Enpro Inc (NPO) 2015 Q1 法說會逐字稿

Good morning. My name is Suzanne and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industries' first-quarter 2015 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Dan Grgurich, Director of Investor Relations, you may begin your conference.

Thank you, Suzanne. Good morning, and welcome to EnPro Industries' quarterly earnings conference call. I will remind you that our call is also being webcast at EnProIndustries.com, where you can find the slides accompanying the call. Steve Macadam, our President and CEO, and Milt Childress, Senior Vice President and CFO, will begin their review of our first-quarter performance and our outlook in a moment.

But before we begin our discussion, 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 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, 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.

Our earnings release and conference call presentation materials contain additional disclosures regarding non-GAAP financial information, collective references to EnPro and our subsidiaries, the consolidation of Garlock Sealing Technologies, or GST, and pro forma financial information presented as if GST was re-consolidated for financial reporting purposes. These disclosures are important to understanding comments we will make on today's call, and we urge you to read them carefully.

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

Thank you, Dan, and good morning, everyone. Activity levels in our markets were mixed in the first quarter. Our North American heavy-duty truck markets benefited from higher demand from both fleet operators and original equipment manufacturers. And we saw strength in other markets, including defense, chemical and aerospace. However, lower commodity prices led to softness in other sectors, most notably in oil and gas and steel.

In North America, refinery maintenance activity was lower, as oil and gas companies took advantage of profitable conditions in refining to offset lower profit in slowing upstream operations and projects. Steel mill activity was also negatively impacted by the slowdown in pipeline building projects, and the ripple effect from box strikes on imported goods from the West Coast. These conditions affected deconsolidated GST as well as CPI.

The strong dollar, as evidenced by the 17% year-over-year decline in the euro to dollar exchange rate, was also a significant macroeconomic factor affecting our results in the first quarter. Our consolidated sales were down 3% for the quarter. And pro forma sales, which include the results from deconsolidated GST, were down 4%. Excluding the impact of currency translation and the year-over-year impact of our acquisitions net of a divestiture, consolidated sales were up 1%, and pro forma sales were level to last year.

The loss provision on F&E's contract with EDF that we announced last week, currency translation, and other unusual items that Milt will cover in more detail shortly, had a substantial impact on our profitability in the quarter. Our consolidated adjusted EBITDA of $28 million was down 14% from a year ago, and our pro forma adjusted EBITDA of $39 million was down 15%. Excluding the EDF loss provision and the negative effect of foreign exchange translation, adjusted EBITDA would have been up 10% over a year ago.

During last month's Investor Day, we highlighted growth strategies for three of our six operating divisions -- Technetics Group and Stemco in our Sealing Product segment, and Fairbanks Morse, our Power Systems business. These three businesses delivered strong results for the quarter supported by healthy heavy-duty trucking and aerospace markets, and in the case of power systems, a strong aftermarket parts and service quarter.

In Sealing Products, as discussed in last quarter's earnings call, we completed the acquisition of ATDynamics, a company that designs, manufactures and sells a suite of aerodynamic products for heavy-duty trucks. Integration into Stemco's business is proceeding nicely, with emphasis -- commercial initiatives to accelerate fleet adoption of the Company's flagship trailer-tail product, which you are likely seeing with greater frequency on the highway.

Also in Sealing Products, Fabrico, a company acquired in December that manufactures components for hot path sections of industrial gas and steam turbines, is performing ahead of plan. We are seeing early indications of commercial synergies that enhance our position with turbine manufacturers.

During the quarter, we made significant progress on three of our capital allocation initiatives. First, we purchased approximately $21.3 million in aggregate principal amounts of our convertible debentures for $44.9 million in cash. This reduces the outstanding aggregate principal amount of the debentures to about $2.2 million, which we expect to remain in place through maturity in October.

As we announced in a March 18th press release, we entered into an agreement during the quarter to accelerate the settlement of the hedge associated with the debentures, which we expect will result in the return of roughly 900,000 shares to the Company during the second quarter, if the average price -- share price stays the same as the first quarter. The actual number of shares returned will be based on the average share price over a measurement period.

Second, we paid our first dividend during the quarter, and yesterday, declared a dividend of $0.20 per share for the second quarter. Third, we repurchased approximately 800,000 shares during the quarter at a cost of $47.4 million.

