Enpro Inc (NPO) 2012 Q3 法說會逐字稿

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone 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.

I would now like to turn the call over to your house, Don Washington, Director of Investor Relations. You may begin your conference.

Thank you, Melissa, and good morning, everyone. We welcome you to EnPro's quarterly earnings conference call. I'll remind you that the call is also being webcast at EnProIndustries.com and you can find the slides that accompany the call on the website.

In a moment, Steve Macadam, our President and CEO, and Alex Pease, our Senior Vice President and CFO, will review the results for the third quarter 2012.

Before we begin their review, I will point out to you that you may hear statements during the course of this call that express a belief, expectation, or intension 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, 2011 and the Form 10-Q for the quarter ended June 30, 2012.

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 these statement 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 or affairs or 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.

I also 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 (technical difficulty) results and will remain deconsolidated during the dependency of the Chapter 11 proceedings to resolve asbestos claims against GST. We refer to this as the Asbestos Claims Resolution Process, ACRP, and you will hear us use that acronym during the call today. GST's results are presented separately in our earnings release.

Now I'll turn the call over to Steve.

Thanks, Don. Good morning, everyone. Before I begin my formal remarks, I just want to take a minute to acknowledge that many of our listeners live in the Northeast and you guys have had a tough week and we really feel for you and your family. So we certainly wish you the absolute best in a very, very difficult situation.

So now I will begin my remarks. I will start with a summary of what we are seeing in our major markets and a brief review of the quarter. Then I will turn the call over to Alex for a detailed analysis of our financial performance.

I will begin by saying that we are pleased with our overall performance even though conditions in our markets continue to be difficult. We saw a modest decline in organic sales but profits were up and we believe we are managing well in challenging times.

Looking at our markets, it should come as no surprise to you that Europe was especially challenging in the quarter and we saw widespread weakness in demand there. In North America, heavy-duty truck markets in the United States remained stagnant and weak Canadian natural gas markets reduced demand for our compressor components. Late in the quarter, conditions did improve somewhat but we don't see any sign that a sustainable trend has begun.

So circumstances were difficult but thanks to the dedicated effort of individuals throughout our Company, we performed well in the quarter. Our sales benefited from acquisitions primarily Motorwheel, even though the overall growth from acquired businesses was not enough to offset the effect of both weaker demand and the negative impact of foreign exchange. Excluding acquisitions and FX, sales were down 5% compared to the third quarter of last year.

In the Sealing Products and Engineered Products segments, low levels of demand were the primary drivers behind the declines. In the Engine Products and Services segment, the comparison was against a very strong quarter a year ago when we shipped six engines under the completed contract method of revenue recognition. We shipped six engines in the third quarter of this year as well but four of them were completed under percentage completion accounting, which recognizes engine revenues over the life of the contract rather than in the quarter the engine is shipped.

By geography but normalized for foreign exchange and acquisitions, sales were down in Europe by 8% as all of our European operations reported declines. In North America, we had mixed results but organic sales were up a little less than 1% excluding Fairbanks Morse.

Even though total sales declined year-over-year, we saw an increase in segment profits in the quarter and an improvement in segment profit margins of more than 1 full percentage point to 12.9%. The improvement in profits and margins came despite slightly higher restructuring expense. So adjusted for this restructuring expense, segment profits were 13.2% compared to 11.9% on the same basis a year ago.

Our teams have worked hard to keep costs in line with the current state of our markets both by developing and maintaining lean organizational structures and by managing the supply chain to make sure we capture the benefits of lower raw material prices wherever possible. The team has also been effective in maintaining and in some cases increasing prices.

Our GAAP earnings were $0.53 a share in the quarter compared to $0.66 a share a year ago when corporate costs were lower for reasons that Alex will explain in a few minutes. However, our adjusted earnings, which excludes items that don't reflect the underlying performance of our operations primarily interest due to GST and restructuring expense, were $0.81 a share this year, up about 7% from $0.76 a share a year ago when we reported last year, another indication of good operating performance.

