seasonal, because typically the second and third quarter are the strongest quarters. And so that is one. And the second is we still are seeing some weakness in some of the gas-gathering businesses that that business supports.

But we are still actually pretty bullish on the increased use of gas, natural gas, ethane, et cetera, going into the future. And that is why we are still committed to our growth plan in CPI. We opened three new service centers last year. We will open a couple more this year. And the acquisition that we announced yesterday of Midwestern will go into CPI as well.

Now what Midwestern will help us do up in -- it's also in northwest Canada, where we have a big presence in CPI, but Midwestern is a little bit more diversified in doing work on more than just the gas -- we are more focused -- the existing CPI business is more focused on gas compressors up there, and Midwestern is more diversified in other energy markets. So we are hopeful that will help us and we will be able to have some nice synergy as a result of that.

Okay. And then one final question. Just to the extent that you can comment on it, any updates on the ACRP in the quarter?

Not really. The thing is the thing moves very, very slow. And we actually think, although in my remarks, obviously, we would love to be done with it and put it behind us. But the simple fact of the matter is, as time rolls forward, I believe our leverage in the case increases.

Because the discovery that we are trying to do in the currently already-formed asbestos trust from all the other companies is going to reveal the double-dipping behavior that we have continued to allege and are virtually certain is going on. And the more of that that comes to light, I believe the more leverage that we get in the case.

So we are really in no hurry, unfortunately. And I know the Street would like to hear something different, and really we as a management team. But the fact of the matter is GST is operating just fine. We've had almost no -- well, really none -- no customer disruptions. Employees are going to work. This is -- everybody in the world realizes this is just a pure asbestos-related strategy, because the court -- the US tort system is so flawed in how it deals with this issue. So we had to get in another -- we had to get it in another form, or GST would have been at risk.

So anyway -- but the thing is moving very, very slow. It is a costly thing to litigate. But it is far less costly than us staying in the tort system. So we will release things as they come up. But all in all, there has really been no significant developments. It is just a lot of legal positioning at this point.

Okay. Thank you.

Todd Vencil, Davenport.

Bill, I've got a few for you, if we can start there, and just on the housekeeping. Because we always kind of walk through this and I want to make sure I have it right. As you know, I always try to look at things as if we reconsolidated the GST businesses in addition to looking at it on a GAAP basis. And basically, help -- make sure I got my numbers right.

If I take $0.30 that you reported, the GST operating income looks like it would have been about $0.22 a share and intercompany note was $0.19. There was a $0.24 tax benefit that I want to take out and then there was some other and restructuring that would add back $0.05. So I get to an adjusted number on that basis of about $0.52 or $0.53. Is my math right on that?

Calculator is working well.

Fantastic. Okay, good. And then again, just to make sure I understand what you guys are presenting. There is what I think is a new schedule -- I might have missed it before -- where you talk about cash flow, the last schedule in the press release, with $184.2 million from EnPro pro forma, [$1 million] of cash flow during the year, and then $45.3 million from GST. That GST is not in that pro forma number, correct? The EnPro pro forma?

That's right. It is prepared on the same basis as above, so the EnPro number -- basically, the EnPro number just eliminates the impact of the intercompany interest and loan payments. And so that is what EnPro standalone would have produced for the year.

Okay. So if we were reconsolidated and none of this had ever happened, it would have been almost $230 million of cash flow from the reconsolidated Company.

Calculator is working well again.

Fantastic. So on the sort of SG&A comments that you made before, I wanted to kind of tease it out a little bit of a different way. And I apologize for going over some of the same ground. But if I look at the corporate expenses, the way you guys break them out sort of below the segment line, the expense was $12.4 million, and the quarter had been running more like $8 million.

Can you tell me how much was sort of related to acquisitions or sort of temporary or one-time things in the quarter, of that $12.4 million?

Yes, we had -- I would say most of the delta you see between the 2009 number and the 2010 number were what I would consider -- we would consider to be of kind of a nonrecurring or discrete, unusual nature.

Okay. So maybe if I think of an $8 million to $9 million number per quarter going forward, is that kind of a good --?

