Enpro Inc (NPO) 2011 Q4 法說會逐字稿

Good morning. My name is Stephanie 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. (Operator Instructions). Thank you. Don Washington, Director of Investor Relations and Corporate Communications, you may begin your conference.

Well, 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 fourth quarter of 2011. But before we begin, I will remind you that the call is being webcast on EnProIndustries.com, where you'll also find the slides accompanying the call.

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, 2010 and the 10-Q for the quarter ended September 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 those 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 or one or more of its subsidiaries as we or to the businesses, assets, debts or affairs of the EnPro's 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 reflect the deconsolidation of Garlock Sealing Technologies LLC, Garrison Litigation Management and their subsidiaries effective June 5, 2010. These entities have been de-consolidated from EnPro's results and will remain de-consolidated 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 are presented separately in our earnings release.

And now I will turn the call over to Steve who by the way is participating in today's call remotely from Austin, Texas where he is attending the CIMCO annual sales meeting. Steve?

Thanks, Don. Good morning, everyone. The fourth quarter capped off a successful year for EnPro. We made a number of acquisitions in 2011 and saw their full impact on our top-line number (technical difficulty) as they contributed nearly two-thirds of our year-over-year sales growth. Costs associated with consolidating and reorganizing facilities and other measures we are taking to improve the performance of the acquired businesses affected our profitability in the fourth quarter. However, we're making very good progress towards realizing their full value and we expect their performance to improve in 2012.

We also saw broad-based improvements in our markets compared to the fourth quarter of last year, of 2010, and recognized organic growth rate of 16%. Growth was strong across the board. Sales grew in all of our businesses, but we are especially encouraged by the organic growth in our sealing products and engineered products segments. Given the general uneasiness about the economy that prevailed in the news early in the fourth quarter of 2011, the growth rates in those segments gives us an increasing level of confidence for 2012.

If you are following along with our slide presentation, slide 4 gives you an insight into how our pro forma results have improved over the past three years, adjusted for the deconsolidation of GST by removing it from the previous year's numbers, as well. Since 2009, when the recession was at its worst, our pro forma sales are up 65% or more than $425 million. About [$195] million of that increase came from acquisitions while the majority came from organic growth as our markets strengthened and as we gained share, sharpened our pricing strategy and introduced new products.

With the benefits of increased volumes and the success of our operating and commercial strategies, measures of profitability also improved. Segment profits and adjusted earnings per share nearly tripled over the past three years and our EBITDA more than doubled despite the fact that we have yet to realize the full benefit of acquisitions on our earnings. Although they aren't shown on the slides, GST's results have improved with equal strength. Pro forma sales at GST were up nearly 45% from 2009. Operating income is up nearly 130%. Adjusted net income has improved by more than 90% and EBITDA-A is up more than 80%. In short we have recovered nicely from the recession and we are confident there is more improvement to come.

Looking at our acquisition activity in 2011 we invested a total of about $240 million to buy businesses that bring us access to new, faster-growing markets or to market segments where we were not present or underrepresented. In many cases they also expand our footprint in the fast-growing geographic markets such as Singapore and Southeast Asia as well as in established markets in North America and Europe. Altogether, the deals we closed last year have over $200 million in annualized sales with a contribution to profits that we are confident will grow as these businesses are fully integrated into our enterprise excellence programs and demand improves in their markets.

Turning to the ACRP, I want to spend a few minutes updating you on events we have previewed for you in last quarter's call.

Late last year GST proposed a plan of reorganization which would provide approximately $250 million to permanently resolve all present and future asbestos claims against GST. To expedite approval of a plan and move the ACRP forward, GST asked the bankruptcy court to set a schedule for a trial to estimate GST's aggregate legal liability. At the trial, GST intends to demonstrate that the proposed amount in the plan substantially exceeds any reasonable estimate of GST's actual liability.

The judge was initially skeptical about the plan but he stated that GST would have an opportunity to convince him to approve it. The plan certainly has very unique provisions compared to other previous asbestos-related plans but GST is a very different defendant compared to defendants in prior cases. And its products are very different products compared to the other products.

In other cases, reorganization plans came about through settlements between the defendants and asbestos claimants. GST hopes that it will also reach a settlement, but if it doesn't, we are confident that the innovative plan GST has proposed is solidly rooted in the bankruptcy code and ultimately can be confirmed. At a minimum, the plan demonstrates that GST is willing to pay a significant sum to resolve asbestos claims despite its strong conviction that the relevant scientific evidence will demonstrate conclusively that its products were safe.

Last month the judge also learned about disappointing response rates to court-approved questionnaires sent to GST's mesothelioma claimants. Many of these questionnaires were either not returned or returned incomplete. And the judge ordered claimants who had not fully complied to supply the requested information. He also directed GST and claimant representatives to file briefs regarding their proposed approaches to estimation and he specifically stated that at estimation he intends to allow GST to present its science-based causation case. We believe that accurate responses to the questionnaires and GST's compelling presentation of the science of asbestos exposure will combine to demonstrate GST's position convincingly.