GST also performed well in the quarter with a 17% improvement in EBITDA before expenses related to be the ACRP. GST's EBITDAA grew to $13.3 million on flat third-party sales of $52.6 million. GST's operating performance continues to be outstanding as the business executes well and maintains a strong position in its markets. We remain confident in the successful outcome to the ACRP and look forward to GST's eventual reconsolidation with our financial results.

Our recently acquired businesses have seen much of the same market conditions as our legacy operations. Demand for their product is generally weaker than we expected particularly as it concerns the deals we closed in early 2011 but on balance, they have also performed well under difficult circumstances. Over the past seven quarters, we have invested about $314 million in six deals that give us access to attractive markets that we do not previously serve and expand our product lines and manufacturing capabilities. In aggregate we expect these businesses to exit the year at an annualized run rate of about $41 million in EBITDA. Their integration is going well and we are confident their performance will continue to improve going forward.

Turning to the ACRP, activity in the third quarter was mostly behind the scenes as the parties continue to sort through and analyze discovery responses, prepare for numerous deposition schedules for November and December, and identify and work with experts as they prepare their respective estimation cases. At an October hearing, the judge set a new date for the estimation trial, which is now scheduled to begin on July 22 of next year.

We remain confident that GST will be able to demonstrate convincingly at the estimation trial that its products did not cause disease and its historical settlements were motivated primarily by cost avoidance in the expensive and unfair tort systems of state courts.

Now I will turn the call over to Alex.

Thanks, Steve. Good morning, everyone. To provide you with more detail on Steve's comments, our top line dropped by about 3% due to a combination of unfavorable foreign exchange rates primarily for the euro and softening demand in most of our markets. We benefited from the Motorwheel acquisition, which closed in April of this year, and a small contribution from Tara and PI Bearings, both of which closed in the third quarter of last year.

Acquisitions contributed about $16.5 million to sales or a growth of about 5%. Sales also benefited from our pricing initiatives in the quarter particularly at GGB, but on an organic basis excluding FX and acquisitions, sales were down 5%.

Businesses in our Sealing Products and Engineered Products segments were faced with weaker market conditions than they experienced a year ago. As Steve explained, sales in our Engine Products and Services segment declined from the third quarter of last year when we shipped several engines under the completed contract method of accounting. I'll go into more detail on the segment's performances shortly.

Looking at the details around profitability, gross margins improved to 33.9% of sales, 170 basis points higher than a year ago. The primary driver was Fairbanks Morse Engine, where parts activity was particularly strong this year and where several unusual items reduced gross margins last year.

Gross margins in the third quarter of 2012 also reflect an increase in Stemco sales into the OEM markets. However at least a portion of this change in mix has been offset by better pricing in most of our businesses and by the benefits of material cost savings as commodity prices have softened this year.

At the segment level, SG&A spending was about the same as last year but total SG&A spending excluding corporate expenses increased by 3%. Compared to last year's third quarter, corporate expense was higher by about $2.6 million primarily because of an increase in the full-year estimate for 2012 employee healthcare costs.

Now let's take a look at our segment results starting with Sealing Products. Sales in the segment were up 6% or $8.1 million from a year ago. The Motorwheel and Tara acquisitions contributed sales of $15.7 million to the quarter but that contribution was partially offset by declining volumes and the unfavorable effect of foreign exchange. Excluding the acquisitions and foreign exchange, sales were down 2% with the decline spread fairly evenly across all three businesses in the segment.

Segment profits were up 5% or $1.1 million. The increase is entirely attributable to Motorwheel and Tara, which contributed $1.7 million to segment profits in total. Excluding the acquisitions, segment profits were down 3%. Total segment margins of 15.5% were about the same as in last year's third quarter; however, we saw an increase in segment EBITDA margins of just over one full point to 20.7% from 19.6%.

Drilling down into the individual operations in the segments, sales at the consolidated Garlock operations were down slightly excluding FX. We saw some improvement in US oil and gas markets and process industries but it was not enough to offset significant weakness in Europe, where inquiries are low and customers are proceeding with much caution in light of the uncertain economic environment.

