Enpro Inc (NPO) 2013 Q4 法說會逐字稿

Good morning. My name is Jay, 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 2013 results conference call.

(Operator Instructions)

Thank you. I would now like to introduce Mr. Don Washington, Director of Investor Relations. Please go ahead.

Thank you, Jay, and good morning, everyone. Welcome to EnPro Industries quarterly earnings conference call.

I will remind you that our call is also being webcast at enproindustries.com, our website, where you can find the slides accompanying the call. Steve Macadam, our President and CEO, and Alex Pease, Senior Vice President and CFO, will begin their review of our fourth-quarter performance and our outlook for 2014 in a moment.

But before we begin, I will point out 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. The 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, with our filings with the SEC, including the form 10-K for the year ended December 31, 2012, and the form 10-Q for the quarter ended September 30, 2013. We do not undertake to update any forward-looking statements made on this conference call to reflect any change in Management's expectations, or any change in assumptions or circumstances on which such statements are based.

You should also note that EnPro owns a number of direct and indirect subsidiaries. From time to time, we refer collectively to EnPro and one of more of its subsidiaries as we, or to the business' assets, debts or affairs of EnPro or a subsidiary as ours.

These and similar references are for convenience only, and should not be construed to change the fact that EnPro and each subsidiary is an independent entity with separate management, operations, obligations and affairs.

Also I want to remind you that our financial results reflect the de-consolidation of Garlock Sealing Technologies LLC, Garrison Litigation Management and their subsidiaries, effective June 5, 2010. The results of these entities 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 summary results are presented separately in our earnings release.

Now I will the call over to Steve.

Thanks, Don, and good morning, everyone.

About a month ago, we had the privilege of talking to you about the judge's order estimating GST's mesothelioma liability at $125 million. His opinion endorsed GST's arguments on key factors in the case, including using legal liability, not historical settlements, as the basis for his estimate. Accepting the compelling scientific evidence that GST's product did not cause disease, and agreeing that GST's settlements in the tort system were not based on merit, but were severely inflated by the necessity of avoiding defense costs and the concealment by both plaintiffs and their lawyers of exposures to other asbestos products.

I will have more to say about the judge's opinion and the process going forward, but first, I want to turn your attention to our operating performance, including our results of the fourth quarter of last year and our outlook for 2014.

As you see in our earnings release, we reported a slight decline in total company sales, compared to the fourth quarter of 2012, even though sales were higher in both sealing products and engineered product segments. The decline in the total is entirely the result of lower sales at Fairbanks Morse Engine, where engine revenue was down, and where parts and service demand softened, due to the combined effects of the sequestration and the Navy's ship maintenance schedule.

The drop at FME more than offset improvements in the other two segments, where sales were up between 6% and 7% from 2012's fourth quarter, as many of our markets strengthened compared to the earlier period. We were especially pleased to see improvement in the markets of the Technetics group and growth in GGB's markets, particularly in Europe. GGB had reported year-over-year declines in European sales for six consecutive quarters, beginning in the third quarter of 2011, before comparisons stabilized at a low level in the second and third quarters of 2013.

This means that the fourth quarter of 2013 is the first time in nearly 18 months that we have seen a meaningful increase in activity in GGB's European markets. Although we have reported a strong improvement in segment profits and profit margins in the sealing product segment, our total company segment profits and margins were lower than in 2012's fourth quarter. Sealing products profits were up around 20% on a 7% increase in sales, and margins improved by more than 1.5 points, driven by the performance of both the consolidated Garlock businesses and of Technetics.

In engineered products, GGB also turned a very healthy profits and margins compared to the fourth quarter of 2012. The benefit of GGB's performance was offset by CPI, where restructuring costs and material costs increased. We also saw decline in profits in the engine products and services segment, where volume and mix for both engines and parts and service were unfavorable, and where we had a non-cash inventory adjustment.

Alex will go into more detail on our financial results, but I want to make it clear that we are confident we have the proper plans and strategies in place to address the issues at both CPI and Fairbanks Morse Engine. The new team at CPI is quickly addressing both operational and commercial issues that have been responsible for the business' week results, and I believe that 2014 will be the turning point for that business.

At Fairbanks Morse, circumstances are quite different, as many of the issues we dealt with in 2013 were temporary effects of sequestration, and of the timing of maintenance cycles for both the Navy and of the commercial nuclear power customers. Fortunately, trends in those areas are favorable for 2014. We also continue to explore avenues to expand FME's engine sales in commercial markets, where last year we won six engines that shipped this year, and we expect FME's performance to improve this year versus last.

The de-consolidated operations of GST continue to perform well. The sales there were down slightly in the fourth quarter of 2013, but the business' operating performance improved. GST recorded strong growth in operating profits and profit margins as it continued to benefit from programs that reduced cost and improved operational efficiencies.

Both the consolidated and de-consolidated businesses in the Garlock family benefited from these programs, which resulted in a weighted average profit margin of the two businesses at near 20% for the full year of 2013. Growth-related investments, particularly in sales and marketing this year, may reduce margins in the Garlock family of companies, but we are confident all parts of the family will perform at a high level.

Before I turn the call back over to Alex, I will touch on the ACRP. As I said, on the call we had a couple of weeks ago, after Judge Hodges issued his opinion, we were pleased and gratified to be in our current position. The judge's opinion that GST's mesothelioma liability is $125 million endorsed to GST's legal liability approach to estimation, which focused on the merits of claims and rejected the claimant representative's approach, which focused solely on GST's historical settlements.

As GST showed at trial, those settlements were inflated by the cost of defense and, to use Judge Hodges words, quote, infected with impropriety, unquote, by some law firms. The judge also validated GST's science case, finding that GST's products resulted in relatively low exposure to asbestos in a limited population, that the asbestos in GST's products with far less toxic than other forms of asbestos, and that the people who used GST's products were, of necessity, exposed to far greater quantities of high potency asbestos from products made by other companies.