As announced last week, we have now completed the $80 million share repurchase program, buying back a total of approximately 1.2 million common shares in open market transactions at an average cost of $66.76 per share. By the end of the second quarter, presuming a return of around 900,000 shares from the hedge acceleration, we expect our diluted share count to be 22 million shares, a 15% decline from average diluted shares during the second quarter a year ago.

Now just a quick update on the status of GST's asbestos claims resolution process. We continue to have success in the court in our march towards confirmation of GST's second amended plan of reorganization. On April 10, a significant milestone was reached when the court approved GST's disclosure statement for the second amended plan, and set October 6 of 2015 as the bar date by which claimants must file asbestos injury claims.

The court also established rules and procedures for the solicitation and voting process, and set the same date, October 6, 2015, as the deadline for voting on the plan. We can now enter into the notice and voting phase. This will be a required multimedia campaign designed to reach current and future claimants, and is expected to take about five months to complete.

After that process is concluded, there will be several months of expert reports and depositions on economic, science, medical and other issues, followed by expert rebuttal reports and depositions. This will culminate in a confirmation trial that the court has set to begin on June 20th of 2016.

As to the five lawsuits GST has made against several asbestos plaintiff law firms, the District Court denied the law firm's motions made in four of the cases to transfer the cases to federal court in those firm's respective states. All these cases will remain in the Charlotte court. We now expect these cases to proceed in earnest with discovery.

Now I'll turn the call over to Milt to add some more color to our results for the first quarter.

Thank you, Steve, and good morning, everyone. Our consolidated first-quarter sales were $277.5 million, down about $10 million or 3% from the same period of 2014. Excluding foreign exchange and acquisitions net of the GRT divestiture, organic growth was about 1%.

By geography, on a constant currency basis, we saw little organic growth in Europe, as a 1% increase in Sealing Products sales was offset by lower Engineered Products. Markets were mixed, as increases in European automotive were offset by lower sales to Renewable Energy, General Industry, and Process Manufacturing. In North America, organic sales grew 2%, as Sealing Products sales increased 7%, largely due to stronger sales to heavy-duty trucking, nuclear and aerospace markets that more than offset Engineered Products sales, which were 13% lower, due to decreased sales in fluid power, automotive, and oil and gas.

Gross profit for the quarter, up $89.8 million, was $6.7 million or 7% lower than in the first quarter of 2014. And gross profit margins decreased to 32.4% from 33.6%. Favorable volume and mix, particularly in Sealing Products and Power Systems, and higher prices in most of our businesses, were more than offset by the $6.2 million loss provision in Power Systems and the negative impact of currency across the Company.

SG&A was down $1.6 million, or 2% from the first quarter of 2014. Of this decline, $1.1 million was due to a drop in corporate-related expenses. Sales in the Sealing Products segment were $160.9 million in the first quarter, up nearly 4% or $5.9 million over the first quarter of 2014. Acquisitions net of dispositions contributed $2.8 million, but this was more than offset by roughly $6 million in unfavorable foreign currency translation. Excluding currency and the net effect of acquisitions, sales in the segment were up 7% from a year ago.

Higher volumes and heavy-duty truck parts, nuclear components and aerospace products more than offset softer demand from oil and gas in still-producing markets. Sealing Products segment profits were up $0.9 million, or 5% from a year ago, and margins improved to 11.2% from 11.0%. Excluding the effects of foreign exchange and the contribution of acquisitions net of dispositions, segment profits increased 18%. The improvement over 2014 also reflects the effect of severance payments and inventory adjustments totaling $1.6 million that occurred in the first quarter of 2014.

In the Engineered Products segment, first-quarter sales of $77.2 million declined by 16% from the first quarter of 2014. Unfavorable foreign exchange translation accounted for 10 points of the decline. Improved demand in European automotive markets and in China was more than offset by decreased demand in North American oil and gas markets, and with OE customers in both Europe and North America.

As overall demand decreased, volumes were reduced and segment profits declined from a year ago. Segment profit was also impacted by an unfavorable foreign exchange of $1.1 million, and restructuring expense at CPI of $1 million.

