Enpro Inc (NPO) 2014 Q1 法說會逐字稿

Good morning. My name is Anastasia, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industries first-quarter 2014 results conference call. (Operator Instructions) Thank you. Don Washington, Director of Investor Relations for EnPro Industries, you may begin your conference.

Thank you, Anastasia, and welcome, everyone, to EnPro Industries' quarterly earnings conference call. I will remind you that the call is also being webcast at EnProIndustries.com, 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 first-quarter performance and our outlook in just a moment. But before we begin, I want to point out that 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 facts. 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, 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 may refer collectively to EnPro and one or more of its subsidiaries as we; or to the business' assets, debts or affair 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.

I want to remind you that our financial results reflect the deconsolidation of Garlock Sealing Technologies LLC, Garrison Litigation Management and their subsidiaries effective June 5, 2010. The results of these entities will remain deconsolidated during the pendency of the Chapter 11 legal proceedings to resolve asbestos claims against GST. We refer to this as the asbestos claims resolution process, or ACRP, and you will hear us use that acronym during the call today. GST's results -- summary results are presented separately in our earnings release.

And now I'll turn the call over to Steve.

Thank you, Don, and good morning, everyone. As you can see in our earnings release, we reported a slight increase in consolidated sales compared to the first quarter of 2013. Sales grew from the benefit of foreign exchange and the small impact from two acquisitions completed in March of this year. Excluding those items, organic sales declined about 1%.

As Alex will discuss in more detail, the Sealing Products segment sales were well above the first quarter of 2013 by about $8.4 million, or 6%. Sales in the engineered products segment were about the same as the prior year, and sales in the power systems segment, formally named engine products and services segment, were down about $8.3 million, or 17%.

Compared to the first quarter of last year, market demand was mixed. We experienced increases in our semiconductor, aerospace, nuclear and heavy-duty truck markets as well as in our European, industrial and automotive markets. However, activity was slower than last year in both the oil and gas pipeline and engine parts and services markets.

Sales at GST, our deconsolidated entity, were lower than the first quarter of last year. Uncommonly cold weather in January and February affected demand across most of our operations in North America. However, warmer weather in March produced an uptick in activity in these markets.

Looking at profitability in the first quarter of 2014, overall gross margins improved over the first quarter of 2013. However, SG&A costs, including R&D expense, were also higher as we invested to support our growth strategies. As a result, segment profits of $29.1 million were 10.1% of sales versus 11.1% in the first quarter of last year.

The deconsolidated results of GST included $52.8 million in third-party sales, down about 7% from the first quarter of last year. GST's operating profit margins before asbestos-related expense were 22.3% of sales, almost the same as the first quarter of 2013.

EnPro reported consolidated net income in the first quarter of $1.3 million, or $0.05 a share, and adjusted net income of $9.8 million, or $0.39 a share. The deconsolidated operations of GST, which do not report income on a per-share basis, reported adjusted net income of $8.2 million.

In March of 2014, we completed two small acquisitions. Stemco acquired the remaining 60% interest of Stemco Crewson LLC joint venture from Tremac, LLC. The joint venture was formed in 2009 to expand Stemco's brake products offering to include automatic brake adjusters. Fully owning Stemco Crewson will allow Stemco to accelerate investment in new product development and commercial strategies focused on market share growth of these products.

In a separate transaction, Garlock Taiwan Corporation, a member of the Garlock family of companies, acquired the assets of Strong-Tight Company Limited, a maker and seller of gaskets and industrial sealing products based in Taiwan. The acquisition adds an established Asian marketing presence and manufacturing facility from which the Garlock family of companies can expand its service to the Asian market. Despite their small size, both of these transactions are important for our growth strategy.

Also in March, we completed two exchanges of our common stock for a total of about $56 million of our convertible debentures, reducing the principal from $172.5 million to $116.4 million. Alex will discuss these exchanges in more detail. But we were pleased to be able to address a meaningful portion of the debt prior to maturity in late 2015 without reducing our liquidity and preserving our flexibility as we seek opportunities to grow.

Also in the quarter, we changed the name of our engine products and services segment to power systems. We made this change to more accurately reflect the segment's products, its principal components of systems that generate electrical power and other types of energy. These components include not only engines but also generator sets, controls and other peripheral equipment required in systems that generate power. The new segment name represents our strategy to broaden the scope of the business deeper into commercial applications.

In the next several weeks, we expect Fairbanks Morse will be able to announce the significant multi-year contract to supply engines to a commercial application. While it's too early to comment on the details, the contract gives us confidence in the viability of Fairbanks Morse's strategy to serve commercial markets.

The second endorsement of Fairbanks Morse's strategy is the recent completion of the design feasibility study for our next generation of opposed-piston engines with favorable results. This work was completed with Achates Power under an agreement we announced last fall. This technology has great potential for commercial applications and could open significant new power systems markets for us.