Yes, we actually anticipate -- we've been able to do some things -- we actually anticipate being a little lower than that. But basically, the entire delta, as I said, is what we would consider to be kind of an unusual (multiple speakers).

Got it. Perfect. So then turning to -- continuing to follow that thread, turning to the CPI then -- or I'm sorry -- turning to the Engineered Products, and thinking about the gross spending for acquisitions and ERP and you mentioned one other thing -- what was it -- the service centers at CPI, can you tell me about how much that was in the quarter?

Quantified -- in terms of the total, it probably has run $3 million to $4 million, roughly, is my guess. I'm not sure of that, but that is roughly my guess.

Okay.

I'll just give you, Todd, again -- just to give you some perspective, again. on this whole issue of the impact of the acquisition. Steve alluded in his remarks to the fact that the contributions are modest primarily because of some of the growth initiatives.

And when we look at the acquisitions, we won't realize the full benefit of the synergies this year. We've got some upfront costs that we will expend. And the full benefit of the continuous improvement programs really won't be reflected until after this year, as we get in and integrate.

But we just went and looked at CPI in particular. You raised that question, so to kind of give you some sense of the impact of the acquisitions there, we've made a series of acquisitions. And we've intentionally structured them in a way to accelerate the write-off of some of the intangibles over a much shorter period of time, because it will translate into real cash savings and tax benefits. Again, that comes at a cost of -- in the short term anyway -- to earnings.

But we went back, and I asked them just to put together the two most recent acquisitions, the lubrication companies we bought in September of last year and the Midwestern deal we just announced yesterday. And I said just kind of lay out what you would see -- what our operating margins are kind of budgeted for combined between those two entities in 2011. And it -- roughly combined, it is about 5%.

And I said go back and add back these expenses that we've intentionally -- are accelerating for tax purposes. Add those back and what would that give us. And that would get us up to close to 13%.

And then when you add in the fact that -- obviously, when we acquire these companies, because of the nature of the companies, the technology involved, we end up allocating a lot of our purchase price to intangibles that are written off over a period of time, usually a longer period, five to 10 years. But that's new amortization that wasn't there before. I said if we added that back as well, where would that get us. And that would get us to almost 18%.

So you can see that there is a significant impact at CPI. Aside from the costs that we refer to in terms of opening up service centers and the ERP system, there is a significant impact in terms of the costs and what we reflect in our reported results that -- again, primarily driven by the desire to save real-life cash savings, cash taxes.

So I think that although CPI's margins are depressed, we still are very, very optimistic about that business. We see a lot of potential and a lot of promise there. We think ultimately once we get through these -- the expected costs we're spending now that we will revert back to the margins we traditionally have seen in this business, which is high teens.

That's incredibly helpful. Just -- so as I think about that, when you think about the difference between that 5% margin and the 18% margin, one being reported and the other being sort of normalized out all this sort of accelerated expenses, over what kind of timeframe does that -- would that normalize out?

The five to the 13 would normalize out over a two-year time frame. And the 13% to 18%, it is longer -- it is a five- to 10-year time frame.

Okay, got it. And then -- so as I think about -- so let's take that and maybe layer it together for all of Engineered Products, and think about what kind of -- I mean, are we going to be looking -- and believe me, I totally accept the notion that we are going to get back over sort of the longer term to historically high levels of margin.

But as we look at the next, say, couple of years, are we going to see -- would you expect to see maybe a steady growth up to through the high single digits from -- I'm looking at an adjusted number the way I did it of about 5.6% operating margin in that segment this year from breakeven last year. Should we be looking for something in the high teens to maybe 10% by 2012?

I haven't laid it out and quantified it by year, but I see us continuing to grow. Obviously, GGB has come a long way. They lost a substantial amount of money a year ago. GGB, because of its high fixed cost base, levers very well. And so volume works wonders there. And so we continue to get volume at GGB, which, again, our recent experience there has been very encouraging.

So we continue to generate some volume there. We've got a lot of good -- of these continuous improvement initiatives underway there as well. And we get through these early parts with CPI, my own personal view is you may be on the low side, but I don't want to go out on a limb. But we would expect to see a continuation and an improvement.

