Enpro Inc (NPO) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to EnPro Industries' fourth-quarter 2014 results conference call. (Operator Instructions). I will now turn the call over to Mr. Dan Grgurich, Director, Investor Relations and Corporate Communications. Please go ahead, sir.

Thank you, Sally. Good morning and welcome to EnPro Industries' quarterly earnings conference call.

I will remind you that our call is 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 fourth-quarter performance and our outlook in a moment.

But before we begin, I will 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 fact. These statements are forward looking and involve a number of risks and uncertainties that may cause actual events and results to differ materially from such forward-looking statements. These risks and uncertainties are referenced in the Safe Harbor statement included in our press release and are described in more detail, along with other risks and uncertainties, in our filings with the SEC, including the Form 10-K for the year ended December 31, 2013, and the Form 10-Q for the quarter ending June 30, 2014.

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's 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.

I want to remind you that our financial results reflect the deconsolidation beginning on June 5, 2010, of Garlock Sealing Technologies LLC, Garrison Litigation Management, and their subsidiaries, which we refer to as GST. 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 may hear us use that acronym during the call today.

In addition to a discussion of EnPro's GAAP financial results, we will also discuss pro forma financial information. This information illustrates the pro forma effect of the reconsolidation of GST based on the terms specified in GST's second amended proposed plan of reorganization, which was filed with the bankruptcy court on January 14, 2015. However, formal reconsolidation cannot occur until a plan for GST's reorganization has been confirmed and completed and GST has exited the Chapter 11 process.

Any pro forma information that we discuss on the call today is derived from the condensed pro forma financial statements included in our earnings release. These pro forma financial statements are provided for informational purposes only and are based on estimates and assumptions made solely for the purpose of developing these pro forma financial statements. They are not necessarily indicative of what the consolidated company's financial position or results of operations actually would have been, had the reconsolidation been completed as of the dates indicated, nor are they necessarily indicative of the future operating results or financial position of the consolidated company.

Therefore, the actual amounts recorded at the date the reconsolidation occurs may differ from the information presented in the earnings release or discussed on this call. Please refer to our earnings release for information about how the pro forma financial statements were prepared, as well as the risks and uncertainties related to confirmation and completion of the second amended plan of reorganization.

Finally, I want to remind you that EnPro Industries will be hosting an investor day on March 19 at the Le Parker Meridien Hotel in New York City. Refreshments will be available at 8 AM, with the presentation starting at 8:30 AM. The event will also be webcast at www.enproindustries.com.

Now I will turn the call over to Steve.

Thank you, Dan.

Before we discuss the quarter's results, I want to touch briefly on the transition in CFO responsibilities that we announced yesterday. Alex has been a very valuable member of the EnPro executive staff for the past four years. His efforts have supported improvements in our strategic direction, our capital structure, our organizational efficiency, and we truly appreciate all he has done.

Alex will continue as our CFO through the end of March and he will be with the Company through the end of May to ensure a smooth transition. Though he is leaving EnPro for an exciting opportunity that is not yet public, we will continue to count Alex as a friend and wish him well in this next phase of his career.

At the same time, we are pleased to announce that Milt has agreed to step into the CFO's role. His long association with EnPro, first as an advisor and then as a senior member of our executive team for the past 10 years, gives him invaluable knowledge of our Company, our strategies, and our markets.

The Board of Directors and I are confident that he is the best choice to be our next CFO. Many of you already know Milt, but I am sure he is looking forward to meeting more of you in the coming months as time and circumstances allow.

Now let's talk about the fourth quarter. I am pleased to report significant growth in sales and adjusted earnings compared to the fourth quarter of 2013. Net sales increased by 15% over the fourth quarter of 2013, despite a 2.5% drag caused by impacts of foreign-exchange translation.

Power systems, following a strong third quarter, had a good fourth quarter due to revenues from several completed contract engine shipments and strong aftermarkets parts and service. If you recall, power systems sales in the fourth quarter of 2013 were abnormally low due to both the effects of sequestration and to a light schedule of ship overhauls.

Activity in our semiconductor, nuclear power, aerospace, and heavy-duty truck markets remained robust. Also, activity in the automotive and industrial markets in Europe, Asia, and North America improved from 2013.

On the downside, we continue to see low demand levels in pipeline project activity and in the western Canada natural gas market, and our refinery and petrochemical turnaround business in both Europe and North America was soft.

Segment profit increased 54% to $38.1 million and segment margin increased to 12%, compared to 9% in the fourth quarter of 2013. The benefit of volume increases on segment profit, particularly in our engine and heavy-duty truck parts business, more than offset increased spending on R&D, IT systems, and restructuring.

Adjusted net income of $13.4 million or $0.57 a share increased 22% from the same period in 2013. On a GAAP basis, net income of $3.8 million or $0.15 a share declined $1.4 million in the fourth quarter, compared to the fourth quarter of 2013.

Alex will walk you through all of the adjustments between our adjusted net income and GAAP results, but I want to highlight a few of the larger ones.

First, our GAAP net income in the fourth quarter reflects an accrual for future contribution to the asbestos settlement facility, which was outlined in GST's second amended plan of reorganization. Our $30 million contribution to GST's settlement facility will be made as of the date the plan becomes effective in exchange for a permanent injunction protecting EnPro, our Coltec subsidiary, and other affiliates from GST-related asbestos claims.