The next steps in this process will include a plan of reorganization that incorporates the court's opinion, and that both GST and we believe is best suited to win confirmation. In addition to amounts from mesothelioma claims, the plan will include amounts for non-mesothelioma claims and for administrative costs. It is too early to say what the total amount will be required to fund the plan, but it will be designed to provide fair compensation to claimants consistent with the judge's decision, and to enable GST to achieve finality and certainty.

As we noted in our call on January 13, we continue to willing to be engaged in discussions about a consensual resolution. We recognize that settlement would provide the best and most expedient path to certainty and finality through section 524G of the bankruptcy code. And in fact, that is the path we prefer.

However, if it is not possible to negotiate an acceptable consensual resolution, GST and we are prepared to carry on in this process for as long as necessary, secure in the knowledge that the judge in GST's case understands the truth about GST's experience defending claims and it's true legal liability. Nevertheless, I remind you that we have entered into uncharted territory, where no other asbestos bankruptcy has ever gone. And absent an agreement with the claimants, it would take us a number of years to complete the process.

We intend to be patient to ensure a favorable outcome, and we hope you will bear with us. With Judge Hodges' opinion in hand, we remain quite confident that GST will ultimately be reorganized and re-consolidated into EnPro, with significant equity value intact.

Now I will turn the call over to Alex to review our results for the fourth quarter.

Thank you, Steve.

Our results in the fourth quarter were $275.5 million, down $3.8 million, or about 1%, from the fourth quarter of 2012. Excluding foreign exchange, sales were down about 2% compared to the fourth quarter of 2012. As Steve pointed out, the top line decline was entirely the result of lower sales at Fairbanks Morse. Both sealing products and engineered products reported healthy increases in sales, as every operation improved over the fourth quarter of 2012, with the exception of CPI.

By geography, we saw improvements in GGB and Technetics sales in Europe, but total sales in Europe were flat with the fourth quarter of 2012, due to decreases in the Garlock businesses and at CPI. In North America, industrial demand increased from the fourth quarter of 2012, and the combined sales of our sealing products and engineered product segments in the region were up about 5%. However, because of the depressed sales level at FME, total North American sales were down 4%.

I'll discuss the performance of our individual businesses in more detail when I cover the segment results. At $24.7 million, segment profits were about 18% below 2012's fourth quarter. The performances of the sealing products segment and of GGB improved, but both CPI and FME were down compared to the fourth quarter of 2012. Segment profits were 9% in the fourth quarter of last year, compared to 10.8% in the fourth quarter of 2012.

Restructuring costs reduced the segment margin in both quarters, and we also recorded a non-cash inventory adjustment of $1.4 million at Fairbanks Morse. Restructuring costs were $2.8 million in 2013, compared to $2 million in 2012.

Adjusted for restructuring, margins were 10% in the fourth quarter of 2013, compared to 11.6% in the fourth quarter of 2012. Looking at our consolidated results for the full year, sales were $1.1442 billion, down about $40 million, or 3%, from what we reported in 2012.

Excluding the effects of foreign exchange and acquisitions, sales were down about 5%. By segment, sales were up about $14 million in sealing products as the result of the Motorwheel acquisition at Stemco. Engineered product sales were down about $7 million, almost all of which was due to lower sales at CPI.

However, the most substantial factor in the decline of sales from 2012 to 2013 was the $47 million drop in revenues at FME. About $24 million of the decline of FME was due to the absence of any completed contract engine revenue, which we have described in detail in the past. And the remainder was due to weaker parts and service sales as a result of sequestration and both Navy ship and nuclear power plant maintenance schedules.

Segment profits were $128.7 million in 2013, compared to $148.5 million in 2012. A less profitable product mix and lower volumes were the primary causes of the decline, but restructuring expense also increased.

We spent $7 million on restructuring in 2013, primarily at CPI and FME. That compares to $6.2 million in 2012. Segment margins were 11.2% in 2013, compared to 12.5% in 2012.

Adjusted for restructuring expense, margins in 2013 were 11.9%, compared to 13.1% in the prior year. On a GAAP basis, we earned $1.17 a share last year, compared with $1.90 a share in 2012. Excluding interest due GST, restructuring and other selected items, we earned $2.39 last year compared to $3.07 the year before.

The de-consolidated operations of GST had a good fourth quarter, although sales were down slightly from the fourth quarter of 2012. Demand in GST's North American markets improved in 2013, but demand in the Asia-Pacific markets served by GST declined, and third-party sales in those operations were $50.4 million in the fourth quarter, down from $52.9 million.

Operating income improved to $11.4 million from $10.3 million, and operating margins were 22.6%, compared to 19.5% in 2012. The business continued to benefit from price improvements, lower costs and operational improvements. We expect GST will continue to perform at a high level this year ago, although as Steve mentioned, GST expects to make growth investments that could impact margin levels.

GST's adjusted EBITDA before asbestos-related expenses improved to $12.5 million in the fourth quarter, from $11.8 million in the fourth quarter of 2012. Adjusted net income at GST, which excludes inter-company interest and ACRP-related expenses, was $8.7 million, an increase from $6.6 million in the fourth quarter of last year. GST recorded almost $7 million in ACRP-related expenses in the fourth quarter, down about $2 million from the fourth quarter of 2012.

For the full year, GST reported $218 million in sales, compared to $220 million in 2012; operating income of $55.5 million, compared to $47.2 million in 2012; and EBITDA before asbestos-related expense of $61.4 million, compared to $53.1 million in 2012. GST's adjusted net income was $37.8 million in 2013, compared to $31.8 million in 2012. ACRP-related expenses at GST totaled $47 million for the year, compared to $30 million in 2012. The expenses increased in 2013, due to costs associated with the estimation trial.