On the other hand, keep in mind, again, we've been fairly acquisitive. We will continue to be fairly acquisitive. One of CPI's core strategies is to grow through acquisition and new service centers. So we will continue to incur expenses associated with opening. Steve mentioned before that I think we opened three last year. We've got two or three in the hopper for 2011. So we will continue to incur those costs as well.

But clearly, though, as I said, will enure to the long-term benefit of the division and the Company.

It will still presumably be accretive to the bottom line, even if at a lower percentage margin, right?

Oh, yes.

Final sort of category for me. Thinking about the M&A, but more to the point, the balance sheet, you guys are putting a lot -- a fair amount of cash to work, as you note here, in the quarter. And I note that your revolver is up in April.

Can you talk about where we are -- where you are, I guess, on getting that sort of renewed and what kind of size you are looking for? And then relatedly, you mentioned bolt-ons. But I mean, what would be the source of -- if you need to go beyond -- do you think you might need to go beyond cash and go into the revolver, or use some other capital source?

Sure. You're right, Todd. The existing revolver expires in April. We've been actively involved in discussions with the banks. We anticipate renegotiating and turning the revolver over in short order, sometime within the next month or two.

We are and will look to upsize the revolver from the $60 million. We are still not locked in on the number yet, but it will probably be north of $100 million. And obviously, that will be used for short-term cash needs, and to the extent that we get involved in financing any of the smaller acquisitions, that will certainly come into play.

But even having said that, and even having spent $155 million in the first couple of months of this year, our core businesses still generate a fair amount of cash. And it wouldn't surprise me, quite frankly, if we would be able to continue to finance the growth prospects through the balance of this year. As Steve said, we are looking at probably more modest-sized bolt-ons that we've done in the past. I wouldn't be surprised if we would continue to be able to finance those out of our existing cash flow.

Perfect. Thanks a lot.

Todd, we continue to look at -- we continue to look at some deals that are a little bit larger. But quite frankly, the ones that are larger are typically auctions that are run by a bank. And gosh, I don't think we've ever -- I'm pretty sure that since EnPro was founded -- I know this is true since I've been here in the last three years -- we've done 20 some odd deals, and not one of them has been in a competitive process, including the three that we just announced. I mean, the competitive processes that get run tend to be so pricey we've never been able to get there.

Now, that said, if -- but we do still continue to look at them and participate from time to time, and if there were one that were just kind of an out-of-the-park strategic fit, maybe we would pay up for it a little bit, in which case there might be a different scenario. But that is not -- that would be on a purely opportunistic basis.

Our core strategy is to continue to execute bolt-ons that fit very well with the businesses that we have, that provide either new products, new geographic access, new technology, some kind of real synergy, and negotiate them kind of off the radar screen of the competitive process so that we can buy them at a reasonable multiple. And that is how our strategy -- what it has been and that is what it continues to be at this point.

Great. Thanks for that a lot.

Gary Farber, CL King.

Just a couple of questions. I think you had said earlier in the conference when you talked about gross margins, and you thought they would be better this year versus last year.

Yes.

I'm wondering, can you quantify that at all.

Gary, you know we don't provide guidance.

Well, you could always start. I mean, you did -- you are doing above like 37%.

We're at 37% this year, and we feel we will do better than that next year (multiple speakers).

As you know, it is no secret that there is a lot of pressure on commodities and input pricing. Fortunately, we are still in a position where we feel like because of the -- frankly, because of all the work we've done getting better at how we price and understand prices and so forth, that we are able to pass that through.

And we've got a very, very good supply chain team that is able to work on a number of different initiatives and try to contain that, although it is really tough. I mean, we've got global shortages and increased prices in a number of commodities.

So -- but, all in all, when you all roll that together, we are pretty confident we will be able to increase our gross margins this year as well.

And you would think that is mostly happening in the last three quarters -- the first quarter was very high. You would think that is more like (multiple speakers) back-half weighted (multiple speakers).

