Enpro Inc (NPO) 2016 Q1 法說會逐字稿

Good morning. My name is Angel and I will be your conference operator today. At this time I would like to welcome everyone to the EnPro Industries first quarter 2016 results conference call. (Operator Instructions). Thank you. Dan Grgurich, you may begin your conference.

Thank you, Angel. Good morning and welcome to EnPro Industries quarterly earnings conference call. I'll 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, Milt Childress, Senior Vice President and CFO, are accompanied by Ken Walker, our Chief Operating Officer, and 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 here 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, 2015. 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 deconsolidation of Garlock Sealing Technologies, or GST, and pro forma illustrative financial information presented as if GST was reconsolidated 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.

In addition to our normal lead-in language, I want to call to your attention to the pro forma segment sales and pro forma segment profit we are providing in the earnings release and call materials for the first time, which are in addition to the full Company pro forma statements we have been providing. We are providing this information in conjunction with the ACRP settlement agreement announced on March 17, to provide investors with additional pro forma information illustrating each segment's result as if GST had been reconsolidated at the beginning of the quarter.

Given where we are in the bankruptcy process and due to requests from investors for this type of information, we believe a focus on pro forma operating results is instructive to investors, as it reflects the performance of all of our subsidiaries. Until the ACRP process is completed, however, our published GAAP financials on Forms 10-Q and 10-K will continue to reflect GST on a deconsolidated basis.

Also, throughout this call we will be using the terms normalized sales and normalized segment profit. Normalized sales refers to consolidated or pro forma sales adjusted for year-over-year differences in foreign exchange translation and the impact of acquisitions and divestitures. Normalized segment profit referred to consolidated or pro forma segment profit adjusted for foreign exchange translation, the impact of acquisitions and divestitures, acquisition related expenses, restructuring charges, and the impact of the multiyear EDF foreign exchange loss provision on a percentage of completion basis.

The intent of providing normalized results is to provide greater clarity of results in the current period compared to the prior year period. And now I'll turn the call over to Steve.

Thank you, Dan, and good morning, everyone. I thought it would be helpful to start with a quick summary of the macroeconomic context we are operating in, because our results for the quarter reflect these conditions. As you may know, in the United States the industrial production index has declined 2 percentage points since March of last year and new orders for durable goods have declined 2.6 percentage points. Driven in large part by the slowing global demand and corresponding drop in commodity prices. On a year-over-year basis the price of oil is 26% below a year ago while metals have declined 16%.

And as a diversified company we serve a variety of industrial markets, with exposure to many of the sectors affected by low commodity prices. While we made the at or near the bottom in certain sectors, our businesses are not yet seeing signs of sustained recovery. Oil and gas, steel, metals and mining, agricultural equipment, OEM truck, and other capital goods sector contracted significantly in the quarter from the prior year.

Other markets we serve, such as aerospace, automotive, aftermarket truck parts, and parts for diesel and gas engines were stable to moderately higher. Semiconductor was lower in the first quarter of 2016 compared to the prior year, but order patterns indicate improved activity in this sector for the second half of the year. For the quarter, our pro forma sales were $334.7 million, which is 4% up from last year's first quarter. Normalized pro forma sales were essentially flat as acquisitions contributed 6 points of growth, offset by 2 points of year-over-year foreign exchange difference.

Our pro forma adjusted EBITDA of $36 million was $3.5 million or 9% lower than a year ago. But excluding a $3 million nonrecurring legal charge in power systems that Milt will cover later, our pro forma adjusted EBITDA was about 1% lower than a year ago. While Milt will provide more detail by segment, in a nutshell, our normalized pro forma segment profit was down in sealing products due to softer market conditions noted previously. Engineered products was modestly higher despite a 5% decline in sales as a result of the restructuring actions that we took last year and ongoing operational improvement activities.

And power systems pro forma segment profit was down on a $10 million increase in revenue as a result of four factors. First, zero margin engine revenues on the EDF program, mostly due to current exchange rates. Second, higher warranty claims. Third, R&D spending on the OP 2.0 new engine development program. And fourth, the nonrecurring $3 million legal charge that I just mentioned. Before Milt provides more detail on our financial results, I want to give an update on several 2016 strategic initiatives important to improving our competitive position.