As you know, GST is required to pay the expenses of all parties involved in the case. We expect legal spending on the ACRP to moderate as activity turns to the development of a plan of reorganization and other post-trial activity. GST's cash and investment balance was $178 million at the end of the fourth quarter.

Now let's look at our consolidated fourth-quarter results in more detail. Gross margins were 31.1% in the fourth quarter of 2013, lower by about 1.5 points from the fourth quarter of 2012. The performance of FME was the most significant factor in the decline in gross margins and in gross profits. SG&A expense of $56.2 million in the fourth quarter was down compared to the fourth quarter of last year by about $1.8 million. SG&A included $8.1 million in corporate costs.

Looking at our segment's operating performances, sales in the sealing products segment were $152.5 million in the fourth quarter, and increased by about 7% from the fourth quarter of 2012. Higher activity in Technetics markets, especially the nuclear and semiconductor markets, was the primary driver of the growth. Excluding foreign exchange, sales improved by about 6%.

Sealing products segment profits were up $4 million from a year ago to $23.9 million. Again, the performance of Technetics was primarily responsible for the improvement in the segment's operating profits, as mix was weighted towards high-margin products sold into nuclear power markets.

Segment margins were 15.7% in the quarter, compared to 14% in the fourth quarter of 2012. Restructuring costs in the segment were about $400,000 in both quarters. Excluding those costs, margins were 15.9% in last year's fourth quarter, compared to 14.3% in 2012's fourth quarter.

Looking at the businesses within the segment, the consolidated Garlock operations reported a slight organic increase in sales. Demand levels were generally comparable to those we saw in the fourth quarter of 2012, but the operation sales level continued to benefit from improved pricing. Although volumes were essentially flat, the consolidated Garlock operations benefited from cost reductions and efficiency improvements, and segment profits and margins improved.

At Technetics, we begin to see conditions improve in the third quarter of last year, and the improvement continued in the fourth quarter. Sales at Technetics were up more than 10%, compared to the fourth quarter of 2012, as the business benefited from higher demand in semiconductor, nuclear and oil and gas markets. As volume increased, and as the product mix became more favorable, the segment profits and profit margins at Technetics improved substantially over the fourth quarter of 2012.

Sales at Stemco also improved, compared to fourth quarter of 2012, as all product groups reported higher sales. Costs were slightly higher at Stemco, as spending on manufacturing improvements increased, and as we completed a new distribution center at Stemco's Berea, Kentucky facility.

This center will enable Stemco to bundle shipments of its full suite of products from a single location, improving customer service and increasing the efficiency of product distribution. The center is now in the final phase of preparation, and should be fully operational by mid year.

Spending on manufacturing improvements, and the distribution center, reduced segment profits at Stemco, compared to the fourth quarter of 2012, and Stemco's margins declined. Conditions in Stemco's markets indicate that OEM activity is likely to increase somewhat in 2014, but after-market activity is likely to be flat with or lower than 2013.

In the engineering product segment, fourth-quarter sales were $85.4 million, up about 6% from the fourth quarter of 2012, when they were $80.2 million. The year-over-year improvement included a contribution of about 1% from foreign exchange.

Profits and margins were down in the segment as the result of the performance of CPI, where we continue to experience weak volumes and expense associated with the restructuring of the operations. Segment margins were slightly above breakeven in the fourth quarter, and down about $3 million from the fourth quarter of 2012. The segment recorded restructuring expense in the 2013 quarter of $2.3 million, compared to $1.5 million in the same quarter of 2012.

GGB performed well in the quarter, and helped to offset some of the weakness at CPI. Sales at GGB improved by more than 10%, as demand increased in all markets and in all geographies. We were especially pleased to see improving sales in Europe, where GGB saw meaningful year-over-year growth in sales for the first time in several quarters.

Conditions improved across both industrial and automotive markets at GGB, and with higher volume, profits and margins also improved. Both measures were substantially better than they were in the fourth quarter of 2012.

Sales were down at CPI, as I mentioned, because of lower volumes in North America and Europe. With lower volume, material cost increases and higher restructuring costs, CPI reported an operating loss in the quarter and a negative margin. We expect CPI's performance to improve in 2014.

As we have already noted, a number of factors affected sales in the engine products and services segment in the fourth quarter, and sales there were 33% below the fourth quarter of 2012. Lower engine revenues accounted for about half of this decline. The remaining half came from lower parts and service revenue, due to the factors we have mentioned previously.

Lower engine revenues and reduced parts and service volume had a significant effect on profits in the segment. Profits were about $0.5 million in the quarter, compared to $9.2 million in the fourth quarter of 2012.

Margins reflect the significant loss of volume, and were additionally reduced by a $1.4 million non-cash adjustment to purchased inventory. FME's backlog stood at about $140 million at the end of December, about the same as at the end of September. We reported GAAP net income of $5.2 million, or $0.22 a share, for the quarter. This compared to GAAP net income of $5.7 million, or $0.27 a share, in the third quarter of last year.

We had an unusually low effective tax rate in the fourth quarter, primarily because of the ratio of pretax income among tax jurisdictions. During the year, we continuously forecast our tax expense and adjust it as necessary at each reporting period.

For the first three quarters of 2013, we were expecting a certain percentage of our income to come from North America, but in the fourth quarter, a much larger percentage of profits originated in European jurisdictions, where taxes are much lower. This mix reduced the effective tax rate for the entire year, which created a low rate in the fourth quarter, due to the catch-up effect. Based on our current expectations, our full-year tax rate for 2014 should be in the range of between 31% and 34%.