This accrual reduces fully diluted GAAP earnings by $0.72 a share. We booked that in the fourth quarter because we believe the second amended plan is confirmable, even though the effective date of the plan won't be known until the plan is confirmed.

Partially offsetting the contribution is a pretax $22.7 million gain on the sale of GRT, or $0.67 a share.

The last adjustment I want to highlight is a $3.8 million pretax environmental reserve accrual. This amount is related to a potential liability for environmental remediation costs associated with a discontinued operation. This reduces earnings by about $0.09.

The deconsolidated operations of GST reported a 4% increase in third-party sales compared to 2013. GST's operating profit of $8.9 million was down from $11.4 million in the fourth quarter of 2013, primarily due to a less profitable sales mix, increased spending on growth initiatives, restructuring costs, and the reduction in a tax credit receivable related to modernization programs at GST's Palmyra, New York, facility.

Pro forma sales for the fourth quarter, illustrating our results as if GST were reconsolidated, were up 13% to $360.9 million and pro forma adjusted EBITDA was up 11% to $51.7 million. These numbers are based on assumptions noted on the pro forma consolidated financials attached to the earnings release.

I want to call attention to the development activities that have occurred since our third-quarter call. In the fourth quarter of 2014, we acquired Fabrico, a business that is being folded into the Technetics group. Fabrico is a leading supplier of components for the combustion and hot path sections of industrial gas and steam turbines. The addition of Fabrico significantly expands our presence and scale in the land-based turbine market and positions Technetics Group to become a leading -- a sealing leader for the combustion section of land-based turbines. We welcome Fabrico employees to EnPro.

As I mentioned earlier, in the fourth quarter we sold the GRT business. As a manufacturer of conveyor belts and sheet rubber products, GRT did not fit into our long-term strategy of providing highly-engineered components that are critical to the performance of our customers' applications. We believe the business will have better opportunities to prosper under new ownership and we wish the GRT employees and new owners well.

Just last week, we announced the acquisition of ATDynamics, a company that designs, manufactures, and sells a suite of aerodynamic products engineered to improve fuel efficiency and reduce carbon emissions in heavy-duty trucks. The company's flagship product as it -- that is patented and award winning, TrailerTail, that improves a tractor-trailer's fuel efficiency by about 5% without hindering the trailer's cargo capacity, loading, or unloading.

ATDynamics is a nice fit with Stemco's growth plan and Stemco can increase the market's acceptance of the product by leveraging Stemco's market access model to both OEMs and fleet customers.

Before commenting on the ACRP, I want to cover our strategy for capital allocation, which has been evolving over the past year as a result of gaining greater clarity on the range of possible outcomes for the asbestos proceedings and completing the debt offering last fall. As you know, we announced initiation of a dividend last month and yesterday announced that our Board has authorized a share repurchase program.

To put these moves into context, our goal is to target a debt leverage ratio of about 2 times EBITDA. This is both a near-term target for consolidated EnPro and a longer-term target based on a post-reconsolidation scenario that would take into account the eventual asbestos settlement and elimination of the intercompany notes between Coltec and GST.

The combined financials would be similar to those illustrated in the pro forma set of condensed consolidated financials included in our earning release. However, the final capital structure will remain unclear until we have more certainty around the timing of a confirmed plan of reorganization and actual GST reconsolidation.

Our capital needs in the near term include retiring the $22.4 million of aggregate principal amount of convertible senior debentures outstanding that mature late this year. As we have previously discussed, in 2014 we made significant progress in redeeming $149 million of the original $172.5 million face amount of convertible debentures through a combination of equity exchanges in the first half of the year and a tender offer upon completion of the bond deal.

If the remaining balance is voluntarily retired for cash prior to maturity, we expect a cash outlay in the neighborhood of $50 million for the remaining principal, plus the conversion premium. If the remaining debentures stay in place through maturity, the principal amount would be paid in cash and the premium would be paid in shares.

Next, we estimate that capital expenditures for the year will be approximately $65 million. This is higher than our typical spend of roughly $40 million, as it includes nearly $20 million in spending on manufacturing facilities and our brake friction production lines, as well as investments to upgrade our IT systems.

Third, we plan to pursue -- continue pursuing acquisitions that complement our operating businesses and support our strategic direction. We have a record as a disciplined acquirer and are confident in our ability to find, execute, and integrate value-adding acquisitions that are complementary to our current business portfolio.

Beyond the Fabrico transaction completed late in 2014 and the ATDynamics deal completed this year, we see the possibility of using between $50 million and $75 million of additional capital for bolt-on acquisitions in the remainder of 2015.

Fourth, in January of this year we adopted a quarterly dividend policy. We will make an initial dividend payment of $0.20 a share on March 16. Presumably continuation of a quarterly dividend at this level, total dividends for the year will require about $20 million in cash.

Finally, yesterday we took another step toward returning capital to our shareholders with an authorization from our Board of Directors to spend up to $80 million to repurchase our common shares. Our evaluation of market conditions and other factors will determine the timing and amount of transactions under the plan, which will expire in approximately two years.

The dividend and share repurchase plan illustrate our confidence in EnPro's long-term cash flow.

Rolling all of these anticipated actions together for the year, along with our expected operating performance, we expect to be moderately below our 2 times target leverage for consolidated EnPro, excluding GST-related intercompany debt.