Although sales were lower at the consolidated Garlock businesses, profits and margins improved as we began to see the benefit of restructuring and facilities consolidations that were completed previously in the year.

Sales were also down at the Technetics Group when they are normalized for the Tara acquisition and FX. Volumes in the group's North American markets and its European nuclear and aerospace businesses remained steady but those factors were not enough to overcome weak demand from other European markets as well as general softness in the semiconductor space. As a result, Technetics reported declines in profits and margins even though volumes improved.

Stemco continues to operate in sluggish markets. Demand for both Stemco's core aftermarket products and its brake products is light and sales at Stemco excluding the Motorwheel acquisition were down compared to last year. Revenue miles, truck loadings, and other indicators of Stemco's business are in a slow growth mode and are expected to remain flat for the next few months. At the same time, trailer production is slowing and industry forecasts show that trend continuing into next year.

However, Stemco showed its resilience in the quarter. The business's performance improved as it benefited from lower commodity prices and lower manufacturing costs. These factors helped to offset the effect of weaker demand and margins at Stemco were slightly higher in the third quarter of last year. Motorwheel also contributed to Stemco's performance in the quarter with a contribution of just over $11 million of sales at margins slightly better than the segment's margins, excluding the effect of acquisition-related costs.

In the Engineered Products segment, sales were down 11% or $11.1 million as demand weakened in Europe and as Canadian natural gas markets remained soft. Excluding foreign exchange, sales in the segment were down 5% compared to last year's third quarter.

We realized benefits from price at both GGB and CPI but they weren't enough to offset lower volumes and the effects of foreign exchange and restructuring on the segment's profits. As reported, segment profits were down $2.9 million or 45% from last year. However excluding acquisitions, FX, and restructuring, the decline was about 25%. In this environment, the segment's margins fell to 4% from 6.5% in the third quarter of last year. Restructuring expense in the segment totaled just under $1 million and reduced margins by about 1 percentage point.

EBITDA margins in the segment were also lower, coming in at 10.2% compared to 12% a year ago. Within the segment, GGB's sales were down almost 10% in Europe excluding the effect of foreign exchange. GGB's European markets are weaker in all segments particularly automotive.

In North America however, demand increased and sales were up about 5% excluding a small contribution from the PI Bearings acquisition which was completed in the third quarter of last year.

Profits at GGB were depressed by the restructuring charge I mentioned a moment ago. A portion of the charge related to reductions in the size of its workforce primarily in Europe as activity slowed in GGB's markets. However, the larger portion was associated with shutting down the fluid film bearing product line which began as a new product development effort a few years ago. Ultimately this product did not prove to be commercially viable and we made the prudent decision this year to shut down production.

Excluding those charges, profits and margins were higher at GGB in the third quarter of 2012 than in the third quarter of 2011 as the business benefited from better pricing for its products and from lower costs. Over the past three years, we have taken significant costs out of GGB and realigned the business to make it much more competitive in global markets. As a result, it's very well-positioned for today's environment as its third-quarter result indicate.

GGB remains sensitive to volumes but today it is a much more value-oriented business and it is much better prepared to withstand fluctuations in volume.

CPI also faced weakness in Europe primarily due to a refining market characterized by very tight margins and reduced maintenance spending. Adjusted for FX, CPI's sales in Europe were down about 3% compared to the third quarter of last year. In North America, CPI's sales were down about 10% primarily because of low levels of activity in Canada. About 30% of CPI's North American sales come from Canada and activity levels there were down 20% from the third quarter of 2011.

The weakness in Canada more than offset higher activity in service centers and in the US petrochemical markets, both of which are the primary drivers of CPI sales. CPI finished the quarter with just better than breakeven on the segment profit line as volumes fell in Canada and Europe. There was a very small restructuring charge at CPI in the quarter as the business moves ahead with an aggressive program to reduce costs. As we mentioned last quarter, we've reduced the size of the organization and realigned it to meet current market conditions.