The consolidated net loss reported for the quarter of $46.8 million largely reflects -- largely resulted from the $80 million non-cash asbestos accrual made in conjunction with the comprehensive ACRP settlement announced in March. As our longer-term shareholders can attest, the ACR process has been a long and arduous one, but our determination and meticulous case management positioned us to achieve a really great outcome for our Company and our shareholders. We appreciate all of you who have supported us through this process and we look forward to our Company's next chapter, one that will be unencumbered by asbestos related financial constraints and the cloud of uncertainty that have been part of our Company since inception.

There has not any significant change since we reported terms of the comprehensive settlement on March 14. The parties are on track to file all plan documents, including the disclosure statement, with the court during the second quarter. We continue to work toward completion with a plan to reconsolidate by the summer of next year. Our restructuring activities have proceeded according to plan. In sealing products, we made the decision to downsize Garlock's presence in the UK and are in the process of closing down a facility. The restructuring has gone smoothly, with orders transferred to Garlock distributors with products still supplied from other Garlock locations.

In the engineering products -- in the engineered products segment, GGB has moved out of the old Chicago facility and successfully transferred the bushing block product line to other sites in the GGB family without interruption. Also at GGB, we have moved into a new facility in Suzhou, China, that is shared with Stemco. The grand opening is scheduled for May 16.

At CPI, we've made excellent progress on the restructuring program announced last October. Since then we have closed five sites, consolidated one, and divested three locations -- one in Western Canada, a small service center in the Western United States, and our service center in Thailand. CPI is actively trying to sublet some of the facilities, but for the most part heavy lifting is complete. This restructuring project reduced CPI's employment population by 110, or about 15%, and cost savings are starting to be realized.

At Stemco, we are making great progress with the integration of the air springs business acquired last July. Work has progressed to move off the seller's SAP system and onto a new cloud-based ERP system that Stemco is adopting across the division. We are also on track to move the air springs research and administrative personnel out of the seller's facility in Fairlawn, Ohio, into our own Fairlawn facility by early July. We've made steady progress in improving inventory availability by stocking key distribution points, such as Stemco's new distribution center, and fine-tuning the stocking levels. Our supply chain team has successfully worked with vendors to improve costs, availability, and quality. We expect to start seeing the majority of these benefits in the second half of this year.

Finally, I want to express my excitement about the work underway at Garlock to develop a greater presence in sanitary markets. As you know, two weeks ago we announced the acquisition of Rubber Fab, and we closed the transaction this past Friday. Over the past 20 years, Rubber Fab has grown to be a leading supplier of critical process consumables for the pharmaceutical, bioprocessing, and food and beverage sectors. The addition of Rubber Fab significantly expands Garlock's presence and scale in the hygienic market space, and complements Garlock's existing sealing solutions to provide a comprehensive product portfolio.

The high level of industry focus, breadth of innovative products and strong distribution network that Rubber Fab brings to our business is very exciting. It fits perfectly into Garlock's strategy to invest in growth markets with engineered sealing solutions and can be leveraged to enhance the sales of Garlock's existing products that serve the sanitary markets.

Now I'll turn the call over to Milt.

Thanks, Steve. As Dan explained in the introduction, beginning this quarter we will focus most of our remarks on pro forma results, which we believe to be of most interest to our shareholders given the consensual agreement reached in the ACRP. Also as Dan noted, beginning this quarter we are providing pro forma segment sales and segment profit information in our earnings release. The pro forma segment results are prepared as if GST had be reconsolidated at the beginning of each of the respective quarters.

As you can see in the earnings release, most of the differences between reported and pro forma segment information is in sealing products, with only small differences in engineered products and power systems stemming from foreign operations for those segments included in GST foreign subsidiaries.

As Steve noted, our pro forma first quarter sales were $334.7 million, up about $14 million from the same period of 2014. Acquisitions contributed $20.7 million and foreign currency translation reduced sales by $5 million. Normalizing for these factors, organic pro forma sales for the quarter were essentially flat compared to a year ago. Higher sales at power systems, largely due to increased engine and parts revenues, offset reductions in sealing products and engineered products due to softness in the North American oil and gas and general industrial markets. I will cover each segment in more detail in a moment.