Most people asserting claims against GST were not exposed to GST's products at all. And those who did a work around GST's products were injured not by GST's products but instead by exposure to friable asbestos insulation and other dangerous products produced by other companies. We are confident that at the conclusion of the estimation trial, a court will determine that as a matter of law the company's products could not have been a substantial contributing cause of any asbestos-related disease, the same conclusion reached last year by the United States Court of Appeals for the Sixth Circuit.

We discussed that decision in our last conference call, but I want to repeat what the Chief Justice wrote when the court reversed a jury verdict against Garlock. And I quote, saying that exposure to 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.

We will continue to keep you updated on the progress in GST's case. We believe that GST will ultimately be re-consolidated into EnPro with significant value intact and will remain an important part of our company for the future.

Now I will turn the call over to Alex.

Thanks, Steve. As Steve mentioned, we had strong year-over-year sales growth in the fourth quarter. Sales were up $80 million from the fourth quarter of 2010. About $50 million of the increase came from acquisitions, which was in line with our expectations going into the quarter but organic growth was better than expected.

On a percentage basis, sales were up 42% with 26 points coming from acquisitions and 16 points coming from organic factors. Organic growth was broad-based across most of our markets and in all global regions. Sales were up 18% in North America and about 4% in Europe. As you recall, our outlook for the fourth quarter was fairly cautious so we're pleased to see those kinds of results.

I'll discuss GST's results separately and in more detail but you should note fourth-quarter results there were strong as well, with a 20% sales increase and operating profits almost double the fourth quarter of 2010.

Our sequential results showed a decline in sales from the third quarter of about 10% which was slightly better than our expectations. In our sealing products and engineered products segment sales were down relatively modestly compared to Q3 with organic declines of 3% and 6%, respectively. That's slightly better than we expected going into the quarter. As we anticipated, engine shipments were lower in Q4 than in Q3 and sales in the Engine Products and Services segment were down 31%.

Our gross margins for the quarter were 32.8% compared to 36.8% in the fourth quarter of last year. The margin reflects costs associated with the increase of acquisitions and other growth-related investments as well as our penetration of OEM markets which are core to our growth strategies at Stemco and the Technetics Group. While OEM margins are less than the margins we are able to achieve in the aftermarket the OEM businesses that we have acquired are healthy and attractive and we expect their performance to improve across the board.

On a sequential basis, gross margins were slightly higher than in the third quarter which is encouraging given the fact that mix is usually less profitable and margins typically compress from Q3 to Q4.

SG&A expenses were $74.7 million in the fourth quarter of 2011, a little more than $11 million higher than last year. The increase in spending came almost entirely from companies we acquired during 2011. As a percentage of sales SG&A expenses dropped to 27.5% from 33.1% a year ago as sales growth gave us better leverage on our fixed costs.

EBITDA reached $153 million in 2011, up 45% over 2010 when pro forma EBITDA, excluding GST, was $105 million. As a percent of third-party sales, EBITDA was 13.9% in 2011 compared to 13.3% of pro forma sales in 2010. Stronger markets, acquisitions and improvements in both sealing products and engineered product segments contributed to the increase. Our business has continued to provide good returns with ROIC reaching 20.5% for the full year of 2011, 3 points better than in 2010.

Now let's turn to the performance of our individual segments. Compared to the fourth quarter of 2010, sales in the sealing products segment were up $51 million or 58%. Acquisitions contributed 45 points or $40 million of the increase while the remaining 13 points reflect increased volumes and better pricing. The effect of foreign exchange on the segment sales was negligible. The segment's profits were just less than $15 million as the benefit of higher volumes and price increases were offset by several factors.

Expenses increased as we added resources to support the segment's growth. Material costs and other operating costs also increased. The product mix reflected higher OEM sales as we execute on our growth strategies for Stemco and Technetics.

Finally, acquisition-related costs, including restructuring and asset consolidations, were almost $3.5 million with amortization making up $2.5 million of the total.

Now let me provide some detail on the individual businesses. At the consolidated Garlock companies, sales were up almost 80% with organic growth of nearly 20% and the balance coming from the PSI acquisition. Activity increased across most of the business's markets, especially in Asia and North America. Although profits and margins were about the same at operations that were included in the fourth quarters of both years, expenses associated with the acquisition of PSI resulted in lower profits in the fourth quarter of 2011. These expenses included the consolidation and relocation of PSI manufacturing operations to other EnPro facilities where we'll be able to improve efficiencies.

In the Technetics Group, sales were up about 50%. Most of the growth came from the acquisition of Tara Technologies in the third quarter of 2011 but sales grew 6% organically, driven by demand for products (technical difficulty) power generation, aerospace, oil and gas, and other high-performance markets. Tara made a small contribution to profits.

Technetics profits climbed in the fourth quarter of 2010 because of lower sales of high-margin products into the nuclear power markets and the addition of Tara's pass-through sales.