We are continuing with facilities consolidations and there will be additional restructuring charge at CPI in the fourth quarter. All in all, we expect these actions to produce approximately $5 million in annualized savings that should be realized over the next few quarters.

The team at CPI has laid out a very detailed plan to improve profitability in support of our long-term goals for margins in the Engineered Products segment. This plan includes actions that have already been taken and other actions that will provide incremental benefits to the business's performance over the next 24 months.

In the Engine Products and Services segment, Fairbanks Morse continues to perform well even though sales were down in comparison to the third quarter of last year. Sales reflect lower engine revenues partially offset by higher parts sales. Engine revenues were affected by percentage of completion accounting, the use of which began in the third quarter of last year for new and nearly new engines. We shipped six in the third quarters of both years but revenue for four of the engines shipped this year was recognized over the past 12 months under POC accounting. Two of the engines shipped this year's third quarter and all of the engines shipped in the last year's third quarter were accounted for under completed contract method, which requires the value of the engine sales to be recorded in the quarter in which it's shipped.

Currently there are two engine programs under the completed contract accounting. We expect to complete one program next year with the shipment of two engines in the second half of the year. The second program includes four engines and is scheduled to be completed in the second half of 2014. In all, we recognized about $14 million less in engine revenues in the third quarter of this year compared to last year but more than half of the difference was made up by stronger parts sales which were particularly strong as we benefited from spending in the US Navy.

Profits and margins improved significantly at FME. Parts sales made a contribution to the improvement because they are generally more profitable than engine sales and the increase in parts sales improved mix and benefited margins. However, the comparison against last year is also influenced by several unusual items recorded in the third quarter of 2011. These items reduced segment profits in the third quarter of 2011 by a net amount of $2.1 million.

FME's backlog was about $170 million at the end of the September quarter and as Steve said, slightly above the quarterly average for the past three years. However as you know, there is a fair amount of uncertainty regarding the US government budget. Its unclear sequestration would affect engine programs but both the Navy and Coast Guard are indicating that budget cuts could lead to reduced spending on ship maintenance programs, which could impact FME's aftermarket business.

Looking at earnings for the quarter, we reported GAAP net income of $11.3 million or $2.9 million less than we reported in the third quarter of 2011 when net income was $14.2 million. On an EPS basis, that translates to $0.53 of GAAP earnings or about $0.13 less than last year.

The primary factors in the difference were the following after-tax amounts -- a benefit of about $0.06 from higher segment profits this year, a benefit of about $0.02 from a lower tax rate this year. The tax rate in the third quarter was 35.4% versus 36.8 last year. A reduction of about $0.03 from an increase in interest expense as borrowings against our revolver increased and as the principal balance on the inter-company notes increased. I will remind you that a portion of the interest on these notes is made as payment in kind and accrues to the principal.

Lastly, a reduction of $0.19 because of higher corporate and other nonoperating expenses.

While GAAP earnings were lower than a year ago, our adjusted EPS increased to $0.81 from $0.76 in the third quarter of last year. The adjustments to the third quarter of 2012 include $0.21 in interest due to GST, $0.03 for restructuring, and $0.04 for tax accrual and other items. It should go without saying that we're pleased with our preference for the quarter. We faced very difficult market conditions and the conditions we encountered in the third quarter are likely to continue for the rest of the year and into 2013. We are confident that the systems and strategies we put in place helped us to meet the third-quarter challenges effectively and they will continue to benefit us.

Turning to cash flow measures, EBITDA was $134 million in the first nine months of 2012, up about 6% from the first nine months of last year. Free cash flow in the first nine months of the year increased to about $35 million compared to about $14 million in the first nine months of 2011. This year, income tax payments were lower by about $17 million and our working capital needs were lower. These improvements were offset by slightly higher capital expenditures as we continued to invest in facility and efficiency improvements.

Acquisition spending was down from the high levels of last year when we closed several transactions in the first nine months of the year. Spending this year reflects only the acquisition of Motorwheel early in the second quarter. We paid for Motorwheel by drawing on our revolving credit agreement. At the end of September, we had an outstanding balance on the facility of about $70 million with about $60 million of borrowing availability.