In the Power Systems segment, sales decreased 2% from the first quarter of 2014. Increased revenues from parts sales, and from sales of service and Engineered Solutions, were offset by a $7 million decline in revenues on engine contracts.

Despite a more profitable product mix, as parts and service sales increased, segment profits declined as a result of the $6.2 million foreign exchange-related loss provision for the EDF contract. Excluding the loss provision, EnPro's Power Systems segment profit more than doubled to $6.8 million for the first quarter of 2015, compared to $3.3 million in the first quarter of 2014.

As disclosed in our April 20th press release about the EDF provision, Fairbanks Morse total euro-denominated sales and purchasing volumes, including the EDF contract, other engine programs and aftermarket parts, are approximately balanced. At current exchange rates, we expect to benefit in the future from parts sourced in euros for other engine sales contracts and aftermarket parts that are denominated in US dollars. However, pursuant to applicable accounting guidelines, each contract must be accounted for separately, and a loss on one contract cannot be offset against the future benefits to be realized on other contracts, even if driven by a common factor -- in this case, foreign exchange rates.

We reported a GAAP net loss of $1.6 million or $0.07 a share for the quarter. This compared to a GAAP net income of $1.3 million or $0.05 a share in the first quarter of 2014. Excluding restructuring costs, a loss on exchange and repurchase of convertible debentures, a fair value adjustment to acquisition data inventory, interest expense and royalties with GST, and other selected items, we earned $5.8 million or $0.25 a share compared to $9.8 million or $0.44 a share a year ago.

The adjustments do not include the EDF loss provision, nor the foreign exchange impacts mentioned earlier, which, together, on an after-tax basis, reduced earnings by $5.3 million or $0.23 per share. Cash flow for the first quarter was a use of $122 million compared to a use of $4.6 million in the first quarter of 2014. The use of cash increased in the first quarter of 2015 as we focused on accomplishing several of our capital allocation goals.

Contributing to the use of cash were higher interest payments from the issuance of debt last fall. We spent $28.7 million more to complete acquisitions. And capital expenditures were $9.8 million -- $9.1 million for the first quarter of 2015 compared to $6.7 million for the comparable period in 2014.

Segment working capital increased by $29 million year-to-date in 2015, with acquisitions accounting for nearly $7 million of the increase. This compared to a $39.6 million increase in the first three months of 2014. Borrowings from debt instruments were about $20 million less than in the first quarter of 2014. However, $44.9 million of cash was used to purchase convertible debentures.

Shares of common stock were repurchased in the first quarter using $47.4 million under our $80 million repurchase program, which was completed this month, as Steve just noted. Lastly, $4.8 million was used to pay dividends to shareholders.

Sales of the deconsolidated operations of GST and its subsidiaries in the first quarter of 2015 decreased by 8% compared to the first quarter of 2014. The decrease reflected softer market conditions, particularly in the Eastern US and Canada, where harsh winter weather and a reluctance to shut down refineries for maintenance slowed seasonal maintenance activity. Sales also reflected the effect of lower global oil prices and reduced activity in the steel industry.

Operating profits were down 19% from the first quarter of 2014, primarily due to lower volume and margin compression resulting from the stronger dollar. Asbestos-related expense was $3.3 million in the first quarter of 2015 compared to $3.2 million in the first quarter of 2014. GST's cash and investment balance was $237.2 million at the end of the first quarter compared to $181.3 million at the end of the first quarter of 2013. The increase included the collection of $21.3 million of asbestos-related insurance proceeds since March 31 of last year.

Now I'll turn the call back to Steve.

Thanks, Milt. We'll close with a discussion of our outlook for the second quarter and full-year of 2015, and then open the line for your questions.

OEM order activity remains firm in our semiconductor, aerospace and trucking markets, and we have a healthy backlog and order rate in Power Systems. However, we are continuing to see slowing demand from oil and gas markets, as low commodity prices result in reduced project and maintenance spending. In addition, we expect the weakness of the euro and other foreign currencies to impact our results.

As we look at the second quarter of 2015 in comparison to the second quarter of 2014, we expect to see a modest decline in sales, as foreign exchange headwinds offset secular growth in our businesses. Segment profit margins in the second quarter should be modestly higher compared to a year ago, based on the volume and mix assumed in our latest forecast.