Before I turn the call over to Alex, I'll touch on the ACRP. As you know, the judge issued his estimate of GST's mesothelioma liability on January 10, 2014. GST's next step will be the submission of a new plan of reorganization that incorporates the court's $125 million estimate of mesothelioma liability that both GST and we believe is best suited to win confirmation with or without asbestos claimants' support.

In addition the amounts from mesothelioma claims, the plan will include settlement offers for non-mesothelioma claims, a litigation option for all claimants in the federal courts, and significant funds to cover administrative and litigation costs. The litigation option will include case management orders that require plaintiffs to make full disclosure of their exposures to asbestos products produced by other companies and of their bankruptcy trust claims, and that will provide efficiency and transparency.

We are confident that the court will agree that GFC's plan is feasible and provides fair compensation to both current and future claimants consistent with the judge's estimations decisions and the merits of the claims, and we believe the plan will enable GST to achieve finality and certainty in resolving asbestos claims against it. GST currently expects to submit this plan in the second quarter.

As we've stated before, we believe a settlement with the plaintiff representatives would be the best -- would be the most expedient path to resolve -- to resolution for all parties. However, thus far the claimants' representatives have not responded reasonably to the court's estimation decision and continue to posture as if that decision is without significance. As a result, GST and we are prepared to move forward with what we believe to be a confirmable plan of reorganization absent a consensual resolution.

As we've stated before, we are in uncharted territory. So we're being very careful to construct a plan that we're confident both makes sense in light of the court's estimation decision and can be confirmed by the court and upheld on appeal. We ask your patience as GST and we continue to navigate through this process.

Now I'll turn the call over to Alex to review our results for the first quarter.

Thanks, Steve. To repeat Steve's comments about first-quarter sales, they were about $287.2 million, up slightly from the same period of 2013. However, organic sales were down about 1% compared to the first quarter of 2013 primarily because of lower sales in the power systems segment, where aftermarket demand remained soft.

By geography, after adjusting for foreign exchange and acquisitions, sales in Europe were up 2% overall from the first quarter of last year, with improvements in GGB, CPI and Technetics. However, the Garlock Company's European sales were lower primarily due to lower oil and gas project activity.

In North America, Technetics' sales were up significantly, and sales at Stemco and GGB were both up modestly. The Garlock companies, CPI and FME, all reported North American sales below the first quarter of 2013.

I'll discuss the performance of our individual businesses in more detail when I cover our segment results.

For the quarter, gross profits were higher by $2.3 million compared to the first quarter of 2013, and gross profit margins improved to 33.6% compared to 32.8% in the first quarter of 2013. Cost improvements at GGB and Fairbanks Morse, along with price improvements at almost all of the businesses, more than offset the effects of lower volume and less profitable mix at the consolidated Garlock companies, CPI and Fairbanks Morse.

SG&A expense of $78.9 million in the first quarter was compared to the first quarter -- was higher compared to the first quarter of last year by about $6.3 million. Higher corporate costs accounted for $1 million of the increase, with the remainder spread across our operations. The increase in SG&A largely reflects project-related expenses as we continue to invest in new ERP systems, R&D programs and other growth-related initiatives.

Looking at our segments' operating performances, sales in the ceiling products segment were $155 million in the first quarter, an increase by about 6% from the first quarter of 2013. Higher activity in Technetics' markets -- especially semiconductor, aerospace and nuclear power market -- contributed, as did higher sales in Stemco's heavy-duty truck parts market. Excluding foreign exchange and the late-quarter acquisitions that Steve mentioned earlier, the segment sales improved by about 4%.

Sealing products segment profits were down $4 million from a year ago to $17.1 million. The largest drivers of the change in segment profits were a less profitable mix as OEM sales increased and higher SG&A costs. In addition, there was a one-time credit that benefited the first quarter of 2013. Segment margins were 11% in the quarter compared to 14.5% in the first quarter of 2013.

Looking at the businesses within this segment, the consolidated Garlock operations reported a decrease in organic sales. Markets were mixed. Softness in oil- and gas-related markets more than offset increases in Asia and the Garlock companies' North American construction market. Lower volumes, new product development expenses and investments in selling resources also reduced margins.

Sales in Technetics were up strongly compared to the first quarter of 2013 as the business benefited from higher demand from semiconductor, aerospace and nuclear power markets. As volumes increased, gross profit and gross profit margins at Technetics improved over the first quarter of 2013. However, segment margins declined as SG&A expenditures increased compared to the first quarter of last year, when we had a one-time benefit that I mentioned earlier.