To briefly touch on the ACRP, as we announced in January, EnPro and GST reached agreement on the terms of a second amended plan of reorganization with the court-appointed legal representative of the future claimants, the FCR, in GST's Asbestos Claims Resolution Process. The plan covers both current and future claims and has an after-tax net present value cost of $205 million. A contingent litigation guarantee could add an after-tax net present value of $31 million if ever drawn in full over the next 40 years after confirmation.

We are confident that this plan can be confirmed as it has been presented to the court and will lead to the certainty and finality that GST seeks in this process. We are very pleased with the recent developments and continued progress in the GST case and grateful for your patience as we continue to grind through this process.

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

Thanks, Steve.

Before I comment on the quarter, I want to thank Steve for his kind words. It's been a privilege to be a part of the EnPro family for these past four years and I look forward to staying in contact with my many friends here. My new situation is not yet public, but I am excited with this next step in the trajectory of my career. Until my departure, I will continue to give my full attention to my responsibilities as EnPro's CFO and to helping Milt in the transition to the CFO seat.

As Steve mentioned, on a GAAP basis our fourth-quarter sales of $316.4 million were up about $41 million or 15% from the same period of 2013, led by a significant increase at power systems of $31 million due to high engine revenues and stronger sales of parts, services, and engine upgrade solutions.

Also, in sealing products sales were up about $12 million, mostly due to heavy-duty truck parts volume.

By geography, we saw moderate organic growth of about 3% in Europe, driven by improvements in demand for our high-performance seals, bearings, and compressor products, partially offset by softer demand in Germany and the UK for our industrial seals.

Excluding FME, organic growth in North America was 7%, with good improvement in the heavy-duty truck, nuclear, and aerospace markets. Our refinery and petrochemical markets in North America have been slower than expected, as uncertainty related to recent oil price declines has led to more cautious spending in these markets.

Gross profits for the quarter were $20.1 million, or 23% higher than in the fourth quarter of 2013, and gross profit margins increased to 33.5% from 31.1%. Favorable volume and a stronger mix of higher-margin parts and service revenues at power systems were the key contributors to the margin improvement.

SG&A expenses in the fourth quarter were up $13.5 million, due to a $3.9 million increase in corporate costs, an increase of $5.7 million spread across our operations, and $2.8 million in a nonrecurring R&D subsidy and acquisition earnout adjustment that lowered the fourth-quarter SG&A results in 2013. The increase in corporate costs was attributed to higher employee medical costs, employee compensation, and information technology costs. Operating SG&A increases were largely due to investments in ERP systems, R&D, and additional commercial sales in the sealing products segment.

Sales in the sealing products segment were $165 million in the fourth quarter, up 8% over the fourth quarter of 2013. The organic increase was also about 8%, as two small acquisitions added 2% to the segment sales that was offset by a 2% reduction due to foreign-currency translation.

Sealing products segment profits were down $1.2 million from a year ago to $22.7 million and margins dropped to 13.8% from 15.7%. The largest drivers of the change in segment profits and margins were a shift -- mix shift to OEM sales, higher operating costs, restructuring expense, and the non-recurrence of both an R&D subsidy and an acquisition-related earnout credit taken in the fourth quarter of 2013. The increase in operating costs included approximately $0.9 million associated with implementing the Stemco central distribution center and other discrete items. The restructuring expense was approximately $1 million, related to the integration of two facilities into one at the consolidated Garlock's UK business, which is now largely complete.

Within the segment, Technetics benefited from stronger demand in the aerospace and nuclear sealing markets, while at Stemco, demand from OEMs for wheel end and suspension products strengthened over 2013's fourth quarter. The Garlock family of companies reported softness in oil and gas and process manufacturing markets in Europe and weaker demand for pipeline products.

In the engineered products segment, fourth-quarter sales of $82.2 million were 4% lower than the last year's fourth quarter. On an organic basis, excluding the negative effect of foreign exchange, sales were up 1%. Segment profits rose to $3.2 million and segment margins were 3.9%, compared to just over breakeven in the same period in 2013. Price increases, operational improvements, and lower restructuring expenses drove the improvements.

Restructuring costs in the segment were minimal in this year's fourth quarter, compared to $2 million in the fourth quarter a year ago.

Within the segment, GBB reported continued strength in the US, Europe, and Asia automotive markets. General industrial and renewable energy market demand improved in Europe and aerospace demand was higher in the US.

CPI's sales improved modestly, excluding foreign exchange, as higher European volumes were partially offset by declines primarily in the Canada and US natural gas businesses. CPI margins grew due to price, cost-improvement initiatives, and lower restructuring expenses, compared to last year's fourth quarter.

In the power systems segment, sales were $69.5 million, which was $31.2 million or 81% higher than in the fourth quarter of 2013. Engine revenues were higher by about $23 million and parts and service sales increased $8.2 million as this segment benefited from increased U.S. Navy ship overhauls and higher demand from power generation customers.

The segment recorded approximately $25 million in completed contract engine revenues. The percentage of completion revenues were down about $2 million. Segment profits were up nearly $12 million and margins increased to 17.6% as higher margins on engines and an increased volume of high-margin parts sales more than offset higher SG&A expense, primarily related to the development of the OP 2.0 engine.