Longer-term, we expect to benefit from our strategic growth initiatives, including growth from new products and our recent strategic acquisitions. Recently-provided guidance for the full-year outlook in our March 19th Investor Day, I want to update that for you.

Our guidance provided a revenue growth range of negative 3.2% to a positive 0.1%, and profit margins between 11.4% and 12%, based on an exchange rate of $1.08 per euro. The guidance did not include the $6.2 million loss provision taken in the first quarter, nor any restructuring or acquisition-related charges. Based on current conditions, I think we are still within the range for that guidance for the year.

Now we'll open your line for questions.

(Operator Instructions). Jeffrey Hammond, KeyBanc.

Hey, so thanks for the update on the guidance here. Maybe within that, it just seems like you've been seeing better trends within sealing, kind of three quarters here of 6%, 7% 8% growth. And conversely, CPI seems a little bit heavier. So maybe how are you thinking about those growth rates going forward and maybe kind of change within those segments?

Well, I think you've made a good observation. Just at the segment level, Sealing Products is doing great absent oil and gas headwinds. Right? And there's less currency exposure in ceiling in total than there is in Engineered. Engineered, both CPI and GGB, the whole segment is probably two-thirds Europe-based.

So even though GGB is actually doing okay in euros, but it's getting hit by translation, and CPI is, of course, getting hit most directly by both euro strengthening and -- or sorry, euro weakening and the oil and gas pressure.

So I think -- my view, Jeff, is that CPI has probably leveled out at its current -- I mean, the first quarter is always weak for CPI. We did take out restructuring action in Q1. That's done and implemented. So we will see some benefits from that throughout the year. CPI is not going to have a great year in total, just with the weakness in its markets. But I don't think it's going to be kind of worse than where we are today from a demand standpoint.

And I think GGB will -- you could probably layer on what we did last year, plus just a little bit of growth and adjust the whole damn thing for FX. And that's about where we are.

Okay.

Does that answer your question?

No, that's very helpful. And then so just as we look at the oil and gas facing businesses, how weak were they in 1Q if you isolate it? And what's kind of the core growth decline you're thinking about?

You want to take a shot at that, Milton?

Well, we have a couple of things going on that have affected our results overall. And I want to come back to foreign exchange and just highlight one thing.

Because, Jeff, we do have some margin compression that we see, especially in our Garlock business because of the product that is manufactured in the US and sold elsewhere. And so I would just add that to kind of temper when we think about Sealing Products, there is a headwind there, but offset by some real strong results at Technetics and Stemco that Steve alluded to.

And with oil and gas, I think what we anticipated coming into this year, that we would have headwinds primarily with the upstream part of the industry. And our sales, the upstream, are fairly small. But what we found is broader-based, I think as a lot of companies have, with refineries trying to take advantage of the current conditions, and operating without typical maintenance cycles, which we believe that, over time, we will make up for that. But it leaves us here in the interim depressed -- the activity there depressed and affecting our results.

Which primarily affects most GST and CPI.

Correct.

Okay. Great. Thanks, guys.

Joe Mondillo, Sidoti & Company.

So first question, just regarding sort of the maintain guidance, if you will. I know there's a lot that goes into that, there's a ton of moving pieces. But just looking at that, which sort of essentially guides to roughly flat margin, I'm just curious to hear how you think about achieving sort of flattish margin with what we saw in the first quarter, as well as maybe some more headwinds at the Sealing segment?

So if you could just sort of address that, because the Engineered Products obviously has to make up a lot of headway in the last three quarters, given the comparison that you just saw in the first quarter. And then if you could address maybe the margins that you're sort looking at for the rest of the year at Power Systems?

Joe, I think to address it, we kind of have to look at segment by segment. And so if you refer to the guidance that we provided in March during our investor day, we had Sealing Products margin being in the 13% range roughly. So about equal to the margin in 2014.

In Engineered Products, absent any kind of restructuring which we have taken, we had (technical difficulty) a little bit below our 2014. I do think there some risk there. I guess my view is there's a little bit of risk there perhaps offset by some upside at Sealing Products.

And probably a little upside at Power Systems.

Correct. Yes.

Excluding the loss provision, so.