Sales at Stemco also improved compared to the first quarter of 2013, particularly driven by OEM demand for its core wheel end and brake products. Costs were higher at Stemco as work continued on the distribution center improvements, consistent with our strategy to ship multiple products in the same load and improve the efficiency of Stemco's freight movements. These higher costs slightly reduced margins at Stemco.

In the engineered products segment, first-quarter sales were $91.8 million, equal to last year's first quarter. The contribution from foreign exchange was about $1.2 million, or 1% from 2014. As I'll discuss in a minute, organic sales benefited from a nice top-line improvement at GGB offset by softness at CPI.

Profits and margins were up in this segment as volumes increased and as pricing costs improved at GGB. The improvements were partially offset by lower volumes and a less profitable mix at CPI. This segment recorded $0.8 million in restructuring expense in the first quarter of 2013, while restructuring expense in the first quarter of 2014 was insignificant.

Sales at GGB improved by almost 6%, including 2 points from favorable foreign exchange. GGB's European, industrial and automotive markets continued to strengthen in the first quarter of 2014, giving us now two consecutive quarters of year-over-year improvements.

In North America, automotive demand was up, but other industrial markets were down compared to the first quarter of 2013. GGB's profit margins improved, especially in its European operations, due to lower scrap and better labor efficiencies. Margins also benefited from lower costs in 2014 related to implementing a new ERP system last year.

Sales were down at CPI, as I mentioned, because of lower volumes in North America. Lower material costs, higher pricing and lower SG&A spending were not enough to offset the impact of this lower volume. CPI's segment margins were about equal to last year.

Although CPI still has a ways to go, the situation there seems to have stabilized. The CPI team is enthusiastic, and the business is tracking toward our expectations for 2014.

In the power systems segment, sales were 17% lower than in the first quarter of 2013. Percentage of completion revenues on new engines were slightly higher than a year ago, but sales of spare parts, engine upgrades and aftermarket parts and service were all lower than last year. Segment margins reflected a less profitable mix as parts and service sales declined and low-margin engine revenue increased. Although aftermarket order rates have improved from the trough we experienced in the middle of last year, they remain below the quarterly average we've seen in recent years.

We reported GAAP net income of $1.3 million, or $0.05 per share, for the quarter. This compared to GAAP net income of $8.6 million, or $0.39 per share, in the first quarter of last year.

Excluding interest to GST, a non-cash loss on the exchange of debt and other selected items, we earned $0.39 per share this year compared to $0.56 per share in the first quarter of 2013. The adjustments that take our first-quarter 2014 GAAP earnings from $0.05 per share to $0.39 per share are a loss of $0.09 per share on the exchange of debt, $0.19 of interest to GST and $0.06 to adjust to the tax accrual and other items.

The difference between our adjusted earnings in the first quarter of this year and our adjusted earnings of the first quarter of last year primarily reflects an increase in our diluted share count and higher SG&A expense. Combined, those two items reduced our adjusted earnings per share this year by about $0.24, $0.05 from the additional dilution and $0.19 from higher SG&A.

Our effective tax rate for the first quarter of 2014 was 45.7% and reflects the effect of discrete tax items on our low pretax earnings. This abnormally high quarterly tax rate compares to an unusually low rate of 11.4% recorded in the first quarter of 2013. The first quarter of 2013 rate reflected a retroactive tax credit that applied to the full year of 2012. Overall, we expect the tax rate to normalize in the 31% to 35% range over the course of 2014.

Our diluted share count in the first quarter of 2014 was significantly higher than in the first quarter of 2013. The first-quarter diluted share count includes about 3.7 million shares required by GAAP accounting in connection with our convertible debentures and related option and warrant hedge. The amount of dilution varies with the price of our stock and has increased as our share price has gone up.

GAAP accounting does not allow us to record the benefit of the hedge prior to the maturity of the debentures. If we were able to include the hedge based on our weighted average share price of $71.12 per share during the first quarter, it would have effectively reduced the dilution of our common stock from 3.7 million shares to about 1.8 million shares. The debentures mature in October of next year.

Steve mentioned we exchanged $56.1 million in aggregate principal amounts of the debentures for 1.7 million shares of our common stock plus cash payments to the holders for accrued and unpaid interest and fractional shares. This transaction reduced the aggregate principal amount of the convertible debentures outstanding to $116.4 million and reduced future cash interest payments associated with the debentures by $3.5 million.

We recognized a non-cash, pretax loss of $3.6 million on the exchange of the debentures, which were trading at a substantial premium. After-tax, that loss was $2.3 million, or $0.09 a share.

Taking a look at the deconsolidated results of GST for the first quarter, third-party sales were $52.8 million compared to $56.5 million in 2013. While sales were down in all of GST's markets, North America was especially impacted by the uncommonly cold January and February. GST's operating profit before asbestos-related expense was $11.8 million, or 22.3% of sales, compared to $12.7 million, or 22.5% of sales in 2013. GST's adjusted net income was $8.2 million in 2014 compared to $8.6 million in 2013.