For the fourth quarter, we expect our operating cash flow to be sufficient to fund working capital and capital expenditures, which we continue to expect to be in the range of between $35 billion and $40 million for the full year. The full-year total includes the purchase of a building in the fourth quarter as part of CPI's facility consolidation plan and assumes that other currently planned capital projects go as scheduled.

Before I give the call back to Steve for the outlook, let's take a look at GST's results in the quarter. Third-party sales at GST were flat with last year, reflecting relatively stable markets in the US. However, both EBITDAA and operating profits improved as GST -- as the business benefited from cost reductions and better pricing for its products. Operating profit margins were 22.6%, almost 5 full points better than last year.

Unfortunately ACRP related expenses continue to go up at GST. Those expenses more than doubled from the third quarter of last year and they are more than twice as high in the first nine months of 2012 as they were in the first nine months of 2011. As we've pointed out in the past, GST is obligated to pay expenses for all parties in this case including representatives of the claimants, both present and future, and their counsel and the experts. These expenses are increasing as the case moves as along towards the estimation trial. We expect for the full-year of 2012, they will be in the neighborhood of $30 million.

Fortunately, GST's financial performance has been strong and the business has a healthy cash balance of about $144 million.

Now I'll turn the call back to Steve.

Thanks, Alex. I will close with a few comments about our current projections for 2012 as well as some thoughts about how I believe we are positioned as we look ahead into 2013.

Our expectations for the full-year of 2012 have been reduced by the combination of softer markets and unfavorable foreign exchange. Weak demand especially from our European operations is likely to support little if any organic growth in either our Sealing Products or Engineered Products segments. Growth in these segments will also be hampered by unfavorable foreign exchange, which by itself is expected to reduce full-year 2012 sales by about 3% from last year's level.

We also anticipate higher engine revenues to increase sales at Fairbanks Morse, which should add about 2 percentage points to our total sales for the year.

We also remain confident that previously completed acquisitions will contribute growth to our sales of a little over 8% or $90 million to $95 million. Year-to-date, they've added about $81 million. However with the little organic improvement in total volume and a negative impact from foreign exchange rate, it appears unlikely that we will report a sales increase in 2012 beyond the amount attributable to acquisitions.

At current levels of demand and in light of restructuring the segment profit margin we report for the full year, is not likely to meet our previous expectations. We will continue to diligently monitor and control costs but our segment profit margins in 2012 may remain below those we reported and 2011 as they have in the first nine months of this year. Our reported margins will reflect a restructuring in acquisition-related costs we have already incurred as well as additional restructuring costs as we size our operations to compete in the current environment. About $4 million of those expenses have been recognized in the first nine months of the year and we expect to recognize another $1 million to $2 million in restructuring expense in the fourth quarter.

Under these circumstances, segment profit margins in the fourth quarter of 2012 are likely to be comparable to the margins we reported in the fourth quarter of 2011.

The short cycles of our businesses make it difficult to see too far into the future. We are naturally cautious about our near-term outlook. However, our organizational structure is strong and we have sufficient flexibility to continue to respond to unanticipated changes in the economic conditions, either positive or negative, as our third-quarter results indicate.

Looking beyond this year and into 2013, we are positioned to improve our results for several reasons. The performance of our recent acquisitions will continue to get better and their contributions to our results should increase.

In our Engineered Products segment, we have clearly developed plans for improvement in CPI that depends principally on our ability to execute rather than on the state of its markets.

At GGB, US markets are fairly stable. European markets are weak but they don't currently appear to be deteriorating any further. In the meantime, GGB is well-managed and will continue to be successful.

In our Sealing Products segment, we have a significant amount of sales in the aftermarket which gives us a stable base of business even in economic downturns. We have attractive opportunities for growth in our heavy-duty truck market where the strength of the Stemco brand gives us an opportunity to gain share even in a soft market.