Our adjusted EPS in the fourth quarter was $0.46, compared to $0.59 per share in the fourth quarter of 2012. After-tax adjustments that increased our $0.22 of fourth quarter GAAP earnings to $0.46, are $0.06 added for restructuring expense, primarily at CPI, $0.20 added for interest due to GST, and a negative $0.02 for the net of other nonoperating items, as well as the tax accrual.

As was the case in the third quarter of 2013, our diluted share count in the fourth quarter of 2013 was significantly higher than in the fourth quarter of 2012. The fourth quarter diluted count includes about 3.1 million shares required by GAAP accounting in connection with our convertible debentures and a related option and warrant hedge. GAAP accounting does not allow us to record the benefit of this hedge prior to the maturity of the debentures, but that hedge would effectively reduce the dilution of our common stock from 3.1 million shares to 1 million shares. These debentures mature in October of next year.

Our free cash flow was about $29 million in 2013, compared to about $82 million in 2012. Several factors drove the change. EBITDA was lower because of the decrease in our operating income.

Compensation-related payments increased compared to 2012, and pension expense was higher in 2013 than in 2012. We also recorded an increase in working capital activity, as our markets moved to higher levels.

Capital spending was about $31 million in 2013, compared to almost $36 million last year. We ended the year with a cash balance of about $65 million, up a little more than $10 million from our balance at the end of 2012.

In 2014, our current plans calls for capital spending in a range of between $45 million and $50 million. The plans include two new facilities at Stemco: one, the friction product manufacturing facility at our Rome, Georgia facility; and the second a facilities upgrade in Longview, Texas. We also plan to install a new GGB bearing production line in Slovakia, and move the production facility shared by GGB and Stemco in China to a new location.

Now I will turn the call back over to Steve.

Thanks, Alex.

Looking ahead to the full year of 2014, conditions in many of our markets have stabilized and economic indicators are pointing towards growth in industrial markets over the course of the year. Under those conditions, we expect an organic growth rate in the low single digit range for the full year. With the benefits of higher volumes and our programs to achieve operational commercial excellence, we expect our segment profits and profit margins to improve in 2014 over the levels we have recorded in 2013.

Looking more specifically at the first quarter of the year, we were encouraged to see increased demand in our semiconductor markets and in the European market served by GGB, compared to the first quarter of 2013. Markets served by other EnPro businesses remained stable, although CPI continues to deal with soft demand in the Canadian natural gas markets, along with the normal weak winter quarter for CPI.

As we have reminded you in the past, our cycles are short and our visibility is limited. But under the conditions I have just described, we expect total first-quarter sales near the level we reported in the first quarter of last year. Our segment profits in the first quarter should benefit from the restructuring and other operational improvements that we have made over the past several quarters, but our product mix is likely to reflect higher sales to original equipment markets, where our profit margins tend to be lower.

This is especially true in the sealing products segment, where lower margin sales to the semiconductor industry are likely to increase. With those factors in mind, our segment profits and profit margins are not likely to improve over those we reported in the first quarter of 2013.

In closing, we are looking forward to a good year in 2014. We are starting to see meaningful growth in Europe for the first time in many quarters, and we're seeing increased benefits from the acquisitions that allowed us to form the Technetics group, and a substantial increase in Stemco's addressable markets. And we continue to make progress in the commercial and operational initiatives that we expect to ensure our long-term success.

These facts, coupled with the judge's opinion estimating GST's liability for mesothelioma claims at $125 million, and endorsing GST's arguments on the key factors in the case, give us a very encouraging start to the new year.

Now we will open the line for your questions.

(Operator instructions)

Jeff Hammond, KeyBanc Capital Markets.

Good morning. First on CPI, one, at what point do we start to get impatient about improvement here? And maybe two, addressing that -- how -- what gives you the confidence, Steve, that 2014 is the turning point where that business gets better?

The patience question is a tough one, because I actually have not been very patient, to be honest with you. So I don't make significant leadership changes without good reason. So we have got, as I think we have shared with everyone, a new leadership team we have moved in at CPI. We have moved a number of our high talent folks from other parts of EnPro into the business, and they really stepped in, in about the August-September timeframe. So they're making great progress. I think the -- certainly, the main bulk of all of our restructuring is behind us at this point.

We have a clear focus, a clear strategy, and what we still believe strongly and as the evidence that this is solid business. There's no reason in the world why we should not be able to get the performance along the margin lines that we have indicated before. We won't get there in 2014. 2014 will be the year to solidify the base. 2014 will be better than 2013. But I think that will position us to move into 2015 and beyond in a great way.

We have a great product line; we have a good reputation, when we do things right. And I have a lot of confidence in the new team that is in there, Jeff. I just -- it's almost inconceivable to me that we would not have a significantly better year this year in CPI than we have had in the past couple of years.

Okay. And then shifting gears to the ACRP. Can you give us a sense of timing for when you would refile your re-org plan? And then secondly, have you heard from the other side in terms of any kind of appeal or want to settle?

Yes, let me handle the second part first, because that's easy. They have 14 days to file an interlocutory appeal, which meant of the process would stop while it was taken up, and they did not do that. So they have taken the committees representing claimants, and other bankruptcy cases have always taken the position that this is not a complete order.

In other words, it's one step along the process. And until there's a final order, it's not appeal-able. Of course, usually the folks that want to appeal it are the defend -- the companies, not the plaintiff side. So for them to have filed an interlocutory appeal -- notice for appeal would have been completely different logic than they have taken in many of these other cases. So they did not do that. That deadline has passed.