ACRP-related expenses at GST totaled $3.2 million compared to -- for the quarter compared to $11 million in 2013. The expenses were higher in 2013 due to costs associated with last summer's estimation trial. GST's cash and investment balance was $181 million at the end of the first quarter.

Our consolidated free cash flow was a use of $33 million in 2014 compared to a use of $21 million in 2013. The first quarter is traditionally the low point in our cash-generation cycle due to seasonality in many of our markets. Free cash flow in the first quarter reflected lower earnings, higher cash tax payments, higher working capital and other items.

Capital spending was about $7 million year to date compared to almost $10 million in the comparable period last year, when we purchased the manufacturing facility. The non-operating source of cash was borrowing against our revolver. We ended the quarter with a cash balance of about $60 million, down about $5 million from our balance at the end of 2014.

Now I'll turn the call back to Steve.

Thanks, Alex. Before I get into the outlook, I want to just take a personal moment to publicly thank Don Washington for his fine service as EnPro's Director of Investor Relations and Corporate Communications for the past 12 years. As some of you already know, Don will be happily stepping into retirement at the end of June. And although he'll remain at the head of our IR program until then, this is his last earnings call.

Don will be succeeded by Dan Grgurich, who some of you have met and whom all of you will get to know better. Dan's been a member of our corporate planning and development staff and has recently served as the chief restructuring officer for GST. But he also brings an operational background, having served as Vice President of Finance at Stemco and the Garlock companies.

Don has done just a simply outstanding job in successfully communicating our relatively complicated Company's journey from the spinoff of Goodrich in 2002 until today. During that tenure, he has contributed to the wider communications and acceptance of our strategies and accomplishments in both good times and difficult times and of the dynamics of a business that is complex and not easily understood.

I also know many of you have worked closely with Don over the years, and I know you'll join me in wishing Don the very best in his retirement.

Now looking at the second quarter of the year, which is traditionally the strongest quarter of the year due to the seasonality of some of our markets, we are encouraged to see increased demand in our heavy-duty truck markets, semiconductor market and in GGB's European and North American markets. Markets served by other EnPro businesses also have improved with the warmer weather in North America, although CPI continues to deal with soft demand in the Canadian natural gas market.

Based on the year-to-date orders and the current backlog, we expect volumes at power systems to begin an upward trend in the second quarter that should continue through the rest of the year. Our segment profits in the second quarter should benefit from the restructuring and other operational improvements we've 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 in the second quarter of 2014 are likely to be in line with those we reported in the second quarter of 2013.

Now we'll open the line for your questions.

(Operator Instructions) Jeffrey Hammond, KeyBanc.

So really just want to delve into the sealing margins little bit more. I guess if we pull out the one-timer from last year, the margins were down 200 basis points. I'm just wondering if you can maybe quantify how much was mix.

And then in terms of the SG&A and R&D, what you think is bad lumpiness or one-time versus maybe something ongoing. Because it just seems like these margins are -- I go back in my model, I just haven't seen a margin this low in a long time. And it's just a little confusing given the revenue growth.

I understand that. And actually you shouldn't be concerned that it's a kind of sustainable level at all because we did have a number of things going on in the segment. You highlighted one, which is the comp is screwed up a little bit because of the $1.5 million good guys last year in Q1.

The other thing is, in the pipeline business within Garlock, it's a very -- it's kind of very lumpy in terms of sales. This is where we sell the insulating gaskets to oil pipeline projects throughout the world. And those typically come in -- those quarters come in in big slumps, Jeff. There's not much of an aftermarket there. There is some.

And they are pretty good margin products. And we just were a little bit weak in Q1. We don't anticipate that being the case for the year as we look at projects coming forward. So that's one.

The second in Garlock, outside of the pipeline business, the performance overall was pretty good. But when you feather in the impact that the weather had -- actually, I'm pretty encouraged about the Garlock base business.

The third big issue was in Stemco, we are in the middle -- literally, when we finished the quarter, we were 50% transitioned. We are opening -- I referenced this in previous calls -- but we are opening a US centralized distribution center for Stemco in Berea, Kentucky. It happens to be one of the motor wheel facilities we purchased a few years ago.

But this has been a pretty -- one, it's a very, very exciting strategic move because, as I think I've explained to you guys before, up until this point to buy the full range of Stemco products, you would have had to make four or five phone calls and get four or five shipments from different facilities and get four or five invoices depending -- because the brake products, the suspension products, the core products, et cetera, all that comes from these separate facilities where they are made. Well, that is changing.