As Steve mentioned, we reported GAAP net income of $3.8 million or $0.15 a share for the quarter. This compared to GAAP net income of $5.2 million or $0.22 a share in the fourth quarter of 2013.

Excluding restructuring costs, a provision for the anticipated contribution to the asbestos case settlement related to GST's second amended plan of reorganization, a gain on the sale of GRT, the adjustment to an environmental reserve related to a discontinued operation, interest expense and royalties with GST, and other selected items, we earned $13.4 million, compared to $11 million a year ago.

On a per-share basis, adjusted net income was $0.57 in the first -- fourth quarter of 2014, compared to $0.50 in the fourth quarter of 2013. We have also adjusted our diluted earnings per share for the unrealized benefit of a call option that is part of the hedge purchased in October 2005 to reduce the potential dilution to our common shareholders from the conversion of the convertible debentures.

For accounting purposes, the warrant piece of the hedge is included in our diluted share count, but the antidilutive call portion is not. The hedge, which is on the original $172.5 million amount of the convertible debentures, will (technical difficulty) corresponding benefit will be realized in October 2015. This adjustment is for about 2.4 million shares, which adds $0.05 in 2014 and $0.04 in 2013, assuming the fourth-quarter 2014's average share price of $62.62 a share.

Cash flow for the 12 months ended December 31, 2014, was $129.8 million, compared to $10.5 million in the same period of 2013. The increase is primarily the result of net proceeds from EnPro's recently issued 5-7/8 senior notes. Debt transactions provided $180.5 million of cash for the full year of 2014, after giving effect to the purchases of a portion of the Company's convertible debentures under a tender offer in September 2014.

Debt transactions in 2013 used cash of $14.8 million, primarily consisting of repayments of short-term borrowings. Three acquisitions used nearly $62 million of cash in 2014 and the gross proceeds from the sale of GRT were $39.3 million, net of an escrow and transaction expenses.

Free cash flow was a use of $16 million in 2014, compared to a cash generation of $38.3 million for the full year of 2013. A significant factor in our 2014 use of cash was the contribution of about $49 million to our defined benefit pension plans. The contribution significantly improved our funding status and was a way to proactively reduce our pension-related expenses going forward. We do not expect to make any further pension contributions in 2015.

Tax payments were about $31 million higher year over year, partly due to taxes on the sale of GRT and partly due to a higher effective tax rate in 2014 versus 2013.

Working capital increased by $13.3 million in 2014, compared to $7.5 million in 2013, as the result of investments in inventory in Stemco's distribution center and inventory and receivables for several large engine programs underway at Fairbanks Morse.

Capital expenditures were $41.8 million for 2014, compared to about $31 million for the comparable period in 2013.

Taking a look at the results of deconsolidated GST for the fourth quarter, organic net sales were up 2.4%; however, unfavorable foreign-currency impact resulted in flat reported net sales compared to prior year. Third-party sales were up 4%; however, there was a decrease in intercompany shipments to foreign affiliates, primarily due to the softer conditions in Europe.

GST's operating profit before asbestos-related expense was $8.9 million or 15.5% of sales, compared to $11.4 million or 19.9% of sales in 2013. In 2014, GST had a less profitable mix, higher manufacturing costs, and a reversed receivable for about $1 million non-cash related to a tax dispute with the state of New York associated with the modernization program investments at GST's Palmyra facility.

Asbestos-related expense was $62.5 million in the fourth quarter of 2014, compared to $6.9 million in the fourth quarter of 2013. Of the increase, $57.9 million was due to the change in the asbestos liability on GST's balance sheet related to the second amended plan of reorganization.

Administrative and litigation-related expenses declined by $2.3 million compared to the fourth quarter of 2013. A slide in the appendix of these presentation slides provides more detail on the GST's asbestos-related income and expenses for the year.

GST's cash and investment balance was 22 point -- $229.3 million at the end of the fourth quarter, compared to $177.8 million at the end of the fourth quarter of 2013.

Now I will turn the call back to Steve.

Thanks, Alex. That wraps up our review of the fourth quarter of 2014, so let's look at the outlook for our markets.

I will start with the challenges and end with the opportunities. The first challenge we see is the effect of recent reduction in foreign-currency exchange rates. The euro is the most meaningful to us as we traditionally have over a fourth of our business in Europe. The translation impact of current exchange rate versus average rates in 2014 would adversely affect sales and segment earnings by approximately $50 million and $5 million, respectively.

In addition, questions remain about the economic outlook for Europe. Given the short-cycle nature of our business, we don't have clarity on Europe for the full year. If industrial production slows in Europe, demand for our products there will also likely decline. However, the weaker euro could provide a boost to the European economy and European exports containing our parts.

The foreign-exchange situation and conditions in Europe primarily affect our sealing products and engineered products segments.

Second is the current price of oil. While much of our oil and gas business is related to the regular maintenance cycles of our customers and less sensitive to the fluctuation in oil prices, the cutbacks in drilling rates and new pipeline projects impact the consolidated Garlock operations and CPI and, to a lesser extent, Technetics Group. At CPI, the situation is leading us to take additional actions to right-size the business, so that we will be profitable at a lower level of demand while maintaining our service levels to our customers.