Technetics nuclear order book is currently very strong so the change in nuclear sales from the fourth quarter of 2010 appears to be a matter of timing.

Stemco sales were up more than 45% compared to the fourth quarter of 2010 and while more than 30 points were from the acquisition of Rome Tool & Die, the business reported organic growth of 15% as OEM markets grew and sales of brake products increased.

Profits at Stemco were about the same as a year ago while margins reflected the increase in brake product sales and expenses associated with the Rome acquisition.

Compared to earlier quarters of 2011, Stemco's margins were also impacted by a seasonal shift in sales from aftermarket breaking products breaking braking products to OEM braking products, which is typical in latter part of the year. As we have said in the past, we are encouraged by increases in activity at Stemco, which we feel is an indication of good things to come in 2012.

In the Engineered Products segment, sales were up 19% from a year ago to just over $92 million. Acquisitions accounted for growth of 12% over the fourth quarter of 2010 as the Midwestern Companies and PI Bearings combined contribute just under $10 million in sales. After a modest negative effect from foreign exchange, the segment reported an organic growth rate of 8%.

Segment profit improved to $3.1 million as the segment's core businesses strengthened. Acquisition-related costs in the fourth quarter were about $600,000, mostly reflecting amortization expenses.

GGB's sales were up about 8% compared to the fourth quarter of 2010 with about half of the increase coming from the acquisition of PI Bearings and half from organic improvements.

It's worth noting that GGB's organic growth came against a strong fourth quarter in 2010 when demand was recovering from the dramatic destocking that occurred in 2009. GGB's profitability improved year over year and GGB's market segments are generally showing positive trends, even though our European customers appear to be proceeding cautiously.

At CPI, sales were up nearly 40% over the fourth quarter of 2010. The acquisition of the Mid Western Companies in the first quarter of 2011 accounted for nearly 25 points of the increase but for the third consecutive quarter we saw healthy year-over-year increases in volume at operations that have been part of the CPI for over a year. Organic growth was 14% in the quarter and CPI continues to report higher volumes in most regions where it operates.

Although fourth-quarter margins were higher in 2011 than in 2010 at both GGB and CPI, they remain below our targets for those businesses. At GGB we made a number of operational improvements and we are confident that the performance of the business will continue to improve and margins will grow as volumes return.

At CPI, the current price of natural gas and our geographic expansion into western Canada are both affecting margins. Activity in CPI's natural gas markets is low because weak natural gas prices are leading producers to cap wells while they wait for prices to improve. In addition, CPI's expansion into western Canada has resulted in duplication of facilities and other inefficiencies that we are working to resolve. Resolution of these issues will require additional investments in 2012. But long term, we are confident the natural gas market has substantial potential and that CPI will capitalize on it. And we're also confident CPI's performance will improve in the near term regardless of natural gas prices.

Sales at Fairbanks Morse Engine were $40.3 million, an increase of 52% or about $14 million over the fourth quarter of 2010. Higher parts and service revenue was responsible for just more than half of the increase with the remainder coming from the use of percentage of completion accounting for new engine sales, which began in the third quarter of 2011.

While the segment shipped two engines in the fourth quarter of 2011 compared to one in the fourth quarter of 2010, these were small commercial engines and their combined value was slightly less than the value of engines shipped in 2010.

FME's profits improved to $7.3 million in the fourth quarter of 2011, an 83% increase over 2010. Higher aftermarket parts and service sales, which typically are more profitable, helped raise the segment's profit margins to 18.1% from 15% a year ago. The backlog at SME stood at $209 million at the end of the quarter compared to $248 million a year ago when the backlog included more than $95 million for the South Texas nuclear project, which was canceled following the Fukushima disaster in Japan.

After net interest expense of $10.6 million which includes interest on our convertible debt and the interest due to GST, as well as a small tax benefit, net income in the fourth quarter was $2.6 million or $0.12 a share. Those earnings compare to net income of $6.3 million or $0.30 a share in the fourth quarter of 2010 when there was a tax benefit of $9.5 million. The tax benefit I'm referring to in the fourth quarter of both years was recorded in order to adjust the full-year tax rate.

Before selected items net income in the fourth quarter of 2011 was $7.7 million or $0.37 a share, up $0.07 a share over the fourth quarter of 2010 when income before selected items was $6.4 million or $0.30 a share. These earnings are calculated to remove the effect of items including the intercompany interest expense due to GST, which in the fourth quarter of 2011 was about $0.21 a share after tax, compared to $0.19 a share in the fourth quarter of 2010. The effect of these items on our earnings in both quarters are presented in a schedule attached to our press release.

Our consolidated operations generated cash of $78.6 million in 2011. And even though sales grew by over $240 million the increase in working capital was actually lower than 2011 than in 2010. Capital spending was $31.5 million in 2011, nearly $10 million higher than in 2010 as we made investments to accelerate growth and improve productivity. We spent about $230 million in acquisitions in 2011, as Steve mentioned earlier, not including the acquisition made by GST.

