Enpro Inc (NPO) 2011 Q3 法說會逐字稿

Good morning. My name is Tania and I'll be your conference operator today. At this time, I'd like to welcome everybody to the EnPro Industries third quarter 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. Don Washington, Director of Investor Relations, you may begin your conference.

Thank you, Tania, and good morning, everyone and welcome to EnPro Industries' quarterly earnings conference call. In a moment, Steve Macadam, our President and CEO; and Alex Pease, Senior Vice President and CFO will review the results for the third quarter of 2011.

But before we begin, I'll remind you that our call is being webcast at enproindustries.com, where you'll also find our presentation material. You can access presentation through the webcast link on the Investor Relations page of our website. A replay of the call will also be available on the website.

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 risk and uncertainties that may cause actual events and results to differ materially from such forward-looking statements. These risk and uncertainties are referenced in the Safe Harbor statement included in our press release, and are described in more detail, along with other risk and uncertainties in our filings with the SEC, including the Form 10-K for the year ended December 31, 2010 and the 10-Q for the quarter ended June 30, 2011.

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 our financial results for the third quarter of 2010 and 2011 reflect the deconsolidation of Garlock Sealing Technologies, LLC, Garrison Litigation Management and their subsidiaries, effective June 5, 2010. These entities will remain deconsolidated during the pendency of the Chapter 11 legal proceedings to resolve asbestos claims against GST. We refer to this as the asbestos claims resolution process, or ACRP, and you will hear us use that acronym during the call today. GST's results for the third quarter are presented separately in our earnings release and we'll also review them in our remarks this morning.

We'll conclude the call with a question-and-answer session after Steve and Alex make their remarks, and if your questions aren't answered on the call or if you have follow-up questions you can contact me at 704-731-1527.

Now, I'll turn the call to Steve.

Thanks, Don. Good morning, everyone. Thanks for taking the time to dial-in. If you've had a chance to review our results for the third quarter, you know that we've reported significant improvements in sales, EBITDA, and adjusted earnings per share versus a year ago.

On the sales line, we got a boost from acquisitions and we benefited from higher demand from most of our core products. Even though we remain cautious on our outlook due to all the macro uncertainty that's out there, our third quarter demand was relatively stable compared to the second quarter and continues to be across most of our markets.

Sales grew 55% over last year and just under half that growth came from acquisitions, which have brought us new products and improved our access to a number of attractive markets. Of the balance, an important portion came from organic growth in our industrial markets as our efforts in commercial excellence had helped us gain market share and improved pricing. Sales also benefited from higher engine shipments at Fairbanks Morse Engine.

Our segment profits improved by 30% over the third quarter of 2010 as we benefited from higher volumes, acquisitions, both in Sealing and in Engineered Products segments. However, our combined segment profit margin declined primarily because of the sales mix and unusual expenses at Fairbanks Morse.

Expenses associated with acquisitions also affected margins as did a shift in mix as we execute an acquisition strategy that gives us opportunities for growth by increasing our penetration of OEM markets. These acquisitions are creating nice growth opportunities and attractive returns.

Consolidated earnings were $0.66 a share in the quarter compared with $0.24 a share a year ago. Before selected items we earned $16.5 million or $0.76 a share in the third quarter, an improvement of 70% over the $9.6 million or $0.46 a share we earned a year ago on that basis. In addition, GST earned $5.5 million before selected items in the third quarter of 2011 compared to $5.8 million a year ago.

Overall, we're pleased with the quarter. Our markets strengthened, we continue to effectively execute our strategies, our acquisitions made solid contributions, and our performance continued to improve.

As you know, we completed three acquisitions in the quarter, the largest was Tara Technologies, which we combined with our existing high-performance sealing business to form the Technetics Group and expand our access to faster growing markets, as well as our presence in Asia. The new group has products, technology expertise and engineering capabilities to provide services from design to delivery of highly customized full system assemblies for original equipment customers in the semiconductor, oil and gas, aerospace and other high-performance markets. It also has the breadth of sales expertise to fully target each of these highly strategic markets.

The acquisition of PI Bearings brings products and technologies to GGB that complement our bushing block business and create a strong global operation capable of meeting the growing demand to these products in industrial and automotive fluid power applications.