Okay. So I guess let's talk about Sealing segment then. It sounds like you're anticipating that you're going to get some margin improvement as we progress throughout the year, to get -- you just have to see that to get to the flat margin. So could you help me understand the dynamic between sort of oil and gas weighing on that segment, as well as the currency weighing on the margin as well, offset by, I guess, maybe Stemco and Technetics? Is it sort of -- is the way to look at it sort of a pure offset? Is that a good way of thinking about all that?

Well, clearly, if you look at the improvement that we expect to see year-over-year in Sealing Products, much of that is going to be driven by the Technetics Group and Stemco. And --

So those businesses will offset sort of the headwinds that you're seeing in oil and gas and currency?

Yes. That's the way we see it.

Okay. And then just lastly and I'll hop back in queue, could you talk about the capital allocation going forward? And sort of where your leverage is at this point in time after you've exhausted the share repurchase? And how you think about capital allocation for the rest of the year going forward, are you going to deploy any more cash? Or at this point in time, after doing all that you've done, are you thinking about taking a couple quarters and hopefully generate some cash before getting back to deploying cash towards all of those strategies?

Yes. I think that's a good question. Thanks, Joe. During our last earnings call, Steve outlined our strategy around capital allocation, and then we talked about it again at the Investor Day. And at that time, we indicated that the way we are looking at it on an average basis, knowing that it's going to kind of spike up and maybe fall below, but was to look at a net debt to EBITDA target of around two times.

And if you look at where we ended up for the quarter, with the -- net of the dividend and the share repurchase and the converts, we ended up right around two times net debt to EBITDA if you exclude the intercompany debt. So we are right around that target leverage.

And so at the current time, our focus now is investing in our businesses. As we noted previously, that we have some higher than normal capital expenditures this year, largely associated with some facility investments and purchases that we're going to make. And we are also focused on growing our businesses, and hope to be in a position to move forward with additional investments on the acquisition front, depending on how things shake out there. So I think our focus now between now and the end of the year is really more internally and growing our business.

Yes. And so, obviously, we announced last week, Joe, that the share repurchase is done. Right? That spilled over into Q2, clearly. And we also announced a while ago that the acceleration of the bond hedge, that requires some open market purchases by our agent as well, which we'll begin here, I think, shortly. And that will take some period of time.

So through the second quarter, I think we are going to get that hedge acceleration piece done and so forth, and kind of regroup on where we are. So for the back half of the year, we hadn't anticipated doing anything originally, but we'll -- I mean, we'll see. We'll see where the share price stays. And it's going to continue -- the repurchase will continue to be part of our thinking to the extent we have available capacity, and we think that the Company is undervalued, so.

Okay. And just a follow-up on that. Is there -- do you have to get another approval by the Board? Or is there anything else in place regarding the share repurchase?

That's correct. We would have to get another authorization from the Board, which we do not have today. We've exhausted the full authorization that we have currently. Yes.

Okay, great. Thanks a lot.

Todd Vencil, Sterne Agee.

Steve, just kind of thinking a little bit bigger-picture maybe. Obviously saw the charge related to the restructuring of CPI. Where do you guys stand on getting that business where you want it to be?

Well, there's -- I guess there's two lenses to look at that, Todd. One, let's just talk about operationally how we are doing, and then we can talk about financial performance.

And when I talk about operational, and let's just talk about manufacturing, I'm talking about everything from commercial effectiveness to on-time delivery to our ability to be world-class in our applications engineering, and so forth and so on. Right? So, the stuff we actually work on on a day-to-day and week-to-week basis.

You know, I think we're -- I would say we are at -- if a year -- if when Ken Walker took over the business, we were performing at a 2 out of 10, I would say today we are performing at a 5.5 or 6 out of 10, roughly. Maybe -- between 5 and 6 out of 10. So we've made a lot of progress and we have a lot of stuff underway.

But the team is working really hard and making great progress. We've strengthened our applications engineering; we are upgrading the talent in the commercial team. We are restructuring how the commercial team works in terms of -- we put a strong guy in as our commercial lead there, that came from another part of EnPro. He's only been on the ground for three months now.

The new operational -- VP of Operations we have there doing an outstanding job. He's been with us for a little over a year now. So when I go to the facilities, when Ken and I both visit facilities -- Ken was just in the UK; I was recently in Stafford, the main plant in the US -- there are a lot of positive signs and there's a lot of good feedback from customers on how we are doing.