Pro forma gross profit for the quarter of $115.9 million was $6 million or 5% higher than for the first quarter of 2015, and pro forma gross profit margins increased to 34.6% from 34.3%. Adjusting for the impact of the acquisitions made last year, which had a lower margin profile, the pro forma gross profit margin would've been 35.6% for the quarter, reflecting improved results from restructuring actions and other cost control initiatives, and the improved gross margin in power systems related to the EDF loss provision included in last year's first quarter.

Pro forma SG&A was up $8.3 million or 9% from the first quarter of 2015. Contributing to the increase were $3.5 million due to acquisition made during 2015, $3 million in higher legal costs at power systems related to the settlement and fees of a lawsuit, and higher spending on growth initiatives at Stemco and power systems. Partially offsetting was a $1.7 million favorable impact from foreign currency translation.

Consolidated net loss for the quarter was $46.8 million or $2.15 per share compared to a net loss of $1.6 million or $0.07 per share in the first quarter of 2015. As Steve noted earlier, the loss this quarter was primarily driven by our consolidated subsidiary, Coltec Industries, Inc., accruing $80 million for its expected $110 million contribution to a trust in conjunction with the comprehensive ACRP settlement agreement announced in March.

Pro forma adjusted net income -- which adjusts pro forma net income for items such as restructuring, legacy environmental reserves, and normalized tax accruals, all as shown on the reconciliation table in our earnings release -- was $7.6 million, down $2.3 million from a year ago. Most of the year-over-year decline is attributable to lower profit in sealing products. Average shares outstanding for the first quarter of 2016 were 2 million lower than in the first quarter of 2015 as a result of share repurchases and last year's transactions related to our convertible debentures.

Pro forma sales in the sealing products segment were $211.1 million in the first quarter, up about 4% over the first quarter of 2015. Removing the impact of acquisitions and foreign exchange, pro forma normalized sales were down about 5%, reflecting the softer demand from oil and gas, metals and mining, nuclear, semiconductor, and general industrial markets, partially offset by stronger industrial, gas turbine, and aerospace sales. Pro forma segment profit of $18.9 million was down $4.8 million or 20% from the first quarter last year. Pro forma segment margins declined from 11.7% to 9.0% due to the lower volume, the lower margin profile of newly acquired businesses, and restructuring. Lower material costs were a partial offset.

On a normalized basis, adjusting for foreign exchange, acquisitions, and restructuring, pro forma margins were 10.5% in the first quarter of 2016 versus 12.4% in the prior year's first quarter. When comparing pro forma segment margins to margin information provided in previous earnings releases, please note that pro forma segment profit includes $3.2 million of additional depreciation and amortization related to assumed asset step-ups in conjunction with the reconsolidation of GST. This additional depreciation and amortization has about a 1.5 point negative impact on pro forma segment margins in sealing products for the quarter.

In the engineered product segment, first quarter pro forma sales of $74 million declined by 5% from the first quarter of 2015. Unfavorable foreign exchange translation accounted for 3 percentage points of the decline, with pro forma normalized sales down about 2 percentage points on a year-over-year basis. Strength in the European and North American automotive markets was more than offset by decreased demand for compressor parts and services due to weakness in oil and gas markets in North America. Demand for bearings from agricultural and industrial equipment OEMs was also lower.

Pro forma segment profit of $2.2 million was down $1.5 million from the first quarter of last year due to higher restructuring charges. On a normalized basis, excluding restructuring, pro forma segment profit was $5.1 million, or $400,000 higher than a year ago, despite the lower sales. And that's as a result of the benefit of the restructuring and other operational initiatives underway in this segment.

Normalized pro forma segment margins were 6.7% in the first quarter of 2016 versus 6.0% in the prior year's first quarter. In addition to lowering our cost structure, the operational initiatives in the segment has led to improved on-time delivery and customer satisfaction, which are contributing to commercial success that will benefit future periods.

In the power systems segment, pro forma revenues increased about $10 million or 25% from the first quarter of 2015. The increase was largely due to higher percentage of completion engine revenues as well as higher parts sales. A decline in service revenue from the previous year was a partial offset. Pro forma segment profit for the quarter increased to $1.4 million from $800,000 a year ago. Pro forma segment profit in the first quarter of this year was negatively affected by a nonrecurring $3 million expense attributable to the settlement of a lawsuit between AVL Powertrain Engineering and Fairbanks Morse related to a contract for AVL's use of engine test equipment at Fairbanks' Beloit facility during the period 2007 through 2012.