GST's acquisition of the ONE-UP Pump Diaphragm product line from W.L. Gore was not only a significant product line expansion of our existing industrial pump diaphragm business, but also a sign that GST remains a healthy viable business as it seeks a final and permanent resolution of asbestos claims.

Mentioning asbestos, you may have seen our announcement in mid-October regarding a ruling in the Delaware federal court that oversaw -- this is the court that oversaw the reorganizations of numerous asbestos defendants in the early to mid 2000s. That court denied GST's access to records filed in bankruptcy courts identifying claimants against numerous bankrupt asbestos defendants who have already established 524(g) trusts. The judicial records GST seeks are evidence of claimants exposures to the products made by the former defendants.

We believe GST is entitled to have access to that evidence and that the arguments in GST's favor will be compelling upon appeal. We can't predict how long the appeal will take, but we're confident that when these records are made public, they will reveal additional evidence of the double dipping and evidence concealment abuses that we've discussed on several occasions.

Also in the quarter, we were very pleased with a decision of a federal appeals court overturning a 2009 verdict against GST. The Chief Judge in the sixth circuit court of appeals writing for the majority concluded that considering the extensive exposure to thermal insulation products of other manufacturers finding that GST's product was a substantial contributing cause of disease was not supported by the evidence. The Chief Judge commented in her writing -- in her written opinion that -- and I'm quoting here, saying that "Exposure to Garlock gaskets was a substantial cause of the claimants mesothelioma would be akin to saying that one who pours a bucket of water into the ocean has substantially contributed to the ocean's volume."

Obviously, the judge's decision is consistent with GST's long-held position that its products could not have caused any asbestos related disease. It also supports GST's position asserted in its claims resolution process that evidence of exposure to thermal insulation and other dangerous asbestos products is relevant to a determination of liability and should be made available.

Meanwhile in the ACRP process, GST plans to file its plan of reorganization later this month. We believe that this filing will be an important step to move the case into the resolution phase, however we caution that the process still has a ways to go.

With that, I'll turn the call over to Alex.

Thanks, Steve, and good morning, everybody. For the first time since the implementation of the ACRP in June of 2010, the deconsolidation of GST does not -- did not affect year-over-year comparisons of our quarterly consolidated results. So with that we're once again looking at like-for-like results, which should make our discussion this morning a little bit easier to follow.

Consolidated sales were just over $3 million in the quarter, up $106 million or 55% from the third quarter of last year. 27 points of our sales growth came from acquisitions, which contributed about $52 million. And organic growth and higher engine shipments combined to contribute about 24 points of growth, with the remainder coming from foreign exchange.

By geography, organic sales in North America grew at a rate in the high teens excluding FME. In Europe, organic sales grew at a rate in the low teens, which indicates that we've not seen the dramatic slowdown in Europe that many may have feared. As expected, sales were fairly flat when compared to the second quarter.

Gross margins for the quarter dropped to 32.2% compared to 37.6% in the third quarter of last year, primarily because of the unusual expenses and a less profitable mix at FME. Excluding FME from the third quarter of both years, gross margins were 36.1% in 2011 compared to 38.4% in 2010.

As Steve indicated, gross margins also reflect the shift in the profitability of our product mix, expenses associated with acquisitions, and growth related investments. Increases in raw material costs were not significant to the change in gross margins because we're generally able to raise prices as material costs increased.

SG&A expenses were $66.8 million in the third quarter of 2011 compared to $55.8 million last year. As a percentage of sales, SG&A fell to 22% from 29% a year ago as we continue to see the benefits of scale across our businesses. Almost all of the increase in SG&A spending over the last year was related to growth in acquisitions, but SG&A also benefited from unusually low corporate expenses, which were down by about 50% from the third quarter of last year.

Several factors benefited corporate expenses, including a change in incentive compensation related expenses, [as our] share price declined. However, in the fourth quarter, corporate expenses should return to typical levels.

In the first nine months of 2011, EBITDA was almost $125 million, up 42% over the pro forma [EBITDAA] of $88 million in the first nine months of 2010. The 2010 pro forma excludes GST. The improvement reflects a substantial jump in earnings of Sealing Products and Engineered Products as business conditions improved and acquisitions added to our results. Our businesses are also performing well as measured by ROIC, which was just under 20% over the 12-month ending September 30, 2011.