Offsetting these concerns, OEM order activity remains firm in our semiconductor, aerospace, and trucking markets and we have a healthy backlog and order rate in power systems. We are cautiously optimistic that the automotive and general industrial OEM markets will remain strong as consumers benefit from lower gasoline prices and an improving US economy.

Likewise, the demand for aftermarket parts looks strong in heavy-duty trucking and in both marine and commercial engine markets. As you know, our power system engine sales have been fairly lumpy from year to year. However, assuming there are no demand interruptions like we had with sequestration in 2013, which carried over into early 2014, we expect our power system segment to have another good year in 2015, with potential upside if we are able to capitalize on our reentry into commercial power markets through our new partnership with MAN that we announced last year.

Overall, we feel good about 2015. We have a strong balance sheet, greater clarity on capital allocation, continued progress in resolving our legacy asbestos issue, and with both near-term and long-term benefits from our strategic growth initiatives, we are confident in driving growth in the value of EnPro.

We will now open the line for your questions.

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

If we can just -- I think you have a number of one-time items and disruptions in 2014, I guess most notably the Stemco distribution center. Can you maybe just walk through what those were collectively, and how much of that you'd expect to go away and not be replaced with other kind of investments?

You want to look at the full year, Jeff?

Yes.

The full year, the Stemco distribution center was probably somewhere between $2 million and $5 million.

Okay, and then, was there some other investment spending --

Let me go through them real quick here. I'm sorry, I gave you the wrong number. In the Stemco distribution center, net was about $1 million.

For the quarter.

That was for the quarter, yes. I'm going for the full year. Okay, all right, so the Stemco -- sorry, I was looking at the wrong spreadsheet, Jeff. I apologize. I am giving you full-year numbers. For the Stemco distribution center, it was $4.8 million.

We had inventory adjustments year over year -- I'm going to compare year over year. We had $0.2 million more in 2014 than we had in 2013. We had bad debt accrual incremental $1.2 million. We had severance expense of $1.8 million incremental and we had a year-over-year change in R&D of $8.7 million, much of that will continue as we continue with the OP development program.

Then in 2013 for the full year, if you will recall, we had a combination of $2.4 million for the earnout credit in sealing products that we reversed that was an earnout for an acquisition we did earlier, and then we had a $2.4 million benefit from an R&D subsidy that also hit in 2013, so neither of those -- so a total of $4.4 million, neither of those repeated in 2014.

Then we had a $1.2 million R&D tax adjustment in engineered products in 2014. We had -- and we had some early retirement costs for a program back in 2013 that we did also at power systems, okay, so if you -- and then the restructuring delta was actually lower, so we had lower restructuring costs in 2014 than we did in 2013 to the tune of about $2.4 million.

So if you add up that entire amount, you get pretty close to $17 million to $18 million -- actually exactly $17.9 million of incremental one-time differences in 2014 compared to 2013.

Now I would caution you, though, that some of those will continue and we will have others, like we're working on restructuring more in CPI. That will happen in Q1, and we will continue with the R&D cost with the OP 2.0 and in other businesses we have had. Most of the increase has been with Fairbanks, but not all, as we continue to focus on trying to develop new products and grow our markets.

The Stemco distribution center is behind us and the consolidation of the facilities in the UK for Garlock is also substantially complete. That was part of the restructuring in 2014. Is that what you wanted?

Yes, yes, that's perfect. So it seems like of this $18 million, maybe $8 million or $9 million of the R&D continues and maybe some other stuff, but at least $5 million to $10 million go away?

Yes, that's probably accurate. That's probably a good guess.

Okay. Okay, and then just on power systems, it sounds like you expect another good year. I'm just trying to fine-tune that a little bit, just given the strength in the fourth quarter. Maybe just walk through what you are seeing for schedule for ship avails 2015 versus 2014, what the order rates tell you, and then any kind of contribution you expect to get from this EDF contract, which I think is on a percentage of completion basis.

It is right now on percent completion, but there is not going to be a ton of activity in 2015 in terms of shipments. We are still building the qualification engine, and then we have to actually run and test the qualification engine for EDF for quite some time. So most of the actual shipments of that will come later of the production engine.

But, look, we will have three completed contract engines that will probably ship in Q2 this year. However, two of those are the Shaw MOX engines for the nuclear reprocessing facility in Savannah River, and you'll recall back in 2013, I think it was in the third quarter, but I can't remember, but it was in 2013 that we took a hit on those because we realized that we priced them too low and they were actually going to be negative margin. So we booked that reserve back in 2013.

The two Shaw MOX engines are basically breakeven margin.

Now here is the best way to look at it, if you ask me. If you take the last three years of FME and you averaged all three years, that might be a pretty decent guess because 2013 was so polluted or -- yes, 2013 was so polluted with sequestration and it affected 2012. We have been talking about this for a long time.

Since the sequestration was all in the press and, obviously, the military knew about it in late 2012, they ordered parts ahead of time, right, and then in 2013 it just shut off, and then in early 2014 it carried over and we started -- we got orders. Orders in the first half of the year were great, but we weren't -- we didn't get much sales until the second half of the year. You got to levelize all three years with respect to FME, but we expect to be in that neighborhood.

Okay, perfect. Thanks, guys.

Todd Vencil, Sterne, Agee.

Alex, congratulations on whatever you are working up. We will miss you, but welcome to Milt, if he is listening in.