And so at the end of the quarter, we were literally right at almost 50% implemented. So in other words, what that means is 50% of the volume was being shipped out of this new DC. And we've been very careful and very systematic to do this transition because we don't want to miss and disappoint any customers because Stemco's entire value proposition is about excellent service to customers, and we -- and Stemco, we just simply do not drop the ball. And we're not going to drop the ball in transitioning to this distribution center.

So we've had to run with redundant shipping personnel and kind of some extra freight costs as we have migrated customers in blocks into the new DC and on the new system and kind of identified any small issue that we've gone so that we can do it kind of very systematically. That will be done somewhere in the second quarter; certainly by the end of the quarter. But we probably incurred just under $1 million, I would say, of costs that impacted Stemco in Q1.

In addition to that, even though Stemco's top line was above the first year of last year, it was still short of our internal expectations and, quite frankly, got pretty significantly affected by the cold -- the harsh winter in January and February.

What happens in that industry is that when there's a really rough winter like we had, with a lot of salt and sand on the roads, it tears up a lot of the components that we replace in the aftermarket, quite frankly. However, the fleets are very reluctant to take that equipment off the road and put new stuff in it and put it right back on the road until the weather clears.

So the pace of orders and, frankly, shipments in Stemco has rebounded quite nicely because, in truth, the harsh winter is actually very good for the Stemco business. It just all shows up in Q2 -- it hurts us in Q1 and all shows up plus [some] in Q2 and Q3. So we're expecting a pretty good Q2 and Q3 from Stemco.

And then the final thing, which Alex mentioned which is in the Technetics business, even though margins there were actually above our internal plan, not to the prior-year because you've got to adjust out the $1.5 million of good guy in the previous year because that hit Technetics --. But our margins were above current year because the top line was strong, but a lot of that was the growth in semiconductor. And so when it leverages up, it doesn't leverage up with quite the same pop as the rest of the business.

So that's kind of what's going on, Jeff. That's a little bit more color for you. But I do not -- I don't anticipate that we've -- that we have a structurally lower margin profile in sealing products than we've had historically.

Okay. And it sounds like you expect growth in sealing and engineered products in 2Q and I guess sequential improvement in engine or power products. Can you give us a little more granularity -- I mean, is mid-single digits too hopeful in sealing and engineered products for 2Q?

Based on 2Q of last year?

Yes. Year-on-year growth.

Year-on-year growth? Do you have that handy, Alex?

Yes, I would anticipate, based on what we're seeing now, that mid-single digits for the top line is probably a little aggressive. I certainly expect year-over-year comps to be better. And I would expect, sequentially, the margins to improve sort of more normal levels, particularly as the aftermarket demand comes back in both the power systems segment as well as the sealing products segments. But I really don't have a very good visibility in terms of what you should expect for that business right now.

Okay. And then just finally on engine, are you seeing the [avail] schedules kind of coming through more favorably as you would have thought maybe the last couple of quarters?

Yes is the short answer. We've had nice bookings in FME year to date. And so those bookings, many of them carry on through the balance of the year, Jeff, so we won't see it all in -- we won't see Q2 of a sudden with a huge jump. But I think we'll certainly start to see trending improvement in the top line at power systems in Q2. And then, like I said in the script, that will -- I mean, we anticipate that that will continue through the year.

Okay. Thanks, guys.

Ian Zaffino, Oppenheimer.

I just wanted to circle back on your plans as far as getting GST out of bankruptcy. And I guess you mentioned that you're going to maybe proceed without sort of mutual consent. Can you walk us through the hurdles there? Did something per se happen in the negotiations that you are deciding to maybe go out on your own? Or just any type of color or more detail on sort of what's going on there and really the motivation for your statements. Thanks.

Yes, Ian. Well, look, it's always been our intention to come forward with a confirmable plan that the court can move forward with without a consensual resolution. The good news about the judge's decision was -- it was, obviously, very favorable to us because it was right, as I've said in the past, and I'm not going to get into all that again. But everybody knows how I feel about it.

Our products were safe, and the judge recognized that that is, in fact, the case and that we've really been -- it's been a factor of us trying to offset unbelievably high defense costs and deal with the abuses in the system. And he recognized that and outlined that in his orders. So it was a very favorable opinion to us. That's the good news.

The balance of that is -- the balancing side of that is it is going to make the process more complicated going forward because we are not going to just ignore the fact that we got a very favorable judge's ruling. And so -- and obviously the other side is very unhappy with that. It's a precedent-setting thing in their world, and they don't know how to deal with it.

And so we're going to deal with it by putting forth a plan to the court that the court has the authority to implement. This has never been done before in any asbestos-related bankruptcy that the plan has been implemented by the court absent a consensual deal.

In fact, I would argue the other side's complete approach is based on the fact that they believe that they control the Company's ability to exit Chapter 11 through requiring a consensual settlement. We don't agree with it. Our legal team doesn't agree with that.