After completing acquisitions in 2011 our cash balance at the end of the year was about $31 million compared to about $219 million at the end of 2010 when we were just beginning to reinvest the proceeds from the sale of Quincy Compressor. Our current cash balance is sufficient to meet our near-term needs for capital but we also have capacity to drive additional funds from our revolving credit facility should we need them.

With that review of our consolidated results, let's take a look at the de-consolidated results of GST. As I mentioned earlier, GST's third-party sales increased by 20% over the fourth quarter of 2010 and reached $54.1 million. Sales benefited from healthy demand in GST's industrial markets in the United States and with higher volumes in price optimization programs, profits improved to $11.3 million, nearly double a year ago when profits were $5.9 million. As a percentage of sales, profit increased to 20.9% from 13.1% in the fourth quarter of 2010.

GST's net income was $7.4 million in the fourth quarter of 2011 after adjusting for intercompany interest income and expenses associated with the ACRP. That's an improvement of about 51% over 2010 when adjusted net income was $4.6 million.

For the full year of 2011 GST's sales increased by about 17% to $214.4 million. Operating profits improved by more than 45% to $44.8 million and adjusted net income was up 40% to $28.8 million. GST generated EBITDA-A of $50.1 million in 2011, and completed the year with a cash balance of $126 million.

That concludes my financial review, so I'll turn the call back to Steve for a review of our outlook and closing remarks.

Okay. Thanks, Alex. And listen everybody, before we turn the call over to your questions I want to just take a little time here to just kind of summarize the year and how I see the company now and then give you a little bit on our outlook for 2012.

So, as I step back and just reflect on 2011, I think it was a really successful year for our company. If you just look at the entire family of EnPro companies, irregardless of the accounting required by the ACRP and just look at all the assets that we've had over the years, here's how I see it.

Sales in 2011 were up $337 million over 2010 on a combined total family of company basis. That's a 35% increase in sales. EBITDA, pre-asbestos EBITDA, was up $62.2 million which is a 44% improvement in 2011 over 2010.

We did seven significant acquisitions, deploying $240 million of capital, which of course includes the acquisition within GST. That's over 5 times our average investment in acquisitions over the past several years. All of these acquisitions are important strategic fits for the businesses that we have. And in aggregate they were purchased at attractive multiples of less than 7.5 times trailing EBITDA and have margin potential similar to EnPro's average EBITDA margins on a run rate basis as we capture all the synergies.

We obviously completed all of these transactions without needing to raise any new capital, so we did it with the proceeds of Quincy as well as our own internal cash generated and essentially ended the year in a positive net cash position with an expanded revolver.

Our teams have worked hard throughout the year. These acquisitions brought 14 new facilities to us and 560 new employees so those don't get integrated without a lot of work. And I want to take this opportunity to thank -- recognize our success and thank the hard work and dedication of our employees around the world.

I'll also readily admit to you that in a few of these integration cases, we had our hands full. We had a lot of improvement work to do, in some cases more than we even thought in the due diligence period. But we've done that extremely effectively. It in some cases has required a little bit more capital and a little bit more operating expense and a lot more human capital resources. Our team has really, really stepped up in a positive way to work those integrations.

So we're in good shape going into 2012. There's more work to do but we're a stronger and more profitable company today than we were a year ago by a wide margin. And this gives me great confidence going into 2012.

So we currently expect 2012 to bring moderate improvements in industrial production in North America compared to last year. We think growth in Europe is going to be flat to slightly higher than last year. Under these conditions, our consolidated sales should increase by more than 10% over 2011. Sales will benefit from the growth in our sealing products and engineered products markets, a full year's contribution from all our acquisitions, along with market share gains from our commercial excellence programs.

We also expect sales to grow to record levels in our Engine Products and Services segment due to a combination of both a percentage completion accounting and organic growth.

In 2012 we expect our consolidated segment profits and profit margins to improve over 2011 as they benefit from higher volumes, increases in productivity, greater contributions from acquisitions and improvements in price, which will help us offset inflationary cost increases.

Our reported margins will continue to reflect our growth in the OEM markets and some more cost associated with the integration of our acquisitions, especially during the first half of the year. Based on these factors we currently expect the margin on our total segment profits for the year of 2012 to be in the low to mid teens but above the 12.8% we reported in 2011.

Comparisons of our consolidated results in the first quarter of 2012 to the first quarter of 2011 should reflect improving demand in sealing products and engineered products, as well as seasonal activity increases and a larger contribution from our 2011 acquisitions as they contribute to our consolidated results for the full quarter, and a modest increase in sales at Fairbanks Morse Engine.

The segment profits and profit margins that we report in the first quarter will continue to reflect higher integration costs in the sealing products segment and somewhat lower margins at FME as mix shifts to increase new engine sales.