Yes, he is here.

Steve, thanks for the clarity, by the way, on the capital allocation. I think it's well thought out and well laid out in the slide deck and I know a lot of people have been asking you for that, so good job on putting that in there and on the clarity.

Can you talk about capacity utilization across your businesses, where you feel like it is, where you feel like it's going to go, and then what we can think about in terms of incrementals from volume coming back in the various places?

Yes, I think we have plenty of capacity in every segment, in every business within every segment, Todd.

I think there are pockets of debottlenecking that we need to do at the product level. I am thinking of actually within the recent Fabrico acquisition and Technetics, that gives us -- the Fabrico acquisition just gives us a ton of capability and we're pretty excited about it. That business was owned by a private-equity shop before and really didn't make some of the investments in debottlenecking certain product-line capacities that we think we're going to be able to do really, really well with.

But that's not going to -- that's not a huge amount of money in terms of capital. Gosh, if we can just -- we can make a lot more product in power systems, we can make a lot more product in just about every sector in sealing, and really the same thing in engineered products. So, I mean, I would still put the capacity utilization -- we could continue to grow without doing debottlenecking for the next several years. I don't know what I would even estimate the number at, but it's got to be lower than 70%, if you would average it across all product lines.

We do -- it's a job shop type arrangement for our facilities and many of them run one or 1-1/2 shifts or even two shifts because it's engineered products, so we are not a high-volume, sell it at any price kind of company.

Our constraint is very, very rarely on the capacity and production side. It's on, quite frankly, winning new business, new contracts with customers. It's the development, it's applications engineering, responsiveness. It's identifying the right opportunities where we can add value with our customers, and that's what we work on.

That's why you will see over the past couple of years and why Alex mentioned last year our investment in customer-facing resources. We call it sales, but the truth is it's a combination of sales, applications engineering, product engineering, those kinds of things. It's our ability to work with end users, whether they are OEMs or in the aftermarket, to engineer our solutions for their particular application. That's what we do. That's what the constraint and bottleneck is for us, not really on the production side.

That's also why our leverage in -- our operating leverage through selling more product is so -- always been and continues to be so attractive. When we sell incremental product, we typically bring a lot to the bottom line, and it varies whether it's gaskets within Garlock or, obviously, custom-designed high-performance metal seals from the Technetics Group or whether it's GGB bearings or whether it's Stemco product, but I would say on average for the Company it's probably -- what would you say, Alex, 50%? (multiple speakers) rentals, 50%?

Yes, yes, yes. That would be my guess, Todd.

Got it.

As Steve pointed (multiple speakers) obviously it depends highly on what product you are talking about.

Sure.

Some are a lot higher, frankly, which is why the mix effect is so big.

But we are making good progress, Todd. It's never as quick -- it's never as easy as the Street seems to believe it is and it's never as quick, for sure, but we are making good progress.

We track very rigorously the product pipeline. It's not something we could do three or four years ago. We track new customer gains, not something we could do three or four years ago. We know now better, much better, where to add incremental what I call commercial units, which is really a combination of sales and applications engineering. We know much better where to add that that's going to yield incremental return.

We've been adding resources internationally, and so we're making progress. I realize that everyone on the call -- I realize that our earnings have been fairly choppy for the last really two years, partly because we are trying to get this Company positioned to grow. We have encountered and undergone a lot of restructuring and severance costs and facility consolidation.

We will have more in CPI, but that's about it. We have been investing in ERP systems because these assets, as I think everyone knows, for years and years and years before the last five years just didn't invest in that kind of thing. It was legacy businesses. They were pretty much unorganized, didn't share data, didn't have good systems, didn't -- weren't able to track what they were doing. We have been investing in those and we have only got one business left to get done.

We have got some -- we'd still finish -- we will be finishing up with Technetics and the tail end of GGB this year, and we still have Stemco in front of us, but that's it and we have made significant investments there. So we're really excited, starting to utilize those. And unfortunately, we also had some accounting cleanup to do, which we talked about a lot in the second quarter, which is just due to the fact that we haven't had that kind of systems support that we needed overall in the year.

So I am very encouraged about EnPro and the position we have to be able to grow in our markets.

Good, good, and yes, I mean, you're right. You guys have done a ton of work over the past few years.

Switching gears on you to strategy and M&A, can you remind us -- and obviously, you have bought a couple things. You sold something. As you think about making more acquisitions and other strategic changes, how are you thinking about criteria for those in terms of -- obviously, the business fit is pretty clear, but I'm thinking specifically can you update us on the financial criteria and how you look at them?

Look, I think our -- Milt is here, so he can help me with this. Our historic -- if you go back a number of years before the current market -- the current market dynamics, at least since I have been here, which will be seven years here in a month, I think our average is somewhere between 7 and 7.5 times --

That's right.

-- earnings pre- --

EBITDA.

-- EBITDA multiple, pre any synergies, pre what we are going to do with the business on a trailing basis and pretax benefit. As you know, we usually -- we try all the time to buy assets so we get a tax benefit, and that has been just under 1 turn advantage, like 0.8 times. So if you take the low-mid 7 times, you can really drop it down to a mid to high 6 -- from 6.5 to 7 times, net of tax benefit.

Frankly, if you look at Fabrico and ATDynamics and you average -- weighted average those based on the size of an investment, they're also in that range. Now we had to buy equity in both cases, so we didn't get the tax benefit, but they are still in that range.