So that's why it has taken us some time to sort out. Our lawyers have been working very hard, our team has been working very hard with them to construct a plan that we are confident that the court will be able to implement and that will be able to survive on any subsequent appeal.

So that's just simply going to require some time and patience . But, again, you guys need to be very comfortable that Garlock -- I should say GST, LLC continues to operate very effectively in Chapter 11. We don't have any market constraints associated with that process. We are continuing to grow and execute very well across the board in the whole family of Garlock companies.

I believe we now have a situation in our Company where we are unconstrained in our growth with access to capital. It's a little bit more cumbersome to get than it would be if we were able to reconsolidate. But most lenders of any sophistication at all are able to see through this process and know now that the overall asbestos liability is very well framed and contained.

And that was our objective in this process. It was to reduce the amount of total future expenditures that the Company was going to be required to pay to this problem and to get it done with finality and certainty. And what my view is we are -- we've made very solid steps on both of those dimensions.

The liability is now significantly reduced. Of course, it should be zero, but we have never -- you thought, given the legal system we have in our country, that we would be able to get that much justice. But we have gotten a lot of justice in terms of what this should be costing our Company. And we've got the thing framed now so that we still own the Company. There's unquestionably equity value that's there.

And so I personally don't view the accounting process of reconsolidation as that big of an event because we can do whatever the heck we want right now in terms of growing the Company. We have access to capital. Certainly GST has plenty of cash that we could spend within GST; again, requiring court approval, but I feel comfortable that if we had a good deal we could go do it.

And I'm sure that NPO on its own without GST, we feel like we could raise -- Alex has been working hard on this, and the treasury team, that we could raise [a few hundred million dollars] at pretty darn favorable rates. So our constraint at this point is not the ACRP. Our constraint is good ideas, good deals that make good strategic sense that we don't have to overpay for and all the things that normal companies would look at.

So, the -- we -- trust me, we don't have the time on this call to go through the legal complexities of the structure of our plan, why it makes sense, what's new about it, what's different about it, why we believe it is confirmable, et cetera. If you want to have a call, Ian, or anybody for that matter, I'm happy to get on the phone with you and get Rick Magee on the phone with you and explain that.

It's a tedious and complex process; trust me because I've been in it. But you, I'm just sharing you guys the top line which is we are really not encumbered by it, and we're not going to just cave and throw a lot more money at this problem simply to do an accounting reconsolidation, in my view. It's just not -- I don't think it's the right shareholder value creation move.

That said, as from the beginning, our posture has been we are willing to make a reasonable consensual deal with the other side. We just still disagree on what's reasonable. So that's where we are. I hope that color is helpful to you and the rest of the folks on the call.

Yes, and it's pretty reassuring, too.

So just one quick question. On the -- so whatever you would file would then contain that $125 million ruling as sort of the liability amount. Is that kind of right?

Well, it's going to be -- it's a bigger number than that, which we said in the beginning. It has to include other claims, which is other cancers as well as there's still some junk claims in the system that we have to deal with; some non-mesothelioma, non-cancer claims. And it has to have an administrative element to it. And given the structure of the plan that we've landed on, it has several different kind of pools of money, if you will.

So that will all become public when we file the plan in hopefully in three or four weeks; certainly by the end of the quarter. And we'll have to help you guys sort out why that structure looks like it does. I can't talk too much about it because it's not yet filed. But -- it's going to be -- but the base number of -- the base amount of $125.4 million for mesothelioma claims, it will definitely incorporate that estimation as its foundation, if you will. But it won't -- it's not going to be $125 million; it will be $125 million plus these other pieces and elements.

All right, perfect. Thank you very much.

(Operator Instructions) Todd Vencil, Sterne, Agee.

Steve, could you talk a little bit about the opportunity on the commercial side in the power segment? Maybe I was going to ask the question, and then you threw it out there that you've got a commercial contract that you're going to announce; and then the design and feasibility study. Could you give us some color on -- any color you can on both of those things?

Yes, we're just not at liberty yet to talk publicly about the contract that we've won. But, again, we will be in a few weeks. It's pretty darn exciting for Fairbanks. Won't have a huge impact on 2015, although it does have a little bit of impact -- I'm sorry, on 2014 -- it does have a little impact on 2014 because of the lead engineering and advanced work we have to do on kind of the qualification engine of that. But most of it will hit then in 2015 in 2016.

We're really looking forward to being able to talk to you all about that. And then the second is we -- as we started -- and that is with the Fairbanks Morse OPE, opposed-piston engine; the current design is what we won the commercial deal with. So it's not the MAN-designed product that we (inaudible) -- that we make for the Navy on the license agreement. It's basically an FME-owned design.

Now, in addition to that, as we announced last fall, we've entered a formal partnership with a technology company called Achates Power that's out in California. And Achates, that's -- you can easily go on the Internet and look at it; you probably have already. But it's funded by some private investors including John Walton, Sam Walton's son, so it's got plenty of financial backing.