Quarter-to-quarter comparison? Are you talking (multiple speakers)?

Yes, just sort of wondering. Do you think it is sort of evenly spread out, that that's going to be up every quarter, or you think it is more back-end weighted?

Gosh, I don't have what it was last year in front of me from quarter to quarter.

Typically, you will see that the higher activity quarters will have better margin because of the absorption of the fixed costs. And the first half is usually better than -- in terms of pure activity levels, the first half is normally higher for us than the second half. I don't think you're going to see a dramatic change from quarter to quarter.

Okay, all right. That's very helpful. And then just on some of these acquisitions you've done, particularly the bigger ones, when do you think the operating leverage is going to become pretty apparent in the results? Is it going to be gradual, or is it going to be two or three quarters out it is really going to show up?

I think it will begin to show up in our numbers -- or I think it will begin to show up in our numbers about 12 months from now, really. I mean, we've got a lot of work to do. We are going to actually be consolidating facilities and so forth in some of these. And because of what Bill said, so there are significant upfront costs. And then the way we do the amortization, et cetera.

But I think certainly nine, 12 months from now, we should be done with the heavy lifting of the integration and really starting to see the benefits. I'm pretty confident of that.

These are very nice fits for us, Gary. I mean, I wish we had more time to talk about each one individually that we've just done this year. But -- and our teams, because of the work we've done over the past few years building capability and developing our approach, I mean, we are able to get in and pretty aggressively do the integration work and also get continuous improvement efforts launched in each of the acquired facilities. And that is going to have a big benefit for us.

These are not businesses that we don't know. They are not businesses that we don't -- that don't have a good fit. So we are able to move out pretty quick.

Great. I guess just lastly, historically, I think the peak sort of organic revenue growth rate was sort of like in the high single digits. You've been growing at a very -- well in excess of that. I'm just sort of wondering, when you layer in these acquisitions, do you think you can sort of exceed at some point the historical peak, which sort of seems high single digits? Can we think about the organic growth rate being greater than that, when these acquisitions, which, as you said, pretty much layer right on top of your businesses?

I don't know. That is tough. It is hard to think about -- you and I can talk about this at some point. It is hard to think about the Company as a whole because each business is so different. As you know, the Stemco business, we've had phenomenal growth, but the North American trucking industry was so depressed. But we are still not even -- I don't think we are even midcycle in the trucking industry. We might be approaching midcycle, but we still have a lot of recovery to go in Stemco.

And as we've shared with you guys on a number of times, the acquisitions that we've done and partnerships and joint ventures that we've done have really raised the addressable market as we look at it for the Stemco business, from what had previously been a couple hundred million dollars to four times that, just in terms of the addressable market from a product standpoint of what we do.

So it is hard to even benchmark Stemco from an organic growth standpoint from where it was three or four years ago. It is a different business. We literally -- literally, this year in the plan, I'll bet you 30% to 35% of its sales are going to be from products that we didn't even sell three years ago. So that is Stemco. So you've got the cycle in there.

Then when you look at Garlock in total, right -- remember only half of Garlock is in the ACRP. The half that is not in the ACRP is primarily our high-performance seal business, which has made some significant acquisitions that has helped us grow in the aerospace world. And again, these are products that we didn't even sell and markets that we didn't even have much of a presence in before.

So I am actually very bullish about the potential. But it is hard to know, because we kind of look at it on an individual business basis, the strategy. The only business where the growth is going to be sticky is FME. But quite frankly, you know, we've won some really important contracts. Bill mentioned the backlog. And we continue to participate in these nuclear power bids. We got the first big contract at South Texas.

So we got a lot of good activity going on. We are doing a lot of work in the aftermarket, trying to gain back our natural share there from our installed base, which is extensive. So even at Fairbanks, which will continue to be more lumpy, I'm pretty optimistic about our growth there, too. And that is probably the one where we are the most challenged.

Let me just, one last item, Steve, just to kind of help Gary put the history in perspective. We as a company have grown -- we've averaged 10% growth a year, compounded annual growth, from the 2003 through the 2010 period. About half of that is pure organic growth, about 5 points. The other half is pretty well split evenly between acquisitions and the impact of foreign exchange.