We're excited about our position as we begin 2012 and about the opportunities that lie ahead. We're committed to capturing every opportunity we see for improvement in our performance and are looking forward to another very good year. So with that we'll open your lines up for questions.

(Operator Instructions). Jeff Hammond, KeyBanc Capital Markets.

If you could just -- just on the one-time items, or the acquisition-related costs, how much of this $3.5 million and $0.6 million in the two segments would you characterize as one-time versus recurring amortization?

Yes, Alex, why don't you run down both for the fourth quarter as Jeff asked and the full year for acquisition -- one-time acquisition expenses broken into both amortization and OpEx?

Sure. So for 2011, we basically had acquisition-related expenses of about $16 million. About $8.8 million of that was amortization related and about $7.2 million of that were other costs.

In Q4, that number breaks down to about $3 million of amortization and about $1.2 million in other costs. Now the way to think about it -- so amortization obviously will be with us for quite some time.

On the other costs, the way to think about that is in two buckets. One would be retention payments that we pay to the former owners to keep them with the company for generally a period of one to two years following the deal. The other would be costs related to the consolidation of facilities, increased legal expenses and so forth.

So in the fourth quarter, the vast majority of the other costs that I'm referring to would be retention-related payments, although there were some costs associated with the facility movement of PSI from Houston to a number of other facilities. And then the remainder would be the retention payments that I'm talking about. Does that help?

Yes. So this $16 million, what does that number look like in 2012? You keep all the $8.8 million amortization and then, what of the $7.2 million goes away?

So I don't have that number off the top of my head. I would say that probably call it somewhere between $5.5 million to $6 million of the $7.2 million goes away. And then there's you know probably around $1 million in retention payments that would be with us through 2012 and then those would probably roll off in 2013. Does that help?

Yes. That's helpful. And then just on -- I think the biggest variance in my model were the sealing margins. And you talked about a number of things including these acquisition-related costs. But I just wanted to get a better sense of where margins came in versus your expectations -- particularly given the much better sales than you were predicting. And maybe a little bit more color on some of these SG&A and higher material costs and any kind of surprises within the margins.

Alex, let me put some color on the margin question and you can handle the rest of it. But Jeff, here's what's happened in the fourth quarter within sealing.

So you have a bunch of effects that I need to break down for each of the three businesses within the segments. Stemco, then Garlock, then Technetics.

So within Stemco, it's about what we expected. We thought we might do a little bit better in brakes but look, what happens at the end of the year, one, brakes slow down and two, it's almost all OEM business. The brake season mirrors to some extent the Stemco core business, oil seal cyclicality which is strong in Q2 and Q3. But the brake seasonality is more extreme and it shifts dramatically to OEM in the fall -- so -- or in the winter fourth-quarter time period. So we'll see that continuing into Q1.

And we still have operating improvement work to do in Rome. I mean that was something we bought about a year ago and I think we've talked about this in previous calls, but you know we had a lot of our TCV operations work to do there and it's ongoing. So, you got that effect coming in from Stemco.

Then, in Garlock, we had the PSI acquisition. And what we ended up doing actually ahead of schedule, you all didn't know our original schedule, but we anticipated from the beginning of the transaction that we were going to close the Houston facility for PSI and take that operation and move it into an existing -- one or more existing facilities within Garlock. Our original timeframe to do that was 18 months. But because the facility needed so much improvement in productivity and help -- it just was not a well-run facility -- we accelerated that. And so that move started to take place in Q4, again, well ahead of our internal schedule and continued into the first few weeks, well, really through January.

And we took the product lines that were made in PSI and moved the equipment and operations for part of those product lines into our Pikotek facility in Denver. And the rest of it we moved into a facility that's located in Houston that had to have a fair bit of retrofit and equipment moves to get ready to accept that new equipment.

So we had a ton of disruption in -- both in PSI and in the core Garlock business in Q4 as we executed on that move. So that is -- we tried to capture some of that in Alex's numbers, but quite frankly it's a very difficult to capture all the effects of that because that's a lot of activity for the team to try to absorb and get done in a fairly short period of time.

Then the third is within Technetics, obviously, we bought Tara. In the fall, the semiconductor business which is a decent margin portion of their business was a little -- was slow as you know. But the good news is, we don't actually -- three months ago we were worried about that being pretty rough in 2012 as well but that has stabilized. And we are now thinking if you follow any of the Semicon trade material we're thinking that 2012 will not be as good as 2011, but certainly not as much of a correction that many of the industry forecasters were predicting three or four months ago. So, that's good. And obviously, Tara brings with it pass-through business at substantially lower margins.

But then in the broader Technetics business, the nuclear orders that we got, which again are fairly long lead time parts and it's a very profitable part of the Technetics business overall, those ran into pretty significant headwinds after the Fukushima issue. And so believe it or not, that started showing up in both Q3 and Q4 because of -- versus the history because that's how long it -- you get these orders for these large nuclear O-rings in advance.