In our high-performance markets, our semiconductor customers are indicating they expect activity to pick up in 2013 and we have exciting opportunities that we're aggressively pursuing in aerospace, nuclear power, and oil and gas markets.

Finally, Fairbanks Morse ended the quarter with $170 million backlog. The backlog extends into 2014 and is slightly above the quarterly average of the past three years when we adjust for the large South Texas nuclear project we canceled after -- that was canceled after the Fukushima disaster.

So even though there is much macroeconomic uncertainty in the near term, we are confident that in any environment we can continue to gain share and to capture new opportunities.

Now we will open the line for your questions.

(Operator Instructions). Brett Linzey, KeyBanc.

(technical difficulty) GGB Europe showing some -- maybe some signs of stability. Could you just talk about what gives you confidence that things may be finding a bottom here? Is it commentary from customers? Is it order rates? Could you just talk a little bit about what you are seeing there?

Yes, the first part of your question was cut off a little bit so you're just asking about GGB Europe?

Yes, GGB Europe. You had mentioned that you didn't see any further signs of deterioration in that market. I guess just what gives you confidence there?

First of all, it's pretty darn weak now. So I guess we continue to see an order pace more or less on the pace that we have been on. The automotive business is really, really weak. I was in Italy recently and they said they've sold as many cars year to date this year as they did way back in 1969. So that's how weak things are.

So obviously I'm not trying to bake in any kind of financial system -- any additional financial system disruption, so you never know what's going to happen, but the continent is clearly in a recession today. But our sense just in the kind of order flow and commentary from customers and so forth is -- I'm not saying it won't get any weaker but I'm don't think it's going to get significantly weaker. I think it just feels stable.

I was over actually in Europe in the UK, France, Germany, and Italy just a couple of weeks ago for two weeks and did business reviews in all those markets and that is just kind of what we are hearing, so that's where it comes from.

Okay, great. I guess turning to CPI, I know some of those markets have been pretty stagnant, as you mentioned. I guess what inflection points or outcomes in the marketplace specifically within the Canadian natural gas market are you looking for? Is there anything structurally about that portion of the business that maybe worries you going forward?

You mean about the Canadian gas market?

That's right.

Sure, I think first of all, the Canadian market is about 30% of the North American GGB business. Is that right? Alex, isn't that right?

That's right, it's about 30%, 30% overall.

So it's important but it's not critical. It's not over half of it I guess is what I'm saying. So the main market we still serve globally in CPI in both the US and in Europe is the refining and petrochemical market. And so that business has been and continues to be relatively stable and certainly with the expansion of the energy -- the gas energy resource in the United States, the fact that refineries and petrochemical plants, petrochemical primarily, are going to be expanding in the future to take advantage of that lower gas position globally -- will be good for us because they will be installing more compressors and they will be running more in the future.

So now to speak to your question of the Canadian natural gas, we don't see anything that's going to turn that market around in the near term because the gas exports from Canada to the US are down about 25% year-over-year and part of it is with the US's benefit in the gas resource and being able to tap the gas resource now, that's going to back gas up into Canada. And so they're trying to figure out what to do with it. You hear a lot about the pipeline work and so forth to get it liquefied and send it to Asian and so forth.

But these projects are a number of years away, so most of our restructuring costs year to date, not all of it, but most of our restructuring costs year to date in CPI have been in Canada as we have downsized and consolidated operations up there. We're just about done with that.

The restructuring expense that we're going to have in the fourth quarter for CPI will actually be -- in the US will be a facility consolidation of the lubrication businesses that we bought a year and a half ago that we are going to consolidate into our major, major manufacturing site that we have in Stafford right outside of Houston. Does that answer your question?

No, that's helpful. I appreciate it and I'll get back in queue. Thanks a lot.

(Operator Instructions). Joe Mondillo, Sidoti & Company.

Good morning, guys. I just was wondering if you could go over sort of your commentary on the engine segment again, sort of what your outlook is heading into the fourth quarter as well? And thinking about margin, sort of how are you thinking about product mix? It seemed like you got -- you had a very favorable product mix in terms of aftermarket versus engine in the third quarter. How are we thinking about that sort of going forward?