So you alluded to high single digits organic growth before. I mean, over that period of time that six, seven-year period of time, we've averaged about 5%, which is consistent with what we've always said, which we are GDP-plus business. And so that is pretty much in line with -- that is where that comes from.

Right. It sounds like it, though -- and you can correct me if I'm wrong -- it sounds like excluding Engine, though, and excluding the acquisitions, you should be able to grow above that 5% rate in the near term, if you are that early in the recovery in some of these businesses. Is that a fair way to think about how things are going to play out?

I think it's fair.

Okay. And then just the last thing is the tax rate. If you could just give us some thoughts on how to think about the tax rate.

Sure. As you can well imagine and I'm sure you guys can see in the numbers, it bounces around quite a bit. The tax rate on our normalized earnings in 2010 was a little over 30%, about 30.5%, thereabouts. We were able to realize some benefits late in the year, actually, doing some -- repatriating some earnings and taking advantage of the foreign tax credits before the law changes and makes it more difficult to use them.

And we would anticipate the rate to increase next year about 33%, 34% -- probably closer to 34%. Now, we are still working on some things. We may -- we've got a couple of projects going that may come to fruition, may help us to knock that down. But for internal budgeting purposes, we are at 34% for 2011.

Okay, great. Thanks again for all your answers.

Joe Mondillo, Sidoti & Company.

Good morning, guys. I was wondering -- first question just had to do with the acquisitions. And you say modest growth for this year. I was wondering, is that just talking about the first three acquisitions that you made this year, or does that include any of the acquisitions that you -- you made a couple in the second half of last year? I was wondering what --

The comment -- we said we anticipated the acquisitions we've just completed to make a modest contribution. The -- we only made $25 million, $26 million worth of acquisitions in 2010. So yes, they will contribute for sure, but just the sheer size is not going to be a significant number.

Okay.

So, again, we were referring to the three acquisitions we have just closed or just announced. And again, as I've said before, there is a fair amount of upfront integration costs associated with those, and we won't get the full benefit of those synergies. Steve mentioned before, when asked when we thought we would start to see that leverage, and I think sometime in 2012 is the right way to look at it.

Okay. And then on the Engine business, it sounded like you were pretty excited to see how the orders were trending. And you mentioned that the backlog at the end of 2010 was much stronger than 2009. You gave sort of guidance for 2011, but I was wondering at this point where you see the orders, what you've seen -- or where you see the backlog right now. Any idea on what 2012 will look like compared to 2011? Does it look like, with those nuclear orders and the couple orders that you got in the fourth quarter, that 2012 could be a stronger year?

I don't remember off the top of my head the number of engines that would ship in 2012, based on the current orders. Do you, Bill?

Actually, at this point, I think we've got a total engine backlog probably in the mid-30s. As we said before, 14 will go in 2011. Again, you've got to keep in mind, the way a lot of these things are funded, they don't -- you don't -- it may be a 20-year program, but you don't get 20 years' worth of orders. They do it on a year-by-year basis.

Quite frankly, what we have in backlog right now engine-wise for 2012 is almost meaningless, because we anticipate building that backlog throughout 2011 for 2012 delivery.

How long are these lead times? Would there be any engines that are supposed to be shipped in 2013?

Sure. As I said, we've got the mid-30s number of engines in our backlog at the end of the year. 14 will ship in 2011. So the balance of them will be spread over the following two or three years.

Okay (multiple speakers).

Again, that's a small fraction of what we would expect to --.

And Joe, that is not an unusual thing. That is how we are going into every year.

That is a very common pattern, yes.

Sure, sure. Just trying to get an idea what the long-term sort of growth rate looks like. How about --

Bill D (Multiple speakers) pretty excited about Fairbanks and its prospects. I mean, I think that there is a lot of opportunity, particularly on the nuclear side, and we remain very optimistic about.

Yes, because remember, there is --. We are a licensed manufacturer for MAN. And we are allowed to go after two markets with this license. One is the US Government, which is obviously the Navy and the Coast Guard. And then the other is land-based nuclear power facilities in the United States.