So the second is, when we have a plan filed? I think -- I hope it will be by the end of Q1. It's a complicated thing, because we want to make sure that it is a confirmable plan, even outside of the 524(g) statute, if that's what we need, because we are prepared to have the judge move forward to get a plan confirmed, even if we are not under the 524(g) protection. As I said in my script, Jeff, it is a desire of ours to have a consensual deal and get the 524(g) protection.

But quite frankly, with the ruling that we have got, it's not essential. And we can get the judge -- we're pretty sure that we can craft a confirmable plan that the judge can impose. So we want to get that right, but I think it's probably a couple of months away.

Okay, helpful. I will get back in queue.

Todd Vencil, Sterne Agee.

Thanks, good morning guys. Sticking with the ACRP for a second, and I don't want you to have to go into a crazy level of detail on this. But once you guys have filed the plan, can you update us? I know you talked about it some on your prior call, but just update us on what the rest of the process looks like, should the other side choose to appeal? And what kind of time frame? I know we are all just guessing. But what kind of timeframe you think that might involve at appeal to the district court?

I would rather not guess at it, Todd, because it's just so uncertain. Again, to create a basis for appeal, it would have to be a final order and judgment. Unfortunately, Rick is not here on this call, as he normally has been in the past. So I cannot turn the call over to him.

But my understanding -- and again, I'm not a lawyer. But my understanding is that until there were a final order for the judge, which meant he would actually have to impose it. It's only then that -- and in fact, even then, I believe the District Court would have to affirm that plan before it's really in a position to be ready for an appeal. So -- and how long that process will take? It's really just almost impossible for me to predict that, Todd, so I'd rather not throw a date out there.

Appreciate that. Switching to the operation -- the consolidated operations. On the engine side --

Todd, can interrupt? Let me just say one more thing on the whole asbestos thing. And I think, certainly, most, if not all the people on this call understand this. But I think I would be remiss if I did not say, the facts that are laid out in the judge's order are the truth. So this is not a situation of one side versus the other and interpretation in all of this kind of stuff.

The other side's entire game of asbestos against Garlock was based on the fact that they had a lot of -- not a lot, a couple of thousand people that contract mesothelioma. They know it costs us a bloody fortune to defend these cases, and they can stand in front of the jury and offer all the junk science that our judge threw out. And it had a chance of impacting and influencing some of the jurors. By the way, it did not influence very many of them when we went all the way to verdict, hardly any.

So the other side is out there in the world, asking -- why, this judge is biased, or this judge is an outlier, and so forth and so on. It is just a bunch of horse hockey, because all the judge did is see the facts and say, it's the truth. So the risk of appeal, I'm not worried about the risk of appeal, because it's the truth. There is no -- he didn't have to swing to one side or the other. He simply saw the facts as they were and said, this is what is happening and this is what has happened to Garlock. It is so blatantly obvious to any reasonable person that looks at it. So we have that ruling now, and by God, we're going to get a good outcome for our shareholders. That's the way I feel about it.

So anyway, sorry. I just wanted to do that, Todd, because I enjoyed it. But get back to your question.

That was well put, Steve, and I enjoyed it, too. (laughter)

I knew you would, Todd. (laughter)

So now this is a let down, now. I should have asked this question first. But on the engine business, you talked about the fact that a lot of the headwinds you saw in -- at the end of 2013 were temporary in nature. Can you talk about what the path looks like to get back to some sort of more normalized level of profitability? Hopefully, that normalized level of profitability isn't the margin that was in the fourth quarter. So what is the timeframe to see that work its way back to normal? And what do we think normal looks like at this point?

Yes, it's a very good set of questions. Thanks for bringing that up. First of all, there's two things with Fairbanks, right? One is the new engines and one is parts and service. And we shared in great detail, I think two calls ago, that on the parts and service side, which clearly carries more margin, right, than new engines. On parts and service, we got the triple whammy.

First, and the easiest to explain, is just the nuclear parts and service that we do, we have been doing that for 20 plus, 30 years. And we actually looked at the history of what that fluctuation had been. We have not lost any position with those nuclear power customers, and it just has a normal fluctuation to it. Because it's not a big enough market to have stability, so we have several big nuclear plants that don't go down during the year and don't do maintenance, it affects our parts numbers. And so we were just experiencing last year what I would describe as a normal cyclical pattern that does not really have a pattern to it. But that will not -- as far as we can tell, that will not continue into this year. We will be back in a normal level.

The second factor was the government sequestration, which has obviously now been lifted. We -- and it hurt our comps even more than it hurt last year, because there was some advanced buying by the Navy in the fourth quarter of 2012 -- really even the second half of 2012. And so 2013, we had to deal with the sequestration as well as the government shutdown and all of that monkey business. So that's behind us. We have seen orders return at Fairbanks to what we would consider a more normal level.

And the third factor, which is also just simply a timing issue, is that there were far fewer ships. In fact, we had zero that came in for midlife overhauls, and very few that came in for major overhauls. And we even had a reduction in the minor overhauls. And we went to those numbers with you all back, I think, in the summer or the fall. And that will return back to the more normal range this year.

So it's not that the Navy was not working on ships; they were just not working on ships that had Fairbanks Morse engines on them to drive them. So this year, the schedule is back, like I said, to more normal. We have also seen that reflected in the order pattern. So on the parts and services side, I think this year will basically be back to what our historical run rate the last several years has been, excluding last year's results. And as Alex said in his script, about half of our volume shortfall was because of that because of parts and service. And like I said, that carries a higher margin.

The other side is the new engines. And even though this year, we will ship -- what is it, Don? 26 new engines in 2014, because we shifted three years ago to percent completion accounting, a lot of the revenue for the engines that we'll ship has been booked in the past. And we have -- so that's one reason, and we do know, as we have shared with you before, we have a lull, not completely to zero, but we have a lull in the engines we are building for the Navy in the 2015 and 2016 schedule. That's what the team has turned aggressively towards that commercial market to sell new engines.