Now let's turn to the performance of our individual segments. Sales in the Sealing Products segment were up 75% over the third quarter of last year. About 51 points or almost $42 million of the increase came from PSI and Rome Tool & Die, which were acquired in the first quarter; and Tara Technologies, which was acquired at the end of July. Increased demand across the segment's market produced a healthy 21 points of organic growth while the remainder came from favorable foreign exchange.

Segment profits improved by 45% with acquisitions contributing about $4 million to the $7 million increase. The shift in mix and just over $3 million of acquisition related expenses including amortization and transaction expenses lead to lower margins compared to a year ago. In addition, we incurred approximately $1 million in expenses for restructuring of facilities consolidation in connection with the acquisitions, which we expect to yield approximately $2 million in annual savings going forward.

Now let me provide some detail on the individual businesses. Sales more than doubled at the consolidated Garlock companies. The acquisition of PSI accounted for more than two-thirds of the growth, but the organic growth rate was almost 35%. Demand improved across all industrial segments, but particularly oil and gas, petrochemical and power generation. We also expect substantial savings from the PSI acquisition, both in Europe where sales have been strong and in North America where we are consolidating facilities.

At the Technetics Group, sales were up about 60% primarily from the contribution of Tara Technologies. The Group's oil and gas business doubled and this, combined with the increased sales into semiconductor and aerospace markets, produced an organic growth rate of over 15%. The Group's profit also improved, although margins were affected by the lower sales of high margin nuclear products and by the sales of products that are pass through from suppliers to end-use customers with small markups. These pass through sales increased with the acquisition of Tara Technologies.

Stemco's sales were up nearly 60% compared to the third quarter of last year with more than 40 points of the increase coming from the sale of new products, including those acquired with Rome Tool & Die. Organic growth was also strong at 20% reflecting continued strength in Stemco's heavy-duty trucking market where OEM demand has been especially good. Stemco's profits were up as the business continues to increase its penetration in markets for breaking products and capture new opportunities for growth. Sequentially, the segment sales were up about $9 million due to the contribution of the Tara acquisition.

In the Engineered Products segment sales were up 33% from a year ago. The acquisitions of the Mid Western companies and PI Bearings combined to contribute growth of 14 points or about $10 million. Organic growth added about 12 points and FX contributed about 7 points. Segment profit more than doubled compared to the third quarter of 2010, driven by higher volumes at GGB and improvement in CPI's performance.

Increased earnings lead segment margins to improve by 2.6 percentage points over the third quarter of 2010, although the increase was limited by $1.2 million in amortization and transaction expenses and other expenses associated with acquisitions. Those expenses totaled about half that much last year. Because of the acquisition related expenses and costs associated with facilities consolidation at CPI, acquisitions did not make a contribution to segment profits.

Within the segment, GGB's sales were up almost 25% with a little over half the increase coming from improvements in demand from general industrial markets, pumps and compressors, construction and agricultural equipment, and automotive markets. The increases were fairly evenly distributed between Europe and North America.

PI Bearings contribute moderately to GGB's sales growth, although its contribution to profits was not yet meaningful. GGB's profits doubled over the third quarter of 2010 and profit margins improved substantially.

CPI's sales were up nearly 50% over the third quarter of last year, primarily because of the acquisition of the Mid Western companies. However CPI reported higher volumes in most regions where it operate, which produced organic growth of more than 10% and an encouraging sign given the low single-digit organic growth we've seen there in recent quarters.

Sales from service centers that have been opened at least a year increased by about 14%. Profit margins increased at CPI despite acquisition related costs, material cost increases, costs associated with consolidating facilities to eliminate redundancies, and investments in the sales and service personnel required to grow that business.

Compared to the second quarter of 2011, sales in the Engineered Products segment declined by about 4%. As is typical of the third quarter, sales at GGB were lower as activity in Europe slowed during August because of vacation schedules.

Sales in the Engine Products and Services segment were $58.8 million, an increase of $20.3 million or 53% over the third quarter of 2010. The increase reflects $3.3 million of sales that were recorded as a result of the segment's implementation of percentage of completion accounting on new engine contracts. But the primary cause of the increase was higher engine shipments. Six engines were shipped in the third quarter of this year, but only one was shipped in the third quarter of last year. Two small engines that we earlier expected to be shipped in Q3 were actually shipped in Q4.