Pro forma segment profit in the first quarter of 2015 was unfavorably impacted by a $6.2 million charge to reflect an accounting loss associated with the foreign currency impact on the multiyear EDF engine contract. In the first quarter of 2016, there were no gains nor losses associated with this contract as a favorable foreign exchange adjustment was offset by estimated costs to complete the contract.

Excluding the impact of the $3 million charge related to the lawsuit and allocating the EDF loss on a percentage of completion basis, pro forma segment profit margins for the quarter would be 7.4% compared to 15.4% a year ago. A less profitable sales mix, driven in large part by the zero margin EDF contract, higher spending on R&D, primarily for the OP 2.0 engine program, higher warranty costs, and increased SG&A to support commercial growth strategies contributed to this adjusted margin decline.

For a discussion of the balance sheet and cash flow, my comments will be relative to our consolidated segments, given their significance for our credit stakeholders, rather than the pro forma segments. Cash flow for the first quarter of 2016 was a generation of $7.4 million compared to cash usage of $122 million for the first quarter of 2015. The primary differences are higher spending in the first quarter of last year for acquisitions of about $31 million, higher share purchases last year of approximately $39 million, and repurchases of convertible debt last year of nearly $45 million.

Our balance sheet remains strong, and yesterday our Board of Directors authorized a quarterly dividend of $0.21 per share. GST's cash and investment balance was $278.8 million at March 31 of this year compared to $237.2 million at the end of March 2015. The increase includes the collection of $21 million of asbestos-related insurance proceeds since March 31 of last year. There is approximately $80 million of insurance remaining to be collected.

Now I'll turn the call back to Steve.

Thanks, Milt. We'll close with a discussion of current market conditions and our outlook for the year, and then open the line for questions. As we've discussed in the past, we don't have much visibility to future demand for most of our businesses. And the current volatility in global markets makes the industrial demand picture extremely difficult to forecast. Overall soft conditions in many of our markets, as I mentioned in my opening remarks, and the strong dollar continue to affect our results.

For the full year, we communicated last quarter that, subject to this limited visibility, we expect the pro forma sales to be 3% to 5% higher on an FX neutral basis, with the growth attributable to acquisitions that we completed last year. We also noted that we expect flat to low single digit growth in pro forma adjusted EBITDA. Implicit in this outlook was an assumption that we would begin to see signs of a second half improvement, which we have not yet seen. We will have a better picture of the outlook for the year following the completion of the second quarter.

Longer term, we expect continued benefits from our strategic growth initiatives, including growth from recent and future strategic acquisitions such as the recent addition of Rubber Fab, and continued emphasis on both innovation and improving operational efficiencies. Now we'll open the line to your questions.

(Operator Instructions). Jeffrey Hammond, KeyBanc.

This is James Picariello. Thanks for taking my call here. I guess just starting out with CPI and the restructuring benefits that clearly came through within engineered products. Nice profitability in the quarter. Can you just quantify maybe what the restructuring savings were? And how you are thinking about the rest of the year?

Milt, why don't you address that?

James, we are making great progress at CPI. Our team is energized there. As I mentioned in my comments, the operational improvements that have come, in part, from our cost reduction initiatives have also led to much better improvement in the plant, on-time deliveries being up, and we are seeing some commercial wins. And so, for CPI, with our cost restructuring progress to date essentially complete -- we will have some small restructuring charges in Q2. At this point it's mostly about volume. And so, without some help from volume, we are going to have better results than we had last year, but we need some volume help as well.

So Ken is here with us and, Ken, I don't know if you have any other comments about the progress that we are seeing?

No, I completely agree, James. The team is performing very well. We've got the restructuring behind us for the majority of the case. We think we have a little bit to do, as Milt mentioned, but the heavy lifting is behind us. Now it's more -- it's all about growing in our current customers and delivering our new customers. And in addition to the on-time delivery improvement, we're seeing shorter lead times which is allowing us in local markets to win business that we would not have won before. So very encouraged by the team and the work that we are doing and the heavy lifting on the restructuring is all behind us.