And we've won new customers. And we've gotten customers to come back that we lost a year or two ago. So, if you just looked inside the Company and inside the business, you'd say, okay, pretty decent progress, right? With still more to go. Now, unfortunately, with the price of oil falling in half, and so many rigs being laid -- the whole industry is a bit in a -- has been in a bit of a freefall.

Now oil prices kind of stabilize, that's why I think, at least from a demand standpoint, we're probably at where we are going to be. But clearly, the business is not robust enough -- the demand is not robust enough to lead to earnings of anywhere near what we need, which is really what led us to do the restructuring we did in Q1, and continuing to look at various options for some of the business -- some of the parts of that business that are in particularly troubled markets.

So, you know, we would have to have some industry recovery to get that business to an acceptable level of profitability. We cannot do it with the -- at the current point in the cycle.

Now if you do take the longer-term view of the next -- let's call it two to four years, there is a lot of petrochemical capacity that's being built on the Gulf Coast, as you know. Because the decline in the price of oil has not affected -- I mean, it's affected some, but most of the stuff that's going to -- most of the new chemical plant capacity that's going to exploit the low natural gas, and abundancy of natural gas liquids that come along with it, is chemical-related. And that construction is still underway.

These are huge expansions that are going to be multi-years to get started up. But those are still happening, and those will. And that's a core market for CPI. So, we still believe that there will be a gradual lifting of demand for CPI's products, even separating it apart from cycle recovery. But we certainly need some cycle recovery as well.

Got it. Thanks for that. And how about the distribution center at Stemco? Has that -- I may have missed it, but how is that operating for you?

Great. The team has done a fabulous job. So, we are doing great. I mean, it's running just like we wanted it to -- just like we wanted it to be running a year ago. (laughter) So, it took us longer. But, no, team has done a great job. Everything is going great. And so we are working to shift more and more of our customers towards the buying behavior to place one order and get one shipment, which this allows us to do.

So yes, we are pretty pleased with where we sit in Stemco. A lot of things are going well in Stemco. I mean, it's doing great; we've gotten some nice early wins from the new trailer-tail business, some new commercial wins. We had a good first quarter -- really good first quarter in Stemco. And we are positive on where that business stands in the outlook, so.

Good. And then last one from me, this is -- I know this is tricky to answer, but can you -- I appreciate the update on the ACRP and where that stands with the court dates and all that. Can you give us any kind of update on how and if conversations might be going with the current claimants and maybe that potential path to resolution?

You know, I really have tried to stay away from any comments on -- I certainly can't tell about any details with conversations. I'd say it's the same status it's been for a while. And I would describe it as off-again/on-again, and not very productive.

Got it. Thank you.

(Operator Instructions). Justin Bergner, Gabelli & Co.

My first question just relates to the balance sheet and the sort of debt to EBITDA target. I just want to make sure I'm focusing on the right numbers.

If I exclude the intercompany debt, I guess, for EnPro without GST re-consolidated, it looks like there's $340 million of long-term debt, and $72 million of cash? That would seem to get me to a net debt to EBITDA ratio meaningfully below two times, but I'm probably not looking at it the right way.

Let me -- give me one second. Here, Justin, I'll open up my balance sheet. Yes, what -- okay. So we have long-term debt of $340 million, roughly. Right? And cash and cash equivalents of $72 million. And so that's $268 million. And I was saying we are roughly at two times, and our adjusted EBITDA for the quarter was -- let me put it -- on a trailing 12 months basis is kind of roughly [$150 million] or so. So I was rounding earlier. I think it's going to be -- rounding it two times, it might be a little bit below that. So I think you're right.

Okay. Maybe I was looking forward to the sort of low-end of the guidance of $134 million to $146 million of operating income plus depreciation.

If you want to follow-up -- why don't you follow-up with Dan after the call, and we can kind of just go through and check and make sure all our numbers align.

Okay.

But I think we are kind of rounding it about two times, but a little bit below that.

Okay. And is that net debt to adjusted EBITDA or net debt to EBITDA?

It's -- the way we look at it is net debt to adjusted EBITDA.

Okay. I guess the reason I was asking is what I'm driving at is, you talked about using cash to grow the business. And I was just curious, do you still have a good appetite for acquisitions? And are there a lot of things still in the pipeline?