We don't have any intention of paying more for acquisitions, even though everyone believes the current market, and it probably is, is frothy. It is because of the nature of the kind of acquisitions we do and how we go after them and who owns them today, and most of them don't participate in a -- don't sell their businesses through what I would describe as a hard auction. Sometimes it is competitive with one or two other parties.

That's the strategy we are going to continue with, I would say, unless and until we see something larger that is attractive that's still either a fit or a close fit.

Milton, do you want to add anything to that?

The only thing I would add is that clearly we go through cycles in the M&A market. Multiples are pretty high right now. It somewhat mirrors where the stock market is, as well as the activity among private-equity buyers, with low interest rates. So we have seen some upward move in the market on multiples.

But we will respond. We will respond. If something is very strategic, we're still going to be looking pretty hard at those opportunities. That's the only thing that I would add.

I think there is a good argument, too, that for us as a corporate buyer with low interest rates, our cost -- effective cost of capital is lower, too, than it once was. So when we look at returns, we are willing to moderate a little bit, given the environment that we're in. That's the only other thing that I would add (multiple speakers)

Let me just say one more thing, just to make sure everybody understands this. Our acquisition program is strategically driven.

In other words, we don't approach it as, oh, we're going to look at acquisitions and those that are attractive and figure out how to fit those into our portfolio.

We start with the business strategy at the business level and understand where and how we want to grow. What geographic areas do we want to penetrate deeper, what end-use markets do we want to penetrate deeper, what products do we want to add to our portfolio, and what advantage do those give the base business?

Then we go from there and try to find the opportunities that make sense. It's really completely driven from the strategy perspective. I just wanted to make sure everybody understands that. We want to be aggressive on that front, but it's not like we feel like we've got a big pot of money that we have to go spend on acquisitions. We want to grow the company in the way that makes the most sense for our shareholders and that's what we are focused on.

That's perfect. Thank you, guys.

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

I have a couple of follow-up questions from some of the earlier questions. One, related to these one-time items, Steve, it sounds like we're getting a lot closer to a structural foundation where maybe we are not going to see as many of these sort of items that you list. How close are we there?

Then if you don't see any volume growth -- once you get to the sort of ideal structural position where we are not seeing these, if you don't see any volume growth, what kind of an operating margin type of a company is this from where we are now?

Actually, Joe, I would rather address that in the investor day we have coming up where we can look at that specific segment by segment and get into it in more detail.

Okay.

If you don't mind. Look, we have a Company that's got 60-plus locations around the world. We compete in multiple geographies. We compete with six operating companies underneath three segments.

While I hope we don't have quite as many one-time issues and events, things come up that we have to deal with, and that's why we've tried to really focus everybody on adjusted earnings and then explain what these things are.

I would like to say that we are not going to have issues pop up. I think -- I am confident that we are much more stable than we were because when we go in and fix something, we do it -- we fix the root cause and we put systems in place so it doesn't pop up again. But it's unrealistic of me to expect that issues won't happen because markets are dynamic. They develop. We have to respond. Opportunities come up. We have to address those.

These, quote unquote, one-time things that we went through, many of them we -- management, if you will, initiated them, right? R&D expense, investments in sales resources, earnout reversals. Because of the nature of what we buy, one of the reasons we are able to keep multiples low for acquisitions is a lot of times is the owner-operator comes to work for us and we are able to offer an attractive earnout to keep their head in the game and make the valuation make sense, and that is a pretty attractive -- makes us a pretty attractive acquirer.

Well, we are not always going to be right on those earnouts. They are going to go one way or another for us, and as you know, you always have to accrue to the maximum amount, so that kind of stuff is going to continue to happen to us over time. I don't think we're ever going to be like a Fortune 10 company that is able to smooth these kinds of things over their entire business quarter to quarter.

Right. Was the $18 million, was that an abnormally high year compared to the last several years?

Of course. Yes, and I think Jeff's math to get it to what we are looking at was pretty good, at least how I think about it.

Okay. In terms of the capital allocation, I just had a clarification. The debt to EBITDA of 2 times, is that including GST or not including?

It's kind of tricky for us, right, because there is a gray area. That's why I tried to describe it as both a short-term and a long-term target. The short-term target of 2 times is only on EnPro consolidated and reported, excluding the GST intercompany note.

Okay.

So that's the near-term target. As we approach confirmation and get a better sense of when we will actually be able to reconsolidate GST, then it obviously includes the entire company, net of what we have to ultimately contribute in the trust and how that ultimately gets set up.

So there is a bit of a gray area that is going to evolve over time. I actually don't anticipate it being a step change, right, because the closer -- that is why even though we have had, as I think Todd mentioned, a lot of people asking about our capital allocation strategy, the fact of the matter is it just hasn't been clear because of this -- because of the ACRP. Until we got the judge's ruling, until we filed the plan, and then we went out and raised money last fall and immediately went into a quiet period of the tender offer for the converts, and then we were in an extended quiet period because we were in deep and intense negotiations with both the asbestos claimants committee and the FCR, which took months, until we finally concluded that our best course of action was to agree to a second amended plan with the FCR, which we filed in January.