Well, for the last 30 years, one of those markets hasn't done a thing, and now they are starting to do some. So that will supplement the market that we have been participating in. So -- and we are pretty well-positioned in that market. So -- and then we are doing a bunch of stuff to try to grow our presence in the aftermarket, and that is beginning to pay off as well.

So again, Fairbanks is kind of a unique business. And as Bill said in his script, and we continue to try to reiterate, you can't really look at it on a quarter-to-quarter basis, because it is less than a $200 million business, and you ship just a few engines one quarter; it might even be the last week of the quarter. So it is just very, very lumpy.

So you really have to look at it over a year and not get too excited when FME has a good quarter or not so good quarter.

Okay, thanks. And then just on the sealing segment, sequentially, you didn't see that seasonal tickdown that we might have expected in the fourth quarter, that sometimes we usually do. I was wondering just if you could talk about the margins in that business. You saw a tickdown in the margin, so was that product mix?

And just looking forward, you know, you were at roughly 18.5% to 13% in the second and third quarter. What are you thinking about margins in 2011 as a whole?

I think that, again, that has been and will continue to be our highest-margin business. With the activity level and the demand we see, I see that we should continue to be able to maintain those high teen margins, or better, depending on the level of volume.

But I think that, again, just the core, the nature of those businesses, they are primarily aftermarket-related. Some of the -- Steve said before, it's too bad we can't get into the details -- or we don't have the time right now, but a couple of these acquisitions we just made, that we've just announced, at Stemco and Garlock, again, just help us further in terms of penetrating and growing the aftermarket.

And so there is no reason to believe that we should not continue to be able to operate that very high teen margin business.

And the margin you saw in the fourth quarter, was that just on a sequential basis? Was that a product mix issue?

Well, we are down -- what -- less than a point, right? I don't have an answer, to be honest with you. It is not something that kind of caught our attention or kind of set any alarm bells off. It is kind of -- we're consistently, as I said, in that 17%, 18%, 19% range. There is nothing of note that drove that.

Okay. Also, with the Garlock, I was wondering if you could tell me what the gross profit and SG&A was, if you have that.

Of GST, of the deconsolidated entity?

Yes, the deconsolidated, yes.

Gross margins are north of 40 -- or about 40. And we disclosed the operating margin in the press release. Don't know if my calculator is working here, but it is probably in the high teens.

Okay. And then what was the asbestos insurance at the end of the year?

What do you mean -- what we collected?

No, what the balance is on the balance sheet.

Well, again, it is not on our balance sheet. Remember -- that's (multiple speakers).

I mean Garlock's balance sheet, sorry.

It's about $170 million.

About $170 million.

Okay. I think that is about it. Thanks a lot.

Todd Vencil, Davenport.

I had a couple quick follow-ups. You have talked about the $100 million of revenues from the three acquisitions so far this year. Can you split those up by segment for me perhaps -- roughly?

Yes, it is probably 80/20, 80 sealing.

Got it. And then can you remind me the number of engines shipped by quarter in 2010? Or tell me, because I don't know.

Well, I tell you what. I'm going to give you that answer. We had two in the first quarter, eight in the second quarter, one in the third quarter and one in the fourth quarter.

And you said that they are all, in 2011, anticipated at this point to be in the first and the third quarters?

That's right.

Split evenly?

Yes, about even, right.

Okay. And can you talk about the average ticket on those things that you are seeing or expecting?

It's hard to -- the average almost doesn't mean anything, Todd. Depending on the engine, the size of the engine, they usually run anywhere between $2 million to $5 million a copy.

Got it. Okay, that's enough to play around with anyway. Thanks a lot.

All right. Thank you, everyone. That will conclude our call this morning. We appreciate your attention. We appreciate your dialing in and your questions. And if you have any follow-ups, please don't hesitate to give me a call -- 704-731-1527. We'll look forward to talking to you next quarter.

Thank you. This concludes today's EnPro Industries fourth-quarter and year-end results conference call. You may now disconnect.