While engine sales increased, aftermarket parts and services sales were below last year when a unique combination of circumstances related to engine repairs on several Navy ships created record levels of aftermarket demand. Aftermarket sales provided a significant benefit to segment profits in 2010 that was not repeated in 2011.

In 2011 third quarter profits in the segment declined and profit margins decreased to 11.1% from 22.9%. Margins were lower as engine sales increased, but the segment's profits were also impacted by other items as Steve mentioned. Those items included the following. A warranty charge related to engines on a class of ships already in service, a loss provision on a contract which included investments made to enhance FME's long-term position in the nuclear power generation market prior to the Fukushima disaster, and the reimbursement of costs associated with the South Texas Nuclear Project which has officially been canceled. The net effect of unusual items was an expense of $2.1 million. However, we will be looking to recover a portion of the warranty cost from other suppliers. The cancellation of the South Texas project reduced FME's backlog by more than $95 million, but the backlog remains healthy at almost $217 million, including more than $80 million booked in the third quarter.

After interest expense of $10.2 million, which includes the interest due to GST as well as interest on borrowings against our revolver, and a tax rate of about 37% on our consolidated results, we reported GAAP net income of $14.2 million or $0.66 a share in the third quarter. That compares to net income $4.9 million or $0.24 a share in the third quarter of last year.

Before I move on, I should note that the tax rate in the third quarter of 2011 reflects our projected effective tax rate for the full year. While we expect the full-year tax rate to be between 32% and 34%, the rate in the third quarter was caused primarily by international earnings being subject to U.S. tax with limited foreign tax credit relief.

Before selected items, net income in the third quarter of 2011 was $16.5 million or $0.76 a share, an improvement of 72% over 2010 when net income calculated on the same basis was $9.6 million or $0.46 a share. These earnings [can] remove the effect of intercompany interest expense which was about $0.20 a share, after tax, in both quarters, and a gain on a guaranteed investment contract that was received in connection with a previously owned business and contributed to the Company's U.S. defined benefit pension plan. The gain on the contract was about $0.08 a share after tax.

GST reported additional third-party sales of $52.6 million in the third quarter, an increase of about 14% over the third quarter for 2010 as demand grew in GST's industrial markets in the United States. GST's operating profit increased to $9.3 million, despite a $1 million increase in an environmental liability for its [Palmyra] facility. As a result of the increase in the liability, GST's margins were down a little over a point to 17.7%. EBITDAA before asbestos-related expenses was a $11.4 million at GST.

GST's net income was $5.5 million, adjusted for the intercompany interest income, the environmental liability and expense associated with the ACRP. That's slightly lower than last year because of a higher tax rate in 2011. GST currently has about $120 million of cash on hand.

We generated $14.2 million of free cash flow in the first nine months of 2011 despite an increase in working capital as activity levels improved. CapEx was slightly ahead of the first nine months of 2010 as we continue to make a number of growth and productivity-related investments in our plans.

Capital spending for the first full year should to be in a range of between $30 million and $35 million.

I'll quickly point out a couple of items on the third quarter balance sheet before I turn the call back to Steve. First, we've spent about $230 million to complete acquisitions this year, which reduced our cash balance to $23 million from $219 million at the beginning of the year. So far, those acquisitions have contributed about a $106 million of sales with operating profits of about $6.7 million. And we expect their performance to improve as we complete their integration into the Company. Second, because our share price fell below the conversion threshold, our convertible debt was reclassified to long-term debt from short-term debt. Long-term debt also reflects borrowings of about $28 million against our revolving credit facility used to complete the acquisition. During the quarter, we increased the size of our revolver by $50 million to $175 million. And although the borrowing base is subject to certain restrictions, we have sufficient liquidity to pursue additional acquisitions and other strategic opportunities.

That concludes my remarks. So, I'll turn the call back over to Steve.

Thanks, Alex. The first nine months of 2011 have been very successful for our Company. We've closed important acquisitions, purchased at good multiples, we've executed across the board on our strategy for enterprise excellence, and we expect to continue realizing the benefits of our work as we complete the year and move into 2012.

Looking specifically to the fourth quarter, our heavy-duty truck markets and industrial markets in North America appear to be relatively stable, as to our global upstream and downstream oil and gas markets. In Europe, we are well aware, as I know you are, about the concerns of the health of the overall economy. In anticipation of a slowdown our customers there have been lowering their growth expectation and demand has slightly slowed. Although we aren't forecasting a significant downturn in Europe, our 2009 restructurings prepare us to deal with one should it occur.