And it's a technology company. And they have figured out how to make -- how to basically achieve substantial improvements in efficiency, emissions and power density generation for an OP engine, which ought to be able to be done at pretty darn competitive costs as well because the fundamental design of an opposed-piston engine has some significant advantages versus a four-stroke engine. It's pretty exciting if you're a diesel engine engineer.

So, anyway, we started with Achates last summer. We entered this agreement formally last fall, and the first stage of that was essentially a feasibility design -- feasibility piece of work, which is mostly some bench work and a lot of computer modeling to apply their technology. They have a bunch of different proprietary patented technologies that they've -- we've worked -- our engineering team has worked with them, and we've applied those to our engine.

To kind of look at it at the end of this design feasibility stage and see, okay, what do we think this thing will be able to do with our engine in terms of fuel efficiency, power output, emissions, all the key performance criteria of a diesel engine. And we had that review, and it looks very, very promising.

So we're moving into the next phase of that, which is actually to do the full design of -- redesign, basically, of our engine and then build one that we're going to be able to actually put on the test stand and run and see how it performs.

So, again, it's a long process. You don't develop a whole new diesel engine platform overnight. So normally if you start with a clean sheet of paper, it's a five- to seven-year process. But because we already have an OP engine, we believe we can do it in three and actually be in the market with a much-improved OP engine from an efficiency and performance standpoint.

So I'm actually quite excited about it because the OP engine has some unique properties that they could -- very attractive technology for many power-generation applications. And its limitation has been, quite frankly, fuel efficiency and emissions. And we believe that with this Achates technology, we'll be able to overcome those limitations and have a really competitive product.

So you think on both of those factors, efficiency and emissions, you'll be competitive with sort of more popular designs with the Achates adjustments?

I think we'll be better.

Fantastic. So that -- so you think you could potentially be in the market with that in, say, 2017?

Yes.

Okay, all right. And Alex, within the SG&A, it was up $6.3 million. How much -- can you split that out between the ERP costs and the R&D? Just ballpark?

(multiple speakers) Yes, the R&D was around $1 million -- just over $1 million. And then --

And then some of that, by the way, is Achates.

Exactly. But the bulk of that would be the Achates piece. There's also a piece that we can't give you a whole lot of detail on, but within Stemco. So the two primary R&D investments were within FME and Stemco. Both are — well, Steve just told you about the Achates work, which is highly strategic and exciting. And I would just say that the Stemco work is equally strategic and transformational for that business. So that's really where the bulk of the -- just north of $1 million in increased R&D spending went.

We mentioned also in the SG&A number is the about $1.5 million benefit that didn't -- that existed last year that didn't exist this year. And then there's probably about, I would say, mid-$1.5 million, just north of that, in IT-related expenses to the ERP conversion. Basically a lot of contract labor that we are investing in to get those systems in place that ultimately should yield a net benefit for the Company in terms of being able to get some of the redundancy out of the system.

So those are sort of really the big drivers. Also in the SG&A number was an increase in the environmental accrual of around $600,000 related to one of our legacy sites that's been an issue for a while. Does that help? Do you need more detail on that? (multiple speakers)

Absolutely, that's great. And then the final question for me, I guess -- it feels like both within CPI and within sealing products businesses, you called out of the press release and you talked a little bit about the oil and gas markets being weaker, defining this and that. Is there something thematic going on there? Is that lumpiness? Is it weather? What do we attribute that to?

Well, again, I think the oil and gas pipeline -- I think it's different depending on which specific segment you are talking about, Todd. So I don't think there's one blanket issue. Certainly in -- look, CPI is not where we want it to be. Always weak in the first quarter. But they are basically on plan through Q1, both top line and segment income.

So we're actually -- Alex and I the rest of the team are -- as I said, we're encouraged for the first time in a long time about CPI. And what we're looking at now, I don't -- it's not going to return to profitability of a few years ago next quarter, but I do believe we are tracking and trending effectively. Obviously, I've spent a lot of the time in sand around that business myself, and I think we've got some really good stuff going on; really good activity.

But the first quarter is very weak, and the tough winter in North America hit them probably -- it always hits them, but it probably hit them a little harder than usual. And then the oil pipeline business out of Garlock, I think, is due more to the lumpiness aspect. But that's just a really, really challenging business for us to try to have any visibility on.

So while I think it's -- we've definitely think we've gotten some increase in orders in Q2, it's such a short-cycle business; it's hard to look much beyond that. And then all of the chemical and refining weakness that we saw, I mean, it's all just weather related. It's kind of varied across the board in both of those businesses. And, quite frankly, also hit Stemco -- certainly versus our expectations. So it was up versus last year, but it was below our internal plan.