So we are encouraged by that. We are encouraged by the fact that we sold six of our legacy design products not under the MAN license into the commercial markets last year. We have a lot of activity underway to land more of our commercial business. It's kind of new to us. But when you blend all that together, I am very confident that we will have a better year at FME this year than we did last year.

That's great. Thank you so much.

Joe Mondillo, Sidoti and Company.

Hello, good morning. Just to jump on that last questioning there in terms of engine. So a couple of things. First off, how do we think about how -- for one, you anticipate the parts and services to rebound? I am assuming, starting in the second quarter? Is that fair to say?

No, I think we'll see -- there -- it takes us a while to make them, but the orders have been good. So I would expect to see little bit of improvement in Q1. Maybe not full run rate because, as the orders have come in, I think the average lead time on parts is 4 to 5 weeks. So there is always a little natural lag between orders and shipments.

Okay. So I guess -- (multiple speakers)

We are seeing -- we've already seen a return to a good order pace of parts now. It has only been one month, right? But our -- certainly our expectation in any -- we don't see any signals that, that has not returned to normal levels and will be sustained. So I would expect the first quarter to be more in line with what we have seen in the past. And then in the second quarter, to be in line with what we've seen in the past on the parts side.

Right. So just to clarify where I am coming from, it seems like, in terms of your guidance for the first quarter of sales being down, it seems like you are seeing improvement on the sealing segment, engineered products. Stable CPI, improving at GGB, so it seems like if sales are even flat year-over-year, it seems like you're seeing a pretty big year-over-year down at FME. Is that the case? One, and then -- (multiple speakers)

No, the new engine side will be down.

Okay.

So that drives a lot of top line activity, because it's not as much on the margin, as I said, because we don't make as much on that. The other thing, Joe, is, we are always cautious in the first quarter, because our business gets effected by, in the short term, negatively by bad weather. But bad weather is really good for us, actually. So Stemco, for instance, with all the snow and ice and bad weather that we have seen, what fleets do is, fleets -- when we have a bad winter like this, first of all, it really chews up the parts that are on the wheel end of a truck more aggressively than without it.

But the fleets don't want to take their trucks down to do maintenance until the season is over, because the last thing they want to do is put a new CO or new components onto a truck and put it back out in the same environment after spending money on maintenance. And so, that is true every year. So we always have a bit of a first -- weak first quarter Stemco. It's more weather dependent than our other businesses. And the fact of the matter is that, then, returns. So we like it to be bad weather, but it doesn't show up in our P&L until Q2 and Q3.

It's actually a similar phenomenon in our other businesses, to probably a lesser extent. But the same thing is true with CPI, particularly with the higher gas prices. If the -- picture yourself in the middle of Alberta, Canada, and it's 30 degrees below, and you have got four hours of daylight everyday, you are not going to be doing a lot of maintenance on the reciprocating compressors. And quite frankly, when the gas price is high, you are run that compressor until it fails, because you don't want to take it down. Not right now, when the gas prices are actually as high as they're going to be for the year. And so you are going to avoid doing that maintenance until it gets warm and you get more light, and gas price gets back more to non-inflated situation because, in fact, of the cold winter that we are having, right?

So -- and then quite frankly, even in Garlock, we have always seen the same phenomenon. Because if -- the worse the weather, the less mechanics and mill wrights and pipe fitters want to be out in the chemical plant or refinery, or anything. Now, some are on the Gulf Coast, so it's not as affected as much, but for any petrochemical plant that's in the weather zone, if you will, there's just not as much maintenance that happens in the cold weather. Trust me; I used to work in one of these facilities, right? And it's no fun to be out in a chemical plant when it's 5 degrees and you have got to take something down. And we take something down, it's going to freeze up.

So there's just a natural pressure on our business, many parts of our business, when there is a very, very cold and hostile winter. That just simply makes it better for us in Q2 and Q3. So it's really hard for us to call. And as we've always said, we have a short cycle environment, so we don't get to see really advanced order patterns. So I'm giving you guys some feel just based on my judgment of the business.

Okay. No, that's appreciated. In terms of engine, how do we think about the transition? I don't know if you can provide any further color on the transition to the percent of completion, and how that is going to affect the revenue recognition this year? And how that affects the product mix and the margin within the business? How can we think about that?

Yes, so what we did -- when did we make the shift, guys? It was the summer of 2011?

18 months in.

At least 2011. The summer of 2011?

2012.

Summer of 2012. We made the shift. But what we did, Joe, and we have explained this before, if you want to go back and look at any of the scripts or listen to any of the history. You may even have this in your notes. We did not do a cold turkey switch. So what we did is, we said any program, and that does not necessarily mean an engine. Any program -- any ship program that was already won and in the pipeline, we would continue with completed contract. And any new program that we started, we would start with the percent completion.

So it did not have a ton of effect in the first year we did it. It had a lot of effect in 2012. Because what happened is, we were rolling off a bunch of completed contracts, and we got the whole revenue in the engine in 2012. And we were also building, under percent completion, many engines that did not ship until 2013. So it really skewed the comp. The better way to look at FME's business would be to take 2013 and 2014 and average them between two years of the engine revenue.

So because -- and so then in 2014, to your question, we are actually going to be shipping 26. Many of these units were really near completion at the end of last year, so they are going to carry very little revenues with them. And we are going to be shipping some engines that bring back some completed contract revenue this year. So we are going to have in the [mid-$30 millions] of completed contract revenue for four engines that are scheduled to ship this year, which is actually, I think, more than completed contract we had in last year. We had zero in 2013.