Compared to the fourth quarter of 2010, our consolidated sales in the fourth quarter of 2011 will benefit from businesses acquired during the year, which should contribute sales of approximately $50 million. Organic growth rates in our Sealing Products and Engineered Products segments are likely to be flat as compared to a year ago as we deal with seasonal reductions in demand in certain markets and uncertainty in Europe.

At FME, we expect sales to be somewhat higher than in the fourth quarter of 2010, primarily because of increases in aftermarket parts and service sales.

Our reported segment profit margins are likely to be in line with those reported in the fourth quarter of 2010 as they reflect lower volumes especially in Europe, penetration into OEM markets and acquisition related expenses. Alex mentioned that corporate expenses are likely to be higher in the fourth quarter as we currently anticipate they will be in the $10 million to $11 million range.

Although it's too early to comment in detail about 2012, we're very pleased with our position as we prepare for next year. Our organizational excellence programs have improved efficiencies, captured savings, and we expect to see growing benefits from those programs, and from our acquisitions as we complete their integration and take advantage of the market opportunities that they provide.

In summary, we're confident in our expectations and our ability to perform at a high level as we approach the beginning of 2012. We've taken a number of steps to improve our Company and our ability to grow and we're excited about what we see ahead.

This concludes our prepared remarks and now we'll open the lines for your questions. Operator, would you please instruct everyone how to ask a question.

(Operator Instructions). Fred Buonocore.

Good morning.

Hey, Fred.

Good morning.

Very nice quarter, tremendous top line performance. Just first, Steve, just wanted to check back with you on that guidance that you just presented. It sounds like in your key markets you've seen or you are seeing a stable environment, you mentioned the obvious uncertainty in Europe. I'm just trying to get my arms around the organic growth rates. It sounds like you are saying you don't expect to see much organic growth in Sealing Products and Engineered Products in Q4. I just want to understand that a little bit more if you could shed some light on that?

Yes, I mean, Fred, I got to tell you it's really, it's really tough. As you know, as we've talked to you and everybody else on the call, we have short cycle visibility. And so, a week ago we thought third quarter growth, GDP growth was going to be 0.4% that was the consensus economic prediction, it turned out to be 2.5%. So I don't know if that got -- my guess is that's going to end up being revised down a little bit. But still, so we've put together our forecast in an environment a few weeks ago of a lot of uncertainty and so forth.

The fact of the matter is, today, orders are very stable on a sequential basis with the exception of a little bit of softening sequentially from Garlock in Europe primarily and GGB's Germany order pattern, which is, as you know, GGB is two-thirds Europe and of that probably 60% is Germany. But it hasn't been dramatic. And we haven't actually seen much reduction in the order pattern in the other European countries.

So, gosh, it's just -- I don't want to be too optimistic because with everything that we're reading and hearing and so forth, on the other hand I don't want to be too pessimistic. So, I'm just telling you what I see, but sequentially, and we always see leading into the holidays a little bit of slowness in GGB as the auto industry kind of takes it to normal outages around the year-end and we see a little bit of seasonal effect in Garlock, as there aren't as many turnarounds that happened in that period of time.

And then of course our CPI business in Western Canada tends to slow as the gas patch freezes up in November and December. So, some work curtails. That's just normal stuff though. And it's nothing that's dramatic or would be out of line with what we've seen in the past. So -- but I feel very, very good about the Company. These acquisitions that we've made this year have been fantastic. And the team is doing a great job of integrating them. And the third quarter was [polluted] with a number of one-time acquisition costs, but when we look at the sales that they're bringing home, the pace of improvement that they're showing, the savings that we're going to be able to bring to the bottom line, I'm actually quite encouraged about it.

GGB continues to improve its performance regardless of market conditions. The team is doing a fabulous job, delivering on all of our enterprise excellence work. The Garlock team is doing a great job. Stemco continues to roll along. Stemco has done a fabulous job bringing the brake products group along, the shoes that we're selling from Rome. The volume out of the Rome facility versus a year ago is up almost 50% on a unit volume basis. We've done a good job with price increases and we're finally starting to see -- we got -- year-to-date, we've seen over $10 million of cost increases just on steel, PTFE, bronze powder and specialty metals -- sorry elastomer is just our four big categories. We got over $10 million of cost increases, right, and those have finally now started to level off and we're not seeing that same pace of increase going into the fourth quarter, we're going to see a little bit of relief in some of those categories.