Yes. I mean, we do expect -- we are a user of cash. At this time, our typical seasonal cycle is that we use cash in the first part of the year and generate in the last part. So we expect to be generating cash from our operations throughout the year.

And we've always said that this target is simply that -- it's a target. If we find good opportunities that make sense for us strategically, we've got access to capital; we still have a lot of availability under our revolver. And we have access to other capital, should we need it. So it's where kind of we expect to be on average. And, at times, we'll fall a little bit below it, and at other times, we might spike up if we find the right investment opportunity that we want to pursue.

Does that help?

Yes. I guess what I was curious about is how does the acquisition pipeline look? Is that still sort of a 2015 focus for you after some recent deals?

Well, it's certainly a focus -- let me jump in. It's certainly a focus, and we do have a few opportunities in the pipeline that we would say are still likely. And when I say likely, I'm talking in the 70% range, not the 95% range, but more than 50% and more likely than 50%/50%. As you know, the acquisitions is always hard to gauge, because you don't know about the seller side, and you don't know who else is in the game looking for things, looking at the same assets and so forth. But we've still got a few in the pipeline that we are hopeful will happen this year.

Okay, that's good to hear. Turning to a quick question on the growth of the business. Is it possible for you to sort of break out Sealing Products between Garlock, Technetics and Stemco from sort of an organic constant currency point of view?

Well, as you know, we don't disclose division results within the segment. We've mentioned earlier that we expect stronger growth in Technetics. There is going to be some European exposure there, so there will be some currency issues. At Stemco, there's not much in the way of currency impact, and that business has been good.

The backlog of trailer builds continues to remain strong, even though new orders are softening from a year ago. So we expect favorable conditions for the balance of the year at Stemco. And then we talked about the story of Garlock, which is some headwinds in oil and gas and steel. So I think that's our general thoughts on the composition if you look at the businesses within Sealing Products.

Okay. Is there any meaningful -- it seems like Stemco is sort of the strength is continuing and paralleling trailer builds. It seems like in Technetics, you're noticing some notable improvement in that business versus sort of maybe earlier quarter growth rates. Is that a fair characterization?

Yes. I think it is. We've been successful in the aerospace market, landing some pretty significant projects that if you go back and look at our historical calls, I'm sure I referenced those early last year and even frankly late in 2013. Those projects in aerospace, because of the nature of that business, take a while to come online and get up to full run rate, because of the qualification process.

And a lot of times it's a design phase and then a qualification process, where we are working very closely with our customers. And so we've been pretty successful there over the last 18 months, and we're starting to reap some of the benefits. And that's just continuing.

Great. Thank you for taking all my questions.

You're welcome.

Joe Mondillo, Feltl and Company.

Thanks for taking the follow-up. One, I wanted to ask you -- regarding the pro forma balance sheet that you have in the release, how does that compare to if you end up re-consolidating GST? Is that a pure what the balance sheet would look like after you create the trust? And -- or is that not accounting for settling the liability and going through that?

Yes. It -- Joe, it assumes confirmation and moving forward under the terms of the second amended plan of reorganization. So all the economics of that plan that we've talked about previously are embedded in the pro forma balance sheet --

Which includes the establishment of the trust.

-- trust. So, you will see that in assumptions made that the initial part of that trust was funded, and therefore there's less cash on the balance sheet by a corresponding amount. So it -- the short answer is, it does reflect that plan.

Now Joe, if we were able to and successful in reaching a settlement that would include both the future claims representative and the current claimants committee -- remember the second amended plan is only supported by the future claims represented, even though the trust handles everyone. It handles current and future claims. Right? But if we were to reach an agreement, it might be -- it would be different than what's in that. Right? So --

Right. I understand.

Yes, okay.

Okay, thanks. Also, I wanted to ask you sort of the outlook on Power Systems regarding what you see in the backlog, and how any sort of near-term or short-term work that you've been getting suggests how the margin sort of plays out throughout the year? I know that's sort of -- it's a lumpy business, it's tough for us to sort of see how that's going to sort of play out, but --

Yes. No, look, I think -- Power Systems, we feel like we -- I think we guided in New York, if you exclude this provision -- and it's important to exclude the provision, because just keep in mind, just everyone, hopefully, understands this; nobody's asked questions about it, so hopefully everybody does -- that to the extent the FX rate ends any future quarter at different from [110], we have to adjust that provision one way or the other.