So now we have got four new completed contracts coming, as well as percent completion for stuff that we will be building for the future. And anything else that we might win. Because the stuff that we win on the commercial side does not have these two to three year lead times associated with the new engines, because -- the Navy stuff does, so we can see the Navy a few years out.

The commercial stuff is more like a 12 month lead time or 10 month lead times. So if we want something commercially in the first half of this year, we would have to get started building it right away. Like we did the six engines -- the six commercial engines we won last year. So I think the best way to -- if you want a conservative way to think about engine revenue, new engine revenue, it is probably about the same as it was last year. And margin is probably going to be about the same as it was last year. So the recovery in FME is going to be parts and service driven this year.

So even -- yes, that was helpful. I just wanted to clarify, though. Even with a recovery in parts and services, it's not going to be enough to offset the additional engines that you are going to take on. So it sounds like, if margin is flat with 2013, which was about 10% or less, ex any of the one-time stuff, you're not getting back to that mid-teen or higher teen type of level?

No, because we don't -- no, I'm sorry. It will be better. I would say it's going to be halfway between last year cleaned up and where we have been historically. Because what I was saying, it's going to be flat year-over-year, is only the new engine revenue. So the parts and service will be back. That will higher carry higher margin. So we will definitely see an improvement in margin, I believe. Definitely -- I shouldn't say. We are expecting to see an improvement in margin and FME, just because of the return of the parts and service piece. And engine will basically be -- new engine will basically be where it was last year.

Okay, thanks a lot. That took a lot, but thank you. I appreciate that. I will jump back in queue, since that took so long. Thanks a lot.

Gary Farber, CL King.

Yes, thank you. Just a couple of questions. Can you speak to gross margins a little bit in the environment you described? They moved around a fair amount during the year, this year. How do you think about them for fiscal 2014?

Alex is going to address that, Gary.

Yes, and I think, Gary, what I would say for next year, they did move around a lot this year. A lot of that was driven by mix, but even more of that was driven by volume, as things came -- as our volumes were impacted. So I would say that our gross margin level would be at what you saw in 2012, would be a more reasonable comparison. And then we guided you towards the OI levels, as well. We see improving OI rates, as well, again largely driven by margins. (multiple speakers) So I think, Gary, the way to think about 2013 versus 2014, in 2013 we had really good years in all of Garlock, both consolidated and de-consolidated.

We had a really good year in Stemco. Those two businesses are in very good shape. I'm optimistic that they will continue to perform well in 2014. I think Stemco will perform even better, to be honest with you. And if Garlock can match what they did last year, it will be phenomenal. We had great margins in Garlock last year. The third sealing business, Technetics, also had a very good year. But it was all driven by the second half of the year. So -- but we see those trends in those markets continuing into this year, so I am also optimistic that the Technetics group will have a better 2014. So that's sealing, right?

If you look at engineered you have got two-thirds of it, obviously, is GGB. And GGB actually ended last year with a pretty solid performance for the year. Again, it was all second half based. We were significantly behind plan at the middle of the year, really because of the very weak market in Europe. And so GGB was very heavily driven in their performance by the second half of the year. Again, we see that continuing into 2014, I hope. We certainly have not seen any indications that it won't continue. And we struggled with, as you guys know, with CPI and FME. CPI is going to get better to some extent. First of all, we won't have all the restructuring charge. And second of all, we are starting to be doing a lot more of the right actions in CPI.

FME, we will be soft still in new engines, but the parts and service business, for the three reasons that I went through with you, hopefully will be back to our more normal and historic levels there. And obviously, that carries a little bit better margin than new engines. So when you look at it year to year, it's pretty straightforward. The problem becomes when you blend it all together and look at it at the intro level, it is a bit -- it can be a bit misleading or a bit confusing.

Okay, and just a few more, if you don't mind. Can you speak, also, about the acquisition market? Just generally, whether -- how you see it and how you think about your own pipeline?

Yes, look. We -- I think we were pretty honest with you guys after the Motorwheel acquisition, where we had to draw down on our revolver significantly and we were in the middle of the ACRP, not knowing at all where it was going to come out. And having done some decent-sized deals the 12 months prior to Motorwheel, which included the PSI and Tara and other pretty significant acquisitions for us. We said -- you know what? Let's spend the rest of the time until we get a judge's ruling digesting those businesses and getting them integrated well, and getting them really solid. Get the revolver paid back down and play this ACRP out to see where it lands.

So that's really what we did. We did one small deal in Asia for Garlock, but it was real small. But obviously now, we are in a much, much different situation, with the risk associated with the ACRP really very, very much contained. We have all of the capital availability that we are going to need to do whatever inorganic growth make sense to our businesses. And so we have now, for -- and we saw this coming. We certainly did not see it coming as we did not know that the judge would completely see things our way. We were obviously hopeful he would, but we did not know that. But we did start to rekindle the pipeline to some extent a little while ago.

And so yes, it's reasonable to expect that, going forward, we will be back at the pace that you saw us, be able to do deals in the 2009, 2010 and 2011 timeframe. That's certainly my expectation. We have got businesses that are strategically very strong. With Garlock, Technetics Group, Stemco, GGB, very, very strong in their markets. Leading market shares, great reputation, strong operating teams, very focused. And so the notion that now, with the judge's ruling, that we have got now new access to capital, I'm just extremely optimistic about our team's ability to do really, really smart, accretive deals. So I'm pretty excited about it, to be honest with you.

Right. And then just one more. In Europe, is it too early to say it's the beginning of a cycle there? And then, how do you contrast, if it is the beginning of a cycle, with the North America?

I think it's too early to say it's the beginning of a cycle, because we have seen a lot of sputtering out of Europe, really, since the recession. This feels a little bit better, but I think we need another quarter or two, to be honest with you. So yes, I think -- and the other part of your question, Gary?