Perfect. Thank you so much.

Joe Mondillo, Sidoti & Company.

I have a few questions. First off, I did have a question on CPI. And since you were just talking about that, I guess I'll start there.

I understand that you are, I think, putting a little more money into the business that you might've taken out over the past 12 or 18 months or so. But my question is sort of on volume. It sounds like you're getting a little more excited. My standpoint, higher gas prices, production rates, improving supposedly this year. Volume should start to improve. Are you starting to see that, say, in the month of April, or are you anticipating volume to be up in the second quarter at CPI?

We are anticipating it to be up a little bit, Joe.

Okay.

But we're not -- yes. Because we're not ready to throw a party.

And I guess -- with, I guess, some additional costs coming into the business that maybe you've taken out combined with (multiple speakers) --

I'm sorry --

Is that not correct?

No, I don't think that's actually correct.

Okay.

We haven't said that, and I'm not sure --

Well, I thought you might've over-restructured the business, per se. And when you brought in new management, I thought that might've started to get reversed a little bit to try to --

Not in a meaningful way, really. You've got to upgrade a lot of positions from a talent standpoint, but we -- not thrown a lot more headcount at it.

Okay. So I guess what I was trying to get at with the -- sort of the incremental margin or the operating leverage within that business, we should see a pretty good growth on the bottom line once we start seeing that volume improvement. Correct?

Yes.

Okay. All right. Second question was related to the power systems business and really more so than margin. You gave some pretty good color on how you expect improvement throughout the year on the top line. But the margin is a little confusing, just given the mix between the [POV] revenue, completed contract revenue, and sort of how the aftermarket's playing out or how you anticipate that. If you could give any sort of color on the margin trending throughout the year, that would be helpful.

Well, I'll just tell you guys, last year -- since we report that segment separately, last year the full-on margin was up 9% in that business for the year. Historically that's been a high-teens business, and I think we'll be halfway between -- yes, somewhere around halfway between the 9% and what it's historically been for the year; that's for the balance of the year -- that's for the full year. (multiple speakers)

So that's for the full year. So you would anticipate maybe the high margin to come back in the second half of the year?

Not as high as it was prior because we're not going to be -- even with spare parts, were not going to be as busy as Fairbanks in 2014. Period. We're just not -- as we had been before last year. The backlog is just not that healthy, but it's a lot more healthy than -- I mean, we'll do more than last year in top line.

Okay. And I guess, lastly, I'll end with engineered products, and I should have probably gone right to that from CPI. A question that I had -- 9.5% in the first quarter. That's one of the highest you've seen -- maybe not the highest, but one of the highest in the last three years, margin-wise.

Just trying to understand -- in the past, you guys have talked about low teens as a goal out two or three years, and you talked about that two years ago. I'm just trying to get an update on where you see maybe the profitability in that segment going.

Well, what you've seen in the first quarter is the benefit from GGB getting more volume because of the recovery in Europe. Remember, GGB is the largest part of engineered products, and it's 2/3 Europe. And of that European business is half automotive and half industrial. We've continued to say consistently over the last few years that we feel like GGB was executing extremely well given the hand they were dealt. They were just dealt a really lousy hand.

In fact, Dan and I were just looking yesterday afternoon at the GDP for the euro zone countries, now relative to where the demand -- total GDP, not (inaudible) percent improvement -- but just the GDP, the economic output of the core euro zone countries -- and are any of them back to the level that they were in 2007.

And basically Germany is just now getting to the level it was in 2007, and that's the only one. And the UK is still at about 90% of where it was in 2007. France is at about 83% or 84%, and Italy is at 75%. Spain is at 70%. So we are -- even though Europe is better, we're still -- I would describe it as in the early innings of recovery of Europe relative to where they've been before.

Your guess is as good as mine how much will they ultimately recover. Right? But for all the structural reasons that we've talked to you guys about before, GGB leverages extremely well with volume. And they were pretty darn busy in the first quarter, and that has continued.

So I'm optimistic about GGB. And then obviously the whole segment was weighted down by our underperformance in CPI, and we're beginning to get a handle on that. So I haven't fundamentally changed my two-year outlook on engineered products segment. We've always said that it depends on some recovery in Europe, and that would still be the case.

Okay, great. So if we continue to see improvement in both those two businesses, is it fair to say that 9.5% is sort of a base for the year? Or is there a product mix OE related that may sort of offset some of the operating leverage?

I think we're going to be in that neighborhood.

Okay.

Yes.

All right. Thank you, guys.

Okay. Thank you.

There are no additional questions at this time. I'll turn the call back over to the presenters.

Well, thank you everybody for dialing in again today. We hope you've enjoyed the call. And if there's more questions that you have, as you know, please don't hesitate to contact me at 704-731-1527. Thanks.

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