Well, I think it will probably carry into the fourth quarter. We are still saying that our outlook for margins for the full year is going to be more or less in line with last year is kind of what we are thinking. You never really know about parts. It's hard to see exactly what we're going to get in terms of parts. Some of it goes into the backlog and some of it shifts depending on what it is but the parts orders have continued to be reasonably strong. So I think that will continue into the fourth quarter.

We don't really see a seasonal effect in Fairbanks Morse, so we expect that the engine revenues and overall FME will add -- what did we say -- about 2 points to the top line of the whole Company year-over-year.

For the year or for the fourth quarter?

For the year. And we've got a good backlog. As I said, if you take the South Texas project out, obviously which we were looking forward to being our first nuclear program for quite awhile for a number of years and obviously after the disaster in Japan, that customer canceled that project. So if you take that out and assume that that was never in the backlog, our backlog today fits just a little bit above what our kind of average has been at the end of each quarter for the last three to three and a half years.

So we are comfortable with the backlog and we continue to work hard to try to pick up aftermarket business in both commercial and Navy markets.

So just in terms of the top line, just so I understand correctly, you are looking for 2% for the year year-over-year, so that essentially would be about roughly 15% decline in the fourth quarter year-over-year?

Steve Macadam. I'm not looking at those numbers, so I can't check your math. Why don't you call Don after the call and he will step you through it.

Sequentially you are looking for sort of a decline on the top line, though?

In FME? I don't think we are going to see -- we won't ship six engines in Q4.

What's going to happen, Joe, is we have got six units but actually none are going to be shipped under completed contract. You're going to have all of those under percentage of completion. And so that will impact a little bit what -- the difference between the engines shipped and what you're going to see in terms of the revenue booked. Does that make sense?

Yes, that makes sense. Then I guess my next question just had to do with the Sealing segment. In the past, we have seen the fourth quarter and actually partially sort of in the third quarter as well sort of a seasonal decline in terms of the margin just given sort of the product mix and how that works.

Given the acquisitions and the addition of Motorwheel, is that going to change things a little in the fourth quarter or how are we looking at sort of the margin profile now that we have that business under hand?

What are you looking for again, Joe?

Just the seasonality in the margin profile. Last year we saw 11% in the fourth quarter but we saw 18% in the first half of last year, so seasonally you usually see sort of a decline. I'm just wondering given the new acquisitions added to the business in that Sealing segment, are we expecting sort of that seasonality to continue or is it going to sort of level off? The first three quarters of this year, we saw very level around 15.5 so I am just wondering how that seasonality, product mix, and margins will flow?

Look, I don't think the acquisitions that we have done in Sealing will affect the normal seasonal pattern. So I think whatever your assumptions are about the seasonal pattern, you should change those because of the acquisitions that we have done.

Okay, in the Sealing segment, is it usually seasonally weak in the fourth quarter given whatever product mix you see?

Yes, it is because Garlock is always weaker in Q4 and Stemco is as well typically a little bit weaker. So I think our high performance markets, the Technetics Group are stable and don't really have a huge seasonal pattern. Now we are continuing to see weakness in the semiconductor market which as you know because of acquisitions is a bigger portion of our sales, but that's not a seasonal affect. That's just -- it's just weak now.

Probably that will continue into the first half of next year and if you base in the semiconductor sense and our customers are saying the second half of next year might be a little stronger is what they are anticipating.

The only additional point, Joe, that I would make is last year we saw a little bit greater seasonality impact both because of the semiconductor point that Steve is mentioning but also there was a very strong aftermarket business and we didn't have the brake business in the first -- in the early part of the year, plus we had a very, very strong brake season in the first part of the year last year, which didn't materialize. So we are not seeing nearly as much seasonality this year as we did last year.

Perfect. Last question and I will jump back in queue. In terms of the corporate costs, it seemed a little lower I guess if you compare it to the first half of this year. Sort of what we expecting? Is that a normalized rate or is that going to tick back up towards the $8 million to $9 million a quarter.