So, look I feel really good about the Company, but I do think we're in a global, relatively weak growth market. I've told the board just earlier this week we had a board meeting, I just told the board, it feels like a weak economy but not another recession. So, anyway that's kind of my thinking.

No, that's very helpful. I appreciate all that color. So, kind of to sum up, it sounds like, as you look at the fourth quarter and given your short visibility that's just inherent in the business. You're kind of taking a baseline to say, well, we know how we're going to get firm incremental acquisition contribution and with the lack of visibility we're just going to take a kind of a baseline and say, we're going to assume no organic growth year-over-year and we're just going to have to see how it goes as the quarter progresses given the uncertain market, is that (multiple speakers)?

Yes. I think that's a very fair statement. And you got to remember the fourth quarter last year was a good quarter. I mean we came into this year very, very strong. (technical difficulty) improved basically almost every month throughout the year just in terms of order pattern.

So, yes, so that's where we are. And quite frankly a lot of that is just driven by the macro uncertainty out there, I mean, (inaudible). The market dropped, what, almost 600 points on Monday and Tuesday.

So, they're looking at something, they're nervous and when they get -- when the markets have that much volatility and nervous, everybody kind of gets nervous, including our customers. So -- but I just told you what we saw in the order pattern. So, people are still ordering and still buying stuff.

Great. Well, that sounds good. And then just as a follow up. Alex, you went through a number of the one-times and that was very helpful. Would it be possible for you kind of just to itemize those again very quickly as to what you see as the key one-times for the things you were able to quantify on the acquisition integration cost, and the one-times at FME? That would be helpful if you could just get a organization of those?

Sure. So, just to make it very clear, let's start with FME because that's the one where there is the most. And so, there is really three primary ones to think about there. So, one, was an increase in a warranty loss provision. The second was a contract loss provision that we took. And then the third was actually a benefit of the South Texas Nuclear Project cancellation. So, the first one I think is fairly self-explanatory.

On the contract loss provision, it's important to note that this was on a series of engines that we bid on as part of our nuclear strategy and we deliberately had a strategy of making an investment in this program as a way to build our credibility and gain a toehold in the nuclear space. And that strategy of course is under review, given the event of the South Texas -- I'm sorry of the Fukushima and the Japan disaster. The third one, you all already know about, but we've told you about the South Texas Project, we were in the contract, we were guaranteed to be compensated for expenses incurred, if at the event that contract got wound down, which it did. And so the net benefit was from winding that down.

Which is really just recovering previously (multiple speakers).

Recovering previous (multiple speakers). So the net of all those was about $2.1 million -- $2 million or so on FME. (inaudible) to ask a question?

No, no, no, I was just acknowledging that I get it.

Okay. The other big one-time expense that we saw was related to a facility consolidation that we had planned and that cost us about $1 million -- $1 million to $1.1 million to consolidate that facility. The actual unexpected benefit of that is that we anticipate around $2 million a year in savings from basically improved automation and improved material flow and better labor efficiency, as a result of that consolidation. And that was something that happened in the Sealing Products segment. So that is the other big one.

There is a number of others, which I didn't actually break out, but there is a number of other acquisition-related expenses related to facility consolidation and retention payments that are also embedded in the results, okay. So that's in the consolidated results. On the GST side, we mentioned a one-time environmental reserve of around $1 million and that was in Palmyra, so you will see that affecting the GST results.

And that's a project that's been underway, Fred, that we just -- the team just realized it's going to cost us basically $1 million more to complete it than we had originally thought. So we took all that in Q3.

Great, thank you.

Okay, so that's -- hopefully that helps you. We obviously have a final level of granularity here, but I think that's enough for the call.

No, certainly very helpful, thank you.

(Operator Instructions). Ian Zaffino.

I know you guys have mentioned in the past that you were [putting through some of] the price increases and a bunch of the announced ones haven't actually been showing up in the numbers and maybe they're just a matter of kind of going back to your organization and trying to ring out what was announced versus what you're actually receiving. So I guess there is some slippage. What have you been doing to address that, have you been successful of doing that, and how does that reconcile with I guess some of the softness that you're seeing in some areas? Thanks.