Just contrast it with North America. How does North America contrast to Europe, just generally?

If you ask me, in the segments that we touch, in the [indies] segments that we touch, I think we are going to just continue forward in North America on the same margin pace that we have seen in the past couple of years. It has been a 3% to 3.5% growth environment. It might be a little bit better North America, but you see the same economic stuff that I do. It's not going to be 5% or 6% GDP growth, in my opinion. It's going to be maybe moderately better. I think China definitely has reset at a lower level, but as you know, our exposure in Asia is not huge. So I still think our business in Asia will grow little bit, just because we are still gaining share.

Right, okay. And then just one last one. You seem very positive on the truck market. I was wondering if we could speak to, is that a combination of the fact that economic activity is picking up, and you guys have good market shares? Or is that also a function of the fact that you did some good acquisition in that space over the last couple years. Are you getting leverage on that as well?

I think it's more the latter. I don't think the natural demand in North American trucking is going to be anything fantastic. I think it's going to be about what we have seen, to be honest with you. The new truck builds are still going to be hanging in there, is parts, what we look at, in terms of forecast. And I think the aftermarket is going to be about where it has been. It will be -- our business will be positively impacted by the weather phenomenon that I told you about, I believe, in the second and third quarter.

But it's the acquisitions that we have done, and the -- and what our national market share is, and quite frankly, the strength of that team. We're going to continue to grow our share and expand into other product lines that we have acquired, and others that we might acquire going forward, and others that we have in development. So the Stemco engine is going to keep rolling along.

All right. Thank you for your help.

Jay, we have time for about one more question if there is anybody left in the queue.

Jeff Hammond, KeyBanc Capital Markets.

Hello guys, just a couple quick wrap-ups. Can you -- how are we thinking about the share count for 2014? Just given the noise around the stock price and the converts?

It's a little bit of a hard question to answer, Jeff, unfortunately, because the share count will be driven by where the stock price is.

Okay, if we assume the stock price is stable in the low $70s?

Then our share count wouldn't change for the remainder of the year. Does that make sense?

Okay.

Because basically, what we're doing is, we're calculating -- and I can take you through this offline, but we calculate the dilution -- the economic dilution related to the convertible note. And then, for accounting purposes, we have to add additional dilution that is related to the shares we are obligated to provide under the hedge. And we don't get credit for the shares that we get back from the financial institution, under the terms of the hedge.

So you have this double dilution effect, which I tried to explain If you were to look, we diluted roughly 3 million shares this quarter, driven by the share price that the actual economic dilution, once you net out the effect of that hedge, is only about 1 million shares. So if you were going to really do that analysis that the end of the year, we were at, this year, 23.5 million shares outstanding versus last year, at 21.6 million. The real number to use would be more like 22.6 million in terms of the economic dilution. And then if you assume the share price did not move, it would basically stay that way.

That does not reflect the current share price. That reflects (multiple speakers) the average of the year.

Yes, the better number to use probably would be more like the quarter, so 24.2 million less, too, so you would be at 22.2 million shares.

Yes, I can go through the noise or the nuance of it off-line. I guess I just want to make sure that, given that this stock has moved materially since the start of the year, that, that's not going to -- because that would not have effected your 4Q share count.

Right, that's a good point. (multiple speakers) You can just do the math from 4Q to the current stock price, that's correct.

(multiple speakers) So does this big move in the stock price raise the share count, at least from a headline perspective?

It will have. Yes, it will have. Yes.

Okay. We can go through that off-line. Just on the ACRP, and now we have at least a little bit of resolution and a number. Can you just talk about how you are thinking about reporting the same or differently, going forward, in terms of trying to start to get people focusing on the total Company? And then, what is the process for reserving, now that you have a number?

Look, unfortunately, Jeff, as we tried to communicate from the very beginning, there's really two ways to look at the Company. The one way, that it seems like the Street went to, was -- let's look at what is consolidated, and then treat this Garlock thing as an option, right? Just treat this GST thing as an option and how much might come back.

My suggested approach, which was not adopted by the Street, was to continue to look at EnPro as you have always looked at EnPro before the filing, and then simply deduct what is going to be necessary, or some estimate of what is going to be necessary for the -- for -- to fund the trust. So I would still, when I asked look at EnPro, when I think about EnPro, it's on that basis. And obviously, we have a much different point of view now about where the range, if you will, that we will end up with in some kind of trust funding. But we still can't put any kind of precision around what that number is.

Because again, our desire is for a consensual resolution, and to qualify under 524(g) of the bankruptcy code, and to move forward with this. And it is still our hope that we are going to be able to do that. So that still adds a little uncertainty, but I can tell you it's not between $125 million and $1 billion like it was a while ago.

So -- but, that said, the GAAP requirements, the accounting requirements, and everything else, even what our advice from our SEC lawyer basically says, we can't report a pro forma -- on a pro forma basis. And we can't re-consolidate until we have a final order from the court. And it's -- and once we get a final order from the court, we believe we will be able to reconsolidate. But quite frankly, I -- quite honestly, Jeff, I just -- it does not affect the economic view of the Company. It is an accounting exercise.

So I guess if I were doing it, and talking to folks about what the Company is worth, I would look at the whole Company and say -- okay, they've got to be able to get this thing resolved for X, given the judge's ruling. And quite frankly, when the official reconsolidation happens, I'm not sure it's all that relevant from a true economic standpoint. But anyway, that's my --

Okay, thanks, guys.

All right, thank you, everyone, for dialing in today. If you have any follow-up questions or anything else you would like to ask, please don't hesitate to give me call at 704-731-1527. Again, we thank you for dialing in, and we will talk to you next quarter.

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