James, we had said before that we expected in the segment, with the restructuring about CPI and some of the facility consolidations underway at GGB, that we expected $3 million to $4 million of cost savings from those initiatives for the year. And so, we are right on track. That's going according to our plans.

Got it. That's very helpful. Thank you. And in Steve's opening remarks he did note a significant contraction in the OEM truck market for the Stemco business. Could you just maybe round out what you saw in the quarter and then maybe what you are expecting the rest of the year, given where we know Class 8 builds are heading this year. I do believe medium-duty does account for the majority of the mix for that business. Could you just maybe remind us what the breakdown is there? And, again, what you're seeing? Thank you.

Yes, James. First of all, heavy-duty is essentially all we do in Stemco, so it's all Class 8 equipment. Our exposure to trailers, particularly -- both in the aftermarket and OE -- is considerably higher than our exposure to the truck or tractor, the power unit. What we've seen in the OE world is the decline has been so far in the truck area, where we have a lower exposure.

So far, the trailer volume is essentially still at a cyclical high. We have not -- the backlogs are strong. So we actually don't see a forecast in the near-term, which I'll say is the next two to three quarters. We don't see a decline in the trailer OE the production. And our aftermarket is still hanging in there. Obviously, the aftermarket is just almost completely driven by US GDP -- how much freight is moving. And while it's certainly not any stronger than it was last year, maybe marginally weaker, and we see that kind of continuing on. We don't see any signs that that's ready to fall off the table top.

So we feel pretty good about the Stemco business, which as you know is in sealing products. And as I mentioned our team has done a really terrific jobs at air springs. You'll know because you follow us, that when we bought that business, we didn't pay much for it on a multiple basis, and it's a fairly low margin product line. Because of the way that the seller and the market chose to compete. We're competing in a completely different way and, quite frankly, most of it we've had -- we've been working very, very hard on supply chain savings, which will be substantial for that business relative to the profitability that we bought.

But that all requires substituting new suppliers for rubber and steel components and so forth for the air spring, which requires testing, and in many cases customer qualification. So we are well into that, so we haven't started actually seeing any savings come to the bottom line, but what we are -- well, we've got to qualify. We've just begun to get some products from new suppliers that is much lower cost, better quality, and all the rest.

So by the second half of the year we should be cranking along with much better margins in that acquisition, which will -- and we'll also have the facility moved that we need to move -- the R&D and testing and administrative facility that I mentioned -- that was colocated with the seller's building. So part of the acquisition from the beginning was that we had to move that. And so we are in the process of doing that.

I would say that we should be at a much better run rate on the air springs business by the second half of the year which, frankly, was always part of our integration plan. We knew it would take a fairly extended period of time to get new suppliers identified, qualified, and so forth. That's the situation on heavy-duty truck.

James, let me jump in with one additional comment, just as a data point. As Steve said, our business even on the OE side is not affected as much as the headlines that you see on tractor orders and production facilities. There's one data point; if you look at just the core wheel-end products of Stemco, our OE business in the quarter year-over-year was down only about 10%. The aftermarket side of our business for the wheel-ends was up 6% or 7%. So, pretty good results relative to what the headlines are about the heavy-duty truck industry.

Got it. I meant to say trailers, not medium-duty -- my apologies for that, and I will get back in queue.

Ian Zaffino, Oppenheimer.

A question would just be on the guidance that you had mentioned, I guess that we shouldn't be using that guidance anymore that you issued before. But what is the FX headwind that we should be assuming now? Because I know you were talking about the non-FX impact on the revenue side. Thanks.

Ian, I think from this point forward we won't see any -- Milt, I don't know if you have handy the -- we are mostly affected by the euro, Ian, as you know. I'm not looking to at the sheet that has the FX comparisons, but you might be, Milt. But my guess is that we are now stable relative to where we were for Q2 and beyond last year. In fact, I think we are right at the same level. So I wouldn't expect any FX headwinds on a period over period basis going forward for the rest of the year. Milt, is that fair?

Yes, I think that's fair. Clearly there was some this quarter, as we mentioned. Sales in total on a pro forma sales affected us by about $5 million. But it's a smaller impact than we've seen over the last few quarters of last year, and some kind of modest impact on our earnings as well. So, I agree with that. Starting with Q2 when we look on a year-over-year basis, unless something changes dramatically, we wouldn't expect as much noise around FX.