Well, there actually hasn't been a lot of slippage, Ian. I'm not sure, I mean we've done a nice job on the price increases, you never get everything you want, but I think we've done a nice job. It certainly offset, we've seen, as I mentioned earlier, $10 million of cost increases on materials just in four categories. That in total has been about $15 million of cost inflationary pressures that we've more than compensated for.

So what you saw affecting margins in the segment, the FME is clear, it's all the one timers. And if you take that out and you just look at the margins in Sealing Products and Engineered Products, the decline is really driven primarily by a couple of phenomena, one is these one-time acquisition expenses that are embedded into the third quarter. Some are one-time and that they are done in the third quarter. Others are -- will carry a little bit further, because an example of something like that is many times we will have a consulting arrangement with the owner of one of these small companies that works for us for two years and we will pay them essentially as a consultant over that time period. And those are usually two-year arrangement.

So, we've got some of those embedded in, that would be an example of type of cost that would continue. And we haven't yet seen the full run rate benefits of all of these because we're in the middle of integrating them. There is always costs associated with that as well as facility consolidations and so forth. So, that's one big category. The other category is, many of the acquisitions that we've done have a higher share in the OEM market versus the aftermarket, which as you know carries lower margins. And so has tended to mix down the margins in those two segments. We certainly don't see that as a problem because the returns on investment are great for these acquisitions and they are important growth markets for us. And coupled with our presence in the aftermarket, we see great sales and marketing benefits coming from that.

So, however, in aggregate, it's going to tend to blend down the margins a little bit. So, as we look at it here and obviously we access to a lot more numbers than you do, but as we see it here and we go back and kind of cleanse the results from that and recognize that we've covered over $15 million of year-to-date commodity raw material cost increases. We actually feel pretty good about it.

Okay, thank you very much.

Yes.

(Operator Instructions). [James Gentile].

Good morning, gentlemen. How are you?

Yes.

I just wanted to kind of -- we are not -- we don't have the Q yet, so I don't have a sense of the amortization scheduled roll off. Alex, you were nice enough to give us $3 million of amortization from PSI enrollment, the Sealing Products business an additional $1.2 million at GGB. Are those primarily -- could we kind of just understand maybe two-thirds of the -- I mean how much of that $4.2 million kind of carries forward versus is one-time in nature?

I'm sorry, you've [asked me] with your questions so--

I'm sorry.

Yes. I understand, where you are going. So the -- are you asking specifically James the amortization on -- from different deals or --?

That's correct.

Okay. So, I don't know where you got those numbers by the way?

I thought in the prepared remarks, you said $3 million of amortization in Sealing Products and $1.2 million in Engineered.

No, sorry, acquisitions--

Related expenses.

Yes.

Oh, I got you. Okay. I just kind of used those interchangeably. So taking those numbers into account.

(Multiple speakers) use them very differently.

Yes. Taking those numbers into account, how do we understand the kind of cadence of those expenses going away?

Yes. So, those expenses, and the way we articulated those expenses is basically truly one cost. And when we talk about acquisition --

Okay.

-- Expenses, we're talking about sort of this $1.1 million related to a facility consolidation for example.

Okay, good.

Or transaction related expenses, due to the legal fees in the accounting. And so we try to be very pure in terms of those. And those are truly one-time.

Okay good.

Those are not amortization. (multiple speakers).

Okay, good. So amortization is not included in that.

Right.

Great, great, no, that's very helpful.

So then there is two other buckets of expenses that you will hear us talk about. The first are, for the lack of a better term, semi one-time expenses. And the best example of this would be something like the consulting arrangement or the retention payment to key management team members that we put in place as part of the overall deal structure. Generally speaking, those retention payments are sort of a one-year, two-year time horizon type deal. And for the transactions that we currently have in the pipeline, the run rate is sort of in the $300,000, $400,000 range.

In the pipeline. He means ones that are -- that is already done. Yes.

Okay, so those are expenses that you can expect to roll off in kind of a two-year time horizon. The third bucket is transaction related amortization. And for the quarter the transaction related, the delta in the transaction-related amortization is kind of in the $6 million to $8 million range. Most of that is related to acquisitions.

That is a year-to-date number. If you look at quarter-to-quarter, James, third quarter of this year versus third quarter of last year, the increase in amortization due solely of acquisitions of $2.2 million.