Now, as Alex mentioned in his remarks, the orders we got were great. We just didn't ship any product. They're going to be shipping in 2012. So the shipments were low. And because they are such high-margin specialized seals, the margins for Technetics were low because of those two effects. So you have all three of these businesses all with those very independent effects all combining for difficult margins in sealing for Q4. So, I'll let Alex address the other parts of your question.

Maybe what I'll do is just get into some of the specifics. I think Steve gave a pretty good overview of what's going on. I would highlight one point that Steve didn't make is, it's actually not atypical for us to see margin compression when we look sequentially from Q3 to Q4. So if you were to look over the last six years, what you would see in four of those six years you would see margin compression ranging -- this is OI margins -- compression ranging from 1.5 points to 3.5 points. So, what you all are seeing is not that atypical. And a lot of it's driven by the mix-related issues that Steve is referring to.

I'll just give you a couple of numbers to give you a handle on what's going on with SG&A and corporate expenses since I believe, Jeff, you asked that question specifically.

If I look from Q4 of 2010 to Q4 of 2011 on the SG&A line, you'd see about a $10 million -- a little bit more than a $10 million increase -- about an $11 million increase. The vast majority of that is coming from the acquisitions. So, that's a number that we can certainly address as we eliminate some of the redundancies through our systems and our asset consolidations that we talked about.

If you look on the corporate expenses, from Q3 to Q4 you will notice an increase of about $10 million or so. And you'll recall last quarter, I mentioned to you that the decrease we saw in Q3 was actually somewhat atypical and was driven by the decline in the share price predominantly as we had to adjust some of the board of directors phantom shares down.

So, the increase that you saw this quarter, largest piece of it was driven by about a $2.5 million increase in medical claims. There is again a little bit of a pickup in the phantom shares that I referred to earlier. There's about a $1 million or so in consulting costs. And then sort of some dribs and drabs of other things including some incentive compensation and some severance-related fees.

So the $10 million number that you see in the fourth quarter is a much more normal number for us. So, just keep that in mind when you benchmark that relative to the third quarter. So I can -- does that help, Jeff, or do you have more specific questions?

No, that's a lot of good color. I guess maybe just to wrap it up on sealing, if you did a 10.7% op margin, what would you have thought it would've been given all these disruptions? Is it -- should we look at the sequential move somewhere in that 1.5 to 3.5 and then anything over and above that is kind of noise and disruption?

No. Look I think we believe that the sealing -- the sort of normal margins for sealing are in the mid-teens. You know, so that's sort of if you were to look annually I think that's a good number to sort of plug in to your model. There were certainly some of these one-time effects that Steve mentioned.

There's also I think some measure of us strategically focusing on more OEMs, so remember, a large portion of almost all of the Tara business is targeting OEM and it's deliberately lower margin as some of the pass-through revenue that I referred to. The Rome Tool & Die is brake margins -- brake products which are lower margins as well as OEM products. So there is some strategic focus on these attractive OEM markets, which has a little bit of an effect on margins, but I think going forward sealing should be a upper mid-teens-type business.

Okay. Thanks a lot. I'll get back in

Fred Buonocore, Rodman & Renshaw.

Thank you for all the helpful color. Just to -- I think we've gotten a good view on margin going forward there, so we appreciate that. Then just to maybe drill down a little bit more on the top-line expectation, Steve, I think you said that you thought you would see growth in excess of 10% in 2012. And, I'm assuming that that's just a general comment for total revenue growth including acquisitions. Can you give us a sense for where you think organic growth can be? Can it be something similar to maybe what you saw in Q4?

Well, I don't know that it's going to be that strong, Fred. Obviously we're trying to -- as you know our businesses are very short cycle so for us to get a gauge on the full year we are looking at the same kind of industry forecasts and economic growth forecasts that you are. And so, the just north of 10% number, that's our expectation on what I framed up as a very modest growth year in terms of US and basically Europe being essentially flat, maybe a little bit up and includes the full-year effect of acquisitions that we have done. It does not include any effect from acquisitions that might happen in 2012. So it's just a full-year effect and the improvements of what we've already acquired. So is that helpful?

Sure. I guess in that regard you talked about your expectations from a regional standpoint for those markets. How should we think about your businesses in terms of how they grow relative to the growth in those markets if you're getting market share and introducing new products and such?

Well I think over time we've always said that we are -- when you look at EnPro on whole we are basically organically a GDP growth business. But every year our expectations are we pick up a point or 2 in price and a point or 2 in net price and a point or 2 in share growth. And so I think if you take your GDP and add that and give us a full-year effect for acquisitions, you'll get in the just north of 10% range.

Right. And is around $50 million, $60 million or so a good number? I'm not sure if you -- I apologize if you said it in the prepared remarks, but in terms of acquisition contribution, do you think it's somewhere in the $50 million to $70 million range.

The annualized number next year for a full-year run rate?

Yes.

Alex, did we say what that was specifically?

We didn't. I mean I think ballpark I would probably look in the $50 million range.