Okay. And then just given the different geographies and the strong dollar and the varying performance of different regions, how is that impacting your M&A thinking or your thoughts? You are going to look to use maybe the strong currency to go out and do more stuff internationally, or are you more cautious on it given the slow down there? Just how you balance that given what you're seeing now and the company you want to build going forward?

It's a good point, Ian. Look, I think we try to look beyond the near term business cycles when we think about M&A. And it has more to do with the strategic fit. Quite frankly, the place where demand feels the most stable and has the most tailwind, which it's not a huge tailwind, but it is actually Europe, Western Europe. We are actually feeling just a little bit of strength over there. I think now we would be very open to acquisitions over there because of the -- but we would use cash that we have in Europe. So, yes, there's an FX benefit, kind of, but frankly if we are using euros to buy euro sales and earnings, it really kind of neutralizes.

So it's really more -- we don't really factor that in. That said, we've certainly rethought our strategy in Asia because I think that's a much longer term trough that we're in. I don't see that turning around anytime soon. You may recall that a few years ago we bought a few small operations for Garlock in that region to try to grow our footprint in Asia. Not just China, but in Taiwan and Singapore as well. Those are going okay. They were small acquisitions, so we didn't have a lot of exposure there. But the fact of the matter is that whole region is feeling the weakness of China.

And the other place that we have really withdrawn from is Brazil. We had both a Garlock and CPI presence in Brazil and we have exited both. Again, they were small. We had hoped to grow those over time. We were investing not a lot of money but a fair bit of human capital and time in trying to move those operations forward. We have exited both of those, so the only thing left that we have in Brazil is a GGB facility, which has always done well and continues to do decent for us. It really supplies a lot of the automotive production in Brazil and we are able to take advantage of some low-cost production there for export into other markets.

But that's all we have left in Brazil. I'd say it has not really affected our thought process too much about Western Europe, but it has really in South America and Asia. Does that answer your question?

Okay. Thank you very much.

Justin Bergner, Gabelli & Co.

I just want to delve a bit more into the sealing products margins this quarter. If I look at the organic constant currency sales decline, which seems to be about $10 million, and then I look at the pro forma adjusted EBITDA decline of a little over $4.5 million. And let's just say I assume very little EBITDA contribution from the acquisitions, it still seems like a pretty tough decremental there. And I was just wondering if you could call out any areas where either expenses were higher or mix was weaker or pricing was worse to help us understand that decremental?

Let me address that, and Milt, then you can chime in. That is the key that affected our results, Justin. You've honed right in on it. And what it was, quite frankly, is volume in some of our most profitable lines in Garlock as well as in Technetics, quite frankly. We saw weak volume in Garlock. There's just no way to work around it, that all through last year -- and I'm talking about all of Garlock, all of last year. As we were seeing declines in oil price our volumes slowed, and as well as steel.

Garlock supplies a lot of seals into the steel industry, as well as -- and we have a big presence in oil and gas. A big presence in refineries. A big presence in chemical. A big presence in metals and mining, and so forth. So Garlock is just right in the teeth of the most significant hydrocarbon price reduction that we are seeing. And throughout last year we were able to do a pretty darn good job, to be honest with you, of matching cost reduction with this declining volume. And we've gotten that organization so lean, going into this year we were hopeful that demand would stabilize, and we had a weak first quarter. And there's just not a lot of additional cost that we can take out.

We did not see pricing degradation. What you're seeing there is just the cold leverage of some of our most profitable product lines. In addition, in the Technetics Group, we saw a mix shift because our nuclear business was down a little bit. That is more as I've explained in the past. The timing of the -- it's not like nuclear demand goes down, but it actually varies a fair bit quarter to quarter. And it depends on reviewing schedules in nuclear plants around the world, maintenance schedules in nuclear plants around the world. And some of it was timing for us in Q1, stuff that got pushed to Q2. That was unfortunate but it just -- customer demand.

But some of it is just the normal fluctuations that we see quarter to quarter. So that compounded the effect of volume and margin decline in sealing. We don't see that part of it really continuing or repeating, if you will. We think that will be solid going forward. But the Garlock piece, really we need -- that's just a function of the market, and we need the oil price to stabilize. We need maintenance work to start picking up again in those hydrocarbon and basic commodity and metals markets.