And then, of course, we were in the earnings blackout period of time, and so our Board of Directors just met yesterday and the day before for our regular quarterly Board meeting and decided to implement our buyback. As a public company, obviously we're not allowed to initiate a buyback when we've got material nonpublic information, which we potentially had for the last six or seven months because of these different factors.

So we have always known where we are going, to be honest with you, and it's just taken us a while to get clear of these other things so that we could make all that public.

Okay. Then just in terms of the debt calculation, is there anything weird in terms of the way you calculate debt to get to the 2 times calculation?

No, other than the exclusion of the intercompany note.

Right, so it's just you are sort of -- okay, I just wanted to verify that.

Yes.

Just one or two other questions. GST, I missed your commentary on the business. I am just trying to understand where we are at with GST. You saw a little bit of topline growth, but the margin declined significantly. I know you've had some ups and downs in terms of a competitor coming offline two years ago and then coming back online again. Where are we with that and how do we look at the margin that we saw in the fourth quarter going forward?

Yes, I think that's another good case where you could take 2013 and 2014 and average them and you would be pretty close.

Okay, so we should see some improvement, then, in 2015, you would say?

Yes.

What would be the driver behind that, given maybe some of the (multiple speakers) pressures?

No, my belief is just return to more of a normal mix than we saw in the fourth quarter.

(multiple speakers) so are you saying the average between the fourth quarter of 2014 and fourth quarter of 2013 (multiple speakers) year?

No, I was saying the full year.

Okay. So what would the reason for us to see -- because I would expect the topline could be a little pressured maybe with the oil and gas or I wouldn't expect a ton of leverage through growth from the topline, I would think. So what would cause the margin to expand?

We see a little bit better topline for GST. It's not going to be huge, but -- and you are right. They do have FX headwinds. They do have a little of oil and gas headwinds, but there is also a lot of -- there is positive things for GST as well.

So I think it's going to be -- our hope is it is going to be a little bit stronger and return to what we would call normal margins, which the fourth quarter were not. It was a --

Right, right. So to get to low 20s, is that mostly a leverage type thing or is there a product mix potentially?

I don't think we will get quite to low 20s. I think -- because that's what we saw in 2013 and I think we were pretty transparent that was a bit of a -- there were a bunch of unusual things. I think we're going to be in the high teens range.

Okay, okay. Then just lastly, I wanted to see what you thought acquisitions would contribute to the topline for 2015, referring to the ones that you have already made.

Net of the GRT sale, right, because you got to remember we sold the business out of sealing and we have added two businesses to sealing. Milt, do you or Alex know what that is?

The GRT sale for the year, that is about $30 million, $31 million of topline impact, so you have to net that out. Then the combination of Fabrico and ATD, $60 million?

Yes, call it $60 million.

$60 million in topline.

Okay, so net $30 million. Okay.

Yes.

Okay, great, thanks.

Gary Farber, CL King.

Just a couple of questions. Can you speak to your R&D expenditures, how you expect that to manifest itself on a revenue perspective? Over what time do you think that will become more visible?

Then can you also speak to your upcoming analyst day, how, if anything, it will be different than prior years and what our expectations should be for that day?

Let me take the second half first, Gary, which -- good morning. We are not going to spend a lot of time on the asbestos case, so if -- previous analyst days, that was a fairly significant focus. I don't really anticipate talking about that because we're going to talk about the business. So that's going to be, I think, the biggest difference.

Your question about R&D, I think our -- I don't know how expert our -- our budget is going to be pretty much in line with last year, isn't it? Maybe a little bit more?

Yes, I think we're going to spend the same, so if you break down the R&D spend year to date in terms of incrementals, 2014 over 2013, within the sealing products segment you are looking at about $3.5 million, $3.4 million incremental, 2014 over 2013. I would anticipate that to continue.

We are making a lot of investments both in Stemco and Technetics, primarily, a lot of investment in Technetics around the aerospace business and the semiconductor businesses that we are building out. As you know, those are longer-cycle plays, so you probably don't see a revenue impact from that until probably into 2016, maybe beyond.

Within engineered, the incremental R&D was just about $2 million -- $1.9 million, 2013 over 2014. A lot of that is focused on GGB as they're looking at basically new, more advanced materials for the plane bearings. Again, those are going into new platforms, so it's longer dated.

And then, the real bulk of the spend in R&D was in power systems, so that was an incremental $3.4 million this year. It's actually going to be north of that next year, and that's for the OP 2.0, which has substantial revenue, but again probably won't see the payout from that until 2017-2018, realistically. Does that help?

Yes, that helps a lot. Just one other question. On your R&D spend, should we expect that the emphasis or the wins will be more with new customers or getting more footprint with existing customers?

I think it's both, actually. I think it's -- we're doing a lot of development in Technetics with existing customers, and so that's -- we call it R&D, but it's really more application -- advanced application development with -- hand in hand with customers.

On the other hand -- with current customers. On the other hand, the FME OP 2.0 would be all new customers, so I would say if you look at the whole portfolio, my guess is it's probably about 50-50.

Okay, thanks. Just one last one. This big uplift in R&D, does that change your sales approach or your go-to-market approach at all?

Not really.

No.

Okay, thanks.

Thank you. Mr. Grgurich, I will now turn the call back over to you.

Okay, thank you all for joining us this morning. If you have additional questions, you can call me at 704-731-1527. Have a good day.

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