Okay. That's great. Then, turning to your CPI business -- and you talked about obviously natural gas prices are certainly slumping and that's impacting the activity in that market, but in terms of your own initiatives with your -- you've acquired a number of branches over the last couple of years and you've been working on improving the efficiency of how they operate from a client, relationship, sales, operational standpoint -- can you update us on that part of the business specifically in terms of how you think that's doing operationally and how -- what kind of room there is to improve there? Because I would think that would be a -- with or without improvement in natural gas prices I think that would be a lever for margin improvement at some point along the line here.

Oh yes, well it certainly is. It certainly is. And I think even in Alex's remarks he said we certainly expect it to go up regardless of what gas prices do, so. And our growth strategy, Fred, as you know in CPI is really in large part tied to the fact that we have a point of view as a company that gas and related NGLs coming out of gas, gas wells, the shale formations, is a fundamental shift in the US energy picture and petrochemical picture.

And that's why you see the ethylene crackers that have been announced and so forth. And so we have both -- in CPI we have markets both in the gas patch as well as in petrochemical and refining. And both of those should benefit by the increased extraction of gas along with the NGLs that come along with them.

So, this is a long-term strategy for us and it has been really the underlying strategic premise behind the -- a lot of the CPI growth story, so --.

Now within CPI we are probably 65% through an ERP implementation across that whole system. That will continue through all of 2012 and conclude in the first part of 2013. It's going very well. Full-time team, putting that in place and this is to really knit together and run this business as one global business. We consolidated three facilities from Mid Western's acquisitions. In some cases we moved into their shops. In some cases we moved into our legacy shops. We've got additional restructuring to do in Western Canada that will happen in the first half of this year.

And, we've relocated the German CPI facility, just a couple of miles, because they ran out of space and it's an old building. They have moved that construction and activity to move that facility -- happened in Q4 and in the first couple of weeks of January of this year.

So there's a lot of really good work going on in CPI. As you know we opened a new manufacturing and service center facility in Shanghai a year ago. They shipped their first product in February. We actually had budgeted for them to lose money for the year. We didn't think they would get to breakeven until close to now. They actually got to breakeven over the summer and actually ended up making a little bit of money in the year. So we are excited about that new addition to us and that greenfield facility.

So, all of that said, I think our margin expectations for CPI are still consistent with what we've said in the past which we would certainly expect that to move to a midteens margin over time. And that's probably a two- to three-year journey because we need to finish the system and all the integration.

And by the way a lot of these costs that Alex talked about where we have retention payments for previous owners of businesses, a lot of that is within CPI because these businesses are typically owner operated businesses, and we need those guys on our team for some period of time. So, I don't think our expectations on margins there have really shifted. And that's where they are, irregardless really of what the gas price does.

Great. That was very helpful. Thank you.

Todd Vencil, Sterne, Agee.

I'm thinking coming back around to sort of the segment margins, you talked about the mid-teens, the high mid-teens being sort of the normal margin that we're going to get back to in these sealing products. What kind of timeframe are we looking at that, ex any other acquisitions that we might do in the future, just going from where we are now, how long does it take us to ramp back to there?

Well, Alex, you want to give your answer to that? Why don't you give your answer and then I will add some color.

You know, Todd, I actually think it's reasonably short cycle. If you look at a lot of what drove what you saw in the fourth quarter this year was really mix related. There was some of these sort of cost pressure that Steve talked about and some anomalous effects related to the acquisitions. But a large portion of it was both mix related and this phenomena of moving from Q3 to Q4 that I talked about earlier.

So I think that if we assume the markets continue to perform the way they performed the last year I have no reason to believe that our -- by second quarter you wouldn't see sort of the midteens-type margin for sealing. And certainly that's what we are anticipating in terms of what we are budgeting for and what we're planning for. So, that's certainly our expectation.

Yes, I agree completely with him.

Got it, and that's very helpful. And then I guess same question for engineered products. You guys I think the last thing you said there on a long-run margin for the segment was also sort of mid-teens, maybe a little lower than sealing, and -- but you talked about sort of a two-, three-year process in CPI. So if we think about CPI and GGB together and the whole segment, how do you see that playing out time-wise? And am I still right on that level?

Yes. Yes, yes. And I think that in the case of GGB it's probably a little bit quicker than that but still it's not like sealing, because sealing is not a -- sealing was an anomaly in the fourth quarter because of all these effects. It wasn't a structural shift, whereas engineered products has -- is on a journey to improve performance. And both of GGB and in CPI absorb these integration activities and so forth. And GGB of course is still recovering in volume and still working on some operational issues we have in our French -- one of our French facilities, etc.

So I think GGB is a -- is probably I don't know maybe a little bit more accelerated than CPI, Todd, but I think that ballpark of two to three years is reasonable in aggregate.

Got it. So if I look at the segment, I mean 2011 started -- and again I'm just trying to get sort of calibrated, right, to where these things ought to be. And if I look at the segment I mean you started out the year over 10% at least on a bit of an adjusted basis in that segment. And then, sort of come steadily down as you integrate and put in the acquisition and things like that. Should we think about this year in terms of a high single digit number?