Milt, do you want to add anything to that?

I think you've covered it. It really comes down to volume in some of our higher -- most higher-margin product lines. So I really don't have anything else to add. We did see just -- we're looking for the bright spots that might be signals. We don't know if this is one, but we did see some higher maintenance activity in the North Sea, although that accounts for a small part of our volume. We are not seeing the turnaround season yet, at least higher than normal, in other markets. So that's where we are keeping our watch on.

Thank you for all that detail. That's helpful. Just to go back to a comment you made in regards to the outlook for 2016 and the lack of a second half versus first half pickup potentially, as you had thought would be likely with your previous guidance. I guess you are saying now that the first quarter was also weaker than you expected. So should I think about piecing together 2016 as a weaker first quarter, off of which previous second half to first half growth will remain unchanged? Or should I think about 2016 as a weaker first quarter than you expected but also lower second half versus first half growth than you expected?

Well, that's what we have trouble with the visibility on, Justin. I don't think it's too late to still have a slightly better second half. I would still anticipate it, but we haven't yet seen any real tangible signs that that's going to be the case. So I don't know if it's just my optimistic thinking or the fact that I can't imagine that things would get any weaker in these commodity markets we've seen here in the last, really, four weeks.

A little bit of rebound in the oil price; that's going to have a positive effect for our volume. And we are going to see in the second half some of the improvements that I mentioned in the air springs business come through, which will certainly benefit sealing as well. We're still working hard to try to meet the guidance that we had given before, but certainly -- we certainly saw a weaker first quarter than we were expecting.

Okay. Thank you. I may get back in the queue.

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

Okay. That was quick. I'm back. Just drilling down a little bit more on the weakness in the first quarter, we've seen a number of companies in the energy arena, I'm thinking GE and Dover being the standouts, talking about increased margin headwinds in their industrial energy focused businesses. Beyond the sales decline in your higher decremental end markets in sealings, are you also seeing increased price and margin pressure? Or greater decrementals in those parts of sealing products than you would normally see?

Well, I think it's only natural, Justin. Any time competitors -- any time volume shrinks, that's the tendency. That's what free markets do, right? However, given the nature of our products, the critical nature of our performance, the brand names, where we compete -- we haven't actually seen, in our numbers, a reflection of that. We certainly hear that from our guys, right? That, oh, things are tough or tougher etc., and I'm not disputing that. But when we look at the numbers that are generated, we're not seeing a reduction in price effect on our market.

It is volume and what you are seeing there is how those products leverage when you have -- when we have really, in our view, hit the bottom of what we are able to do on the cost side, other than materials and efficiencies and so forth and so on. We just can't take a lot more labor out than we did throughout last year. We pulled the trigger on the CPI. I think you could argue maybe we should have done it quicker, but I'm certainly glad we pulled the trigger when we did. Our team has done a great job of executing that restructuring.

As you guys know, because you follow us, we've moved -- we really had the equivalent of four plant relocations last year in GGB as well. Those are all done as well, as we sit here today. We're in decent shape now from a cost position across the Company, and hopefully that will clean out some of the restructuring noise and other cost noise that we've had in the last couple of quarters. We should have a much better, cleaner look going forward, and obviously our numbers this quarter were affected by the ACRP settlement.

I think -- and we also had the unexpected requirement to settle this lawsuit in FME that -- obviously we were working on that. But as that case progressed towards trial, we concluded that we needed to settle it because we felt like the exposure was larger obviously than we -- potentially larger than we settled it. So that was kind of a one-time thing. That was a contractual dispute from many years ago, and so obviously that won't be recurring either.

Okay. Thank you. And any quick metrics on your recent acquisition, just to put the size of it in perspective for us?

Milt?

Yes. Justin, we are not disclosing the price, per agreement with the sellers, but just to give you some direction. We paid roughly 6 to 6.5 times trailing EBITDA. And we've indicated in the announcement about the acquisition that we had sales of about $17 million in that business.

Great. That takes care of it for me, thanks.

Jeffrey Hammond, KeyBanc.