So, for example, if the quarter were over today and the rate were just about [112], we would reduce the amount in that $6.2 million provision, because the $6.2 million provision is based on where FX -- where the exchange rate ended at the end of Q1. Okay? Likewise, if the FX were to go the other way from now to the end of the quarter and be below [1.10], we would have to adjust it to be bigger. Right?

So when we talk about the business, we're going to be talking about it excluding that provision. And hopefully, we've explained in our press release the fact that it's really just an accounting anomaly the way it's accounted for. Because we don't get to take credit for the natural hedge portion of that business, which is parts we procure in euros and sell in dollars, which over the life of this thing, are roughly balanced. Okay? So --

Right. I guess I'm addressing the 17% -- I was excluding. So if you look at the first quarter, excluding you're at 17%, the guidance that you put out in March sort of reflects margin coming down to 13% to 14% for the rest of the year? Is that fair? Or with the 17%, do you think it could be higher or --? Just wondering sort of what you think.

Well, I think -- Joe, for -- as we see things now, we would kind of continue to look at the guidance that we provided with the margin being in the kind of 13% to 14% -- 14.5% range. And it's going to move -- and that would be before, of course, what Steve just said, and as you understand it, for the impact of EDF.

But generally, to your question about overall activity, I mean, our revenue that we see on engines for the year is kind of roughly comparable with a year ago. Our parts and service had a really good parts and service year last year. And we may be down a little bit overall for the year, although we had a really good quarter this quarter, as we've discussed.

Joe Mondillo

Okay.

And I think the first quarter -- look, I'm not going to differ a little bit here, but I think frankly that with the strength of the first quarter and what we see in the backlog, we've got a pretty good chance at beating the margin from last year, excluding all the provision stuff.

Okay. And just regarding --

I don't think it will be huge, but I think we will beat the 14.2% we saw last year.

Okay, that's helpful. In terms of the long-term outlook of that business, when -- remind me when the EDF contracts sort of hits. And in your investor presentation, you sort of provided -- I remember a chart that sort of showed how you think the trajectory of that business could look over the next few years.

Yes.

And it certainly looked like you're anticipating in the horizon -- I don't know if it's 2016 or if it's beyond 2016, some new business. I know you're in the commercial turbine, and all these new businesses. Do you anticipate a ramp-up in 2016? And also, how does that reflect in the margin profile with all this new business? Is there going to be a little bit of pressure there or --?

No, no -- look. The EDF contract, we are working on it now, so we're -- it's accounted for a percentage completion basis, but we're -- we had to make the qualification engine first. That's complete. We are testing that now. We've got other engines that are being assembled. But that -- and being worked on, parts are being procured.

So we are well into the EDF contract. That will happen over the next three years, those engines will be delivered over the next three years. Right? So those are baked into the guidance for this year, and so forth. That is not an extremely rigid schedule, but it's pretty firm in terms of what happened. I mean, we've made certain commitments to EDF of when we're going to deliver engines; we have to meet those dates and so forth.

There's always a chance that the customer will come back and fine-tune it, but it's pretty well established. The growth opportunity in F&E has to do with the new engine development that we are doing with the opposed piston engine, what we call it in New York, the OP 2.0. Now that is what really could open up substantial new commercial markets for F&E.

And that we'll know -- as I said, in New York, we'll know a lot more about it in the second half of the year, because we are literally building the first engine, which is an experimental engine, as we speak. We will be testing that over the summer and early fall, and be getting real performance data on it.

So, hopefully, by the end of the year, we will have a really good sense of its competitive position and so forth. But even if it is successful, it probably -- it won't lead to any meaningful revenue in 2016, because of just the cycle. We'll have to get some in the field, we have to do endurance testing, et cetera. Hopefully, we will be able to get some orders in 2016. But before we actually build and deliver those engines to any significant rate, we're talking about years outside beyond that, so.

Okay. Okay, great. Thanks for taking my questions. Appreciate it.

Yes.

There are no further questions in the queue at this time. I turn the call back to the presenters.

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

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