No, look, GGB was extremely busy in Q1 of last year -- extremely busy. We're not going to be that busy because part of what we saw -- you can't just look at it year over year because part of what we saw in both Q4 of 2009 and Q1 of 2010 was a supply chain recovering from the recession. And so it kind of -- there were some restocking effects. So we ran hard -- we were sold out across the globe in GGB in Q1 of last year, right? Now although volume and orders seem to be pretty good we're not going to see that kind of sequential growth that we are seeing in those time periods.

It's going to return to more of a normal GDP relevant growth. And quite frankly in GGB a lot of it's going to depend on European automotive because that's a big core of what they do. So that's -- you can read stuff about that as easily as I can. So, as Alex mentioned in his remarks, the European customers are being a little bit cautious about what's going on. So I would not lock in on Q1 of last year as a -- as the sealing -- as the engineered products base for thinking about margins.

Oh sure, understood. But I mean if we look at a year though that came in

Yes, (technical difficulty) I think if you look at a year and that's certainly what we ought to be -- I think that's very reasonable. I'm going to adjust it a little bit for CPI for some of the ongoing integration costs and acquisition costs we have talked about and that's probably a pretty good estimate.

Okay, perfect. That's what I was looking for. Thanks a lot.

Joe Mondillo, Sidoti & Company.

In terms of the AARP I was just wondering if you could go over that? And just I guess one, if you could, I don't even know if you can give sort of the likelihood of that sort of accelerated trial that you were talking about of the -- of that being completed or that being a success? And if not, if you could at least sort of address maybe a timeline -- I don't know -- you said sort of --

Well, Joe what we can do is I'm going to ask Rick to step through this. But what we can do is we can tell you what we know about the process and how it's likely to unfold in terms of the next step in the court and so forth. So if you wouldn't mind doing that, that would be great. And that's going to have to be our last question I think. We're about out of time. So --.

Hi, Joe. This is Rick Magee. Just to tell you a little bit about process and I think Steve hit it in his prepared remarks, but just to lay it out there is going to be a hearing late this quarter or early next quarter -- not exactly laid out yet but probably real near the end of this quarter where the judge is going to hear from both the lawyers for GST and also the lawyers for the claimant representative is about their approaches to estimation, their proposed approaches to estimation and what that will entail and what that will need to look like in terms of both discovery to get ready for those approaches to estimation and the estimation trial and also in terms of time for the actual trial.

We think that the purpose for that estimation trial will be to demonstrate that the plan that GST has proposed is feasible; in other words that the plan that it has proposed is sufficient to meet its liability obligations. And as Steve said we believe it's well in excess of any liability that it has. And, we think that that trial will involve the causation evidence that GST will put on. And we believe that the timing of that trial will be late this year -- late in 2012 or early in 2013; probably more likely early in 2013. The claimant representatives believe that should be a much simpler process and are pushing for that trial to occur without any further discovery of note and for that to happen during the summer or early fall. So, that's sort of where we are on process.

We are confident that the judge is going to give GST a fair opportunity to present its case and we believe that that's going to take a little time to get prepared for and to get all the relevant discovery for. And it will likely be at least the fourth quarter if not the first quarter of 2013.

I think Steve laid out our optimism about our positions. The judge did indicate some skepticism about the plan itself, but that doesn't change anything about our positions, about GST's positions and about its liability. And we really think that the case that GST will put on will be compelling and will demonstrate that the $250 million that we are talking about is more than sufficient to pay any possible liability that GST would have.

So the verdict would likely be by maybe early 2013. And then at that point if it's a favorable ruling, the settlement or what you have to come to would take another three to six months or something? Is that fair to say?

I think it's probably a longer time period than that, Joe, just because a couple of things. As you know in all these other cases, ultimately, the parties have settled on a number and then it's taken as much as a year to 1.5 years and in some cases like the Grace case I think they reached a settlement over three years ago and still haven't closed that confirmation. I don't think it would be anything like that, but we think that -- we continue to hope that GST and the claimants will reach a compromise result and that will expedite things and that that can happen around the time of that trial. But we do believe it would be another year after that before it would all get implemented. Of course, if that happened you would have more certainty about what that ultimate result would be, once that -- once any kind of compromise was reached.

In the event it's the judge making a determination and a verdict it's probably likely that one side or the other is not going to be happy with that and there's lots of appellate avenues available, both through the District Court, and then there's a Fourth Circuit Court of Appeals. So in the event it is a trial and there's not a compromise I think you could look at a longer period.

Okay. All right, great. Thank you.

There are no further questions at this time. Don Washington, I turn the call back over to you.

Well, we thank you all for tuning in today. I realize some of you may have questions that we didn't have time to respond to, but please feel free to give me a call later today at 704-731-1527. Thanks again for attending this morning and we will look forward to talking to you next quarter.

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