I think it will tick back up, Joe, because what happened in the third quarter is we made an adjustment for the incentive comp for this year because our numbers are behind our plan. So we made it Q3 but that's kind of a one-time thing to catch up for the year and forecast for where we are for the year, so it will go back to the normal run rate in Q4.

Okay, great. Thanks a lot.

Todd Vencil, Sterne, Agee.

Good morning. A lot of my questions have been knocked out but I did have a couple and hopefully you didn't hit this and I didn't miss it. In the Sealing business, you talked about less profitable product mix. Was that the Tara acquisition or was that something else?

So there's a couple things going on. With Tara, we did as we've said a number of times, we did inherit a fairly substantial OEM piece as well as a fairly substantial piece in the semiconductor space as well as a fairly substantial chunk of that business, which is -- has more distributor like margins. So that was a dynamic of the Tara deal.

Also with the Rome deal and the Motorwheel deal, we are building a business in the braking segment of Stemco, which is structurally just a lower margin segment. On top of that, one of the things we saw this year in Stemco was relatively speaking our OEMs business was much stronger than our aftermarket business, so that is more of I think anomalous to this year but that's the other element of the mix.

Got it. Excellent, thanks. Steve, just to go back and parse the guidance on margins, I thought -- and I could be wrong about either one or both of these things -- but I thought I heard you say that margins were going to be sort of similar year-over-year for the year and for the fourth quarter. Am I right about both of those things or --? What are you talking about?

For the year they will be a little bit less than last year and they will basically track the delta that you've seen in the first three quarters this year versus last year.

Got it, got it.

Obviously that includes those -- those are the reported numbers. It includes all the restructuring expenses. They're not the adjusted numbers.

Got it. Then Alex, are we off revenue recognition in the engine business on a winship basis? Are we fully on percentage of completion now?

No, no, we still have two programs that are on completed contract and we can give you the details. I went through those in our model. We can go through those again. The important thing to note is that while that's what's currently in the pipeline, it's not to say that we will never have another engine on completed contract once we are through those two programs. That is driven by the accounting treatment of the nature of the engine, but we will try to have as many as we can on percentage of completion.

Okay, cool. Thanks very much.

Ian Zaffino, Oppenheimer.

This is Todd on for Ian. On the CPI segment, you guys talked about the margin improvement for next year being largely due to execution. Can you give a sense of where you think those margins can go in 2013 if you were to execute?

Substantially better than they are now. What we are looking for I think conservatively, there's a number of things going on so we've got the facility consolidations that we have mentioned. We've also got -- those we anticipate yielding somewhere north of around $5 million a year in run rate savings, most of which we should begin booking in the first quarter.

On top of that, related to the building consolidation in Stafford, we have got a reduced lease expense and then we've got a number of our retention payments associated with prior deals rolling off. So that's about another $1.2 million, $1.3 million. So if you add all those up, you get to somewhere around $7 million of pretty high confidence interval savings that we've realized this year. So I think we should see high single digits, low double digits by the end of next year. That would certainly be what we are hoping for.

Great, thanks. Just one last one on the price increasing or price increases you've gotten this quarter, will you have to give any of those price increases back in the lower kind of raw material environment?

That's certainly not our expectation although I'd say that if there is a place that we will, it is in some of our core PTFE related markets because the PTFE price is under a lot of pressure. So we were really, really aggressive at pushing price up along with that, so we may have to see some of that going forward but I don't see a lot of gross margin compression happening to us quite frankly.

Our products as we've said to you before, are engineered. They've got a lot of technology in them. They are critical for the system that they support and so we insist on getting paid for the value we add, so I wouldn't expect a huge decline.

Okay, thanks. Good quarter.

There are no further questions in queue. I now turn the call back over to Don Washington for any closing remarks.

Again we thank you all for joining us this morning and we look forward to talking to you again soon. If you have any follow-up questions or anything else that we didn't address on the call this morning, please feel free to give me a call at 704-731-1527. Thanks and we will talk to you soon.

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