This is James again. Just to flesh out power systems and the margin results in the quarter. If we do add back the $3 million litigation charge, Milt did mention margins would be in that 7% to 7.2% range. Can you just talk about the margin impact the rest of the year? How you are at least thinking about it for the EDF contract? And then maybe just provide any additional color on the one-time related items in the quarter related to the warranty claims and the additional R&D spending, just so we can get a better sense for what that base business mix looks like? Thanks.

Milt, do you want to take that?

Let me take the EDF part of it first, and then we can go back to James with any other questions. EDF in the quarter -- if you just looked at the year-over-year -- I mean in the quarter, the impact of the foreign exchange, as you know -- I think you understand the background, James, of how we are accounting for this. When the swing in foreign exchange last year threw us into a loss position on the contract, the accounting policies require that the full loss be recognized for the entire contract, even though it's a multiyear contract. I think you understand that.

Since then, quarter to quarter we have been looking and recognizing the impact on the P&L of the change in foreign exchange on the contract based on the euro to dollar rate in effect at the end of the quarter. So if you look at the impact of just the foreign exchange part in the first quarter of this year, it was a positive. Because the dollar weakened from the end of the year through the end of the first quarter. It was a positive $3.3 million, approximately.

Due to our estimated costs to complete going up for the contract, we offset that so we recognized no income nor loss associated with the contract. So, EDF had a zero impact for the first quarter. Now, if you look at going forward through the balance of the year, we are going to continue to be recognizing the sales on a percentage of completion basis as we go. And we'll be doing our estimated cost to complete.

And the combination of the estimated cost to complete and the exchange rates at the end of each quarter, the combination of those two, will determine what the P&L impact is on the EDF contract for the balance of the year. So that's EDF.

And so let me jump in, Milt, here. James, we said at the beginning of the year one of the things that will affect power systems this year is we have $40 million, roughly, of revenue that's zero margin stuff. Probably roughly half of that is EDF and half of that is two other completed contract engines that have to ship this year that we built several years ago and are just holding, waiting to deliver to the customer. These are commercial engines into the nuclear reprocessing facility that Shaw runs for the US government.

And we took a charge for those because a couple of years ago, actually, when we realized that cost to produce those engines was going to be significant. So we are not going to lose anything when we ship them; they're on completed contract; they will ship in Q2 and Q -- one in Q2 and one in Q3, I believe, is the current schedule. So we have still -- we've shipped -- where we booked $10 million of percent completion EDF in Q1. So we had $30 million more through the balance of the year for both the Shaw engines, as well as other percent completion that we forecast for.

For EDF it will be zero margin new engines. So that's what's affecting the margins and mix in FME. Now, in addition to that, we'll see a little bit higher expense, but not much, for OP2 development this year versus last year. So, the R&D expenses should be -- I would imagine through the balance of the year relatively similar. Maybe $1 million more or something like that, would be my estimate of that. And that's really the effect for FME.

Got it. That was very helpful. Thank you, guys.

And R&D, just to round out some of your other sub-questions -- R&D was up about $700,000 over the first quarter of 2015. And that's largely because of the spending on the OP 2.0 engine program. Warranty costs were up on a specific -- one specific project that we've dealt with and it's behind us.

Should not recur.

Melissa Bermudez, DDJ Capital.

Just one quick one for me. On the $80 million accrual you guys took, just wanted to check -- is that all of you are expecting to take from now until the time of reconsolidation? And I understand it's an accrual now. Is the cash payment at the time of reconsolidation? Or was there any cash payment associated for now?

No, there's no cash now. And yes, the pro forma financials now anticipate the plan that we have agreed to in the consensual settlement. Now, the only possibility is if for some reason we can't get that plan approved by the court. But assuming that that -- which is unlikely. It's at this point highly likely because we have a consensual deal with both the current claimant's committee as well as the future claimant's representative. Which is why it was such a big deal, what we announced March 17. But what's in the financials now reflects the completion of that. It really reflects as if that plan would have already been adopted. So that's what we anticipate happening, and none of it will be cash until the final plan of restructuring is approved, closed, and we reconsolidate and create the actual trust, which is likely to be sometime next summer.

Got it. Okay. Thanks for clarifying.

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

Thank you, Angel. And thank you all for joining us this morning. If you have additional questions, please give me a call at 704-731-1527. Have a good day.

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