Okay.

And what Alex gave you is the year-to-date number (inaudible) full year forecast.

Gotcha.

Yes, sorry, it is the full year, full year forecast.

I mean I guess the whole reason why I'm asking this question.

Just hold on, hold on, one sec.

Gone on.

One sec. Once sec. So just it's important when we talk about the amortization number that is the number that will be with us for a reasonable period of time.

Okay

Ten years or so.

Right. Long that's good.

So that's why we want to make sure we understand the three different categories.

Good.

Okay.

I mean taking all that into account, I mean, so whatever your -- the amortization piece is just kind of with us and fine if non-cash you will see it through the [EBITDA] and the cash flow, but I mean your tax rate was literally, I don't know, four, four and change percentage points high, that's about $0.05 of hit. You picked up a little bit on the corporate. But I mean we're talking about another kind of $0.25 of kind of inherent earnings power here that folks are just probably just not paying attention to.

So, I guess into next year, following these one-time code acquisition expenses, we have $2 million of savings from consolidation expense [with] basically $6.3 million of one-times. That's including the $2.1 million from the Fairbanks business, is basically going to be recovered next year assuming kind of the business, let's just assume that the business stays flat, overall?

I think you are thinking about it right.

Okay. And then just FME, next quarter, we're going to see a little bit more aftermarket but lower large engine sales, are we expecting margins in the fourth quarter to return to what we've become accustomed to?

I think you would certainly expect margins to be closer to the high teens --

Okay Good.

-- Driven exactly by the mix issue. And keep in mind that the one timers in FME were about explain a significant portion of the compression.

Oh no question about that. But I'm just making sure that our aftermarket mix returns at an okay profit margin?

Yes. We actually booked $30 million of orders in Q3, so actually the orders that we booked aftermarket parts orders that we booked in Q3 were pretty good.

I mean guys don't be afraid to tell us about all these, there is about $1 in earnings that could be uncovered here if we can make the right adjustments but --

We like it when you tell us.

James, we're just trying to deliver (multiple speakers).

I understand.

Sooner or later the world is going to see the power of the Company. So I'm not (multiple speakers).

Can you tell us just once more as we look into 2012, as we see your aggressive acquisition strategy kind of come to fruition or would you expect -- I mean I understand the OEM mixes and certain of the newer businesses that you've acquired, are we going to kind of see a core recovery toward kind of historical segment margins at Sealing and perhaps what is the margin?

And then if I look to Engineered what does the margins look like next year, are we going to kind of see inherent improvement because of pricing and efficiency and no more ERP at CPI, just I guess what those acquisitions look like from a profit perspective purely?

Yes, well, look Sealing, we should be.

Okay

No issue there. With Engineered, a lot of it is -- depends on GGB volume.

Of course.

So, if the markets continue to do well and remain healthy, CPI continues to -- embedded in all this is actually a pretty darn good quarter for CPI. So --

Well, I mean, you're organic growth across the board is spectacular in the quarter relative to what we're comping against?

Yes. And so the things we've talked about in the past would still be valid.

Okay. And then just, there were a couple of quarters where we saw kind of outsized ERP expenses on the CPI side within Engineering. Could you quantify that again for us?

We have spent in that project $2.5 million, which is about half of what's budgeted, because we did have -- the project is expanded because we bought Mid Western and we got to now do it there. We bought the Lubrication group and so forth. So that project is going to continue for another 18 months.

Okay. So we have another $2.5 million of expenses left in the budget and that will probably kind of, we'll see, as we kind of roll through next year?

Yes. That's the approximate number. I'm going off the top of my head.

That's fine.

You will also see, James, next year we'll go live with the ERP implementation at GGB. So --

Oh cool. CPI you suggested in the past certain, very high, quality of the company type operating margin expectations there. When are we going to -- when are we -- is there a step function at CPI?

I don't think it will be a step function, I think it will be a continued increase over time.

Okay, good. Thank you so much.

Thanks, James.

Joe Mondillo.

I think all my questions were covered there. Thanks a lot guys.

Okay.

There are no further questions.

Alright, well, thank you everyone for dialing in. Again if you have questions or follow-ups, please give me a call at 704-731-1527 and we'll look forward to talking to you soon. Thanks.

This concludes today's conference call, you may now disconnect.