May 2, 2013
Executives
Don Washington – Director, IR Steve Macadam - President & CEO Alex Pease - SVP & CFO
Analysts
Jeff Hammond - KeyBanc Capital Markets Todd Vencil - Sterne, Agee Joan Mondale - Sidoti & Company
Operator
Good morning. My is Shirley and I will be your conference operator today.
At this time, I would like to welcome to everyone to the EnPro Industries’ First Quarter 2013 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.
Don Washington, Director of Investor Relations, you may begin your conference sir.
Don Washington
Thanks Shirley. And good morning everyone.
Welcome to our quarterly earnings conference call. I remind you that our calls is being webcasted in enproindustries.com, where you can also find the slides accompanying the call.
In a moment Steve Macadam, our President and CEO; and Alex Pease, our Senior Vice President and CFO will review the results for the first quarter of 2013. But before we begin, I will point out to you that you may hear statements during the course of the call that express the belief, expectation or intension 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, 2009.
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 of 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 businesses, assets and 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 to our financial results reflect the deconsolidation of Garlock Sealing Technologies LLC and Garrison Litigation Management and their subsidiaries, effective June 5, 2010. The results of these entities will remain deconsolidated during the pendency of the Chapter 11 legal proceedings to resolve asbestos claims against GST.
We refer to these as the asbestos claims resolution process or ACRP and you will hear us use that actively during the call today. GST results are included separately in our earnings release.
And with that I will turn the call over to Steve.
Steve Macadam
Thanks Don. Good morning everyone.
Thanks for joining today. Alex will provide more detail on the first quarter shortly when he discusses our financial performance as you can tell from our earnings release we continue to deal with soft market conditions.
Especially in comparison to the levels of demand that we saw in the first quarter of 2012. Seasonal improvements provided a modest uptick in activity levels from the fourth quarter of 2012.
That compared to the first quarter of last year. Our earnings reflect decreased volumes, a less profitable mix as aftermarket demand softened.
Some accounting adjustments at (inaudible) and cost at GGB in France associated with implementing an ERP system and qualifying a new raw material formulation. The events at FME and GGB combined to create a net reduction in our first quarter pre-tax earnings are about $3 million.
Of course future volumes will depend a lot on market demand but we do believe that the mix and cost issues are largely temporary and they don’t indicate a shift in our longer term expectations for performance of GGB or FME. Overall sales were down 8% from the first quarter of last year excluding the Motorwheel acquisition which was not in last year’s first quarter.
Sales were down 12% or $37 million. About half of this organic decrease came in our Sealing Products and Engineered Products segments where demand was much lower than the first quarter of last year.
The other half came at Fairbanks Morse Engine which last year shipped four engines and recognized about $18 million and completed contract revenue on those engines. This year no engines were shipped in the first quarter and all engine revenues were accounted for 100% of completion accounting.
We currently plan to ship 22 new engines in 2013 or 8 more than last year and account for all the engine revenues this year 100 percentage of complete. In our Sealing Products segment sales were down 10% from the first quarter of last year excluding the contribution of the Motorwheel acquisition.
Sales of the Engineered Products segment were down about 9%, conditions were softer and almost all market served by these segments. Profits in margin in all three segments reflected the effect of lower volumes as well as reduced demands for some of our higher margin aftermarket products.
In the Engineered Products segment, however, a portion of the decline was offset by the benefit of cost reductions at CPI implemented last year. In the deconsolidated operation to GST demand in the U.S.
markets were stable compared to last year but sales were down 2% as a result of lower demand and in a couple of foreign markets. GSTs profit margins improved over the first quarter of last year to 22.5% of sales.
Despite the fact that GST spent about $30 million last year to cover the expense of the ACRP, and is on track to continue spending at a high rate as the estimation to our date approaches, it remains a healthy and well-run business. I will go into a little more detail about our outlook after Alex would use the numbers, but currently we don’t see any indication of the substantial change in the direction of our markets.
In this environment of soft demand the continued success of our enterprise excellence program will be especially important to our operations. These programs enable us to continue to manage our cost effective, we are going to take advantage of our strong brands and strong market shares as opportunities arise in this challenging market environment.
As I’m sure you know, we are approaching the date scheduled for the start of GSTs, ACRP estimation trial. Discovery in trial preparations are rapidly moving forward and include the preparation and delivery of reports and we will bundle the reports from more than 30 experts including 14 science and medical experts and 6 economic and legal experts working on behalf of GST.
Experts will be deposed in May and June in preparation for the scheduled trial date of July 22nd. We remain confident in the case and continue to believe GST will provide compelling evidence that is proposed plan at reorganization is feasible and fair.
GST would demonstrate (bulk of) its products could not have been a cause of asbestos to related disease and that it’s settlement payments increased in the 2000s not as a result of reflection of actual liability as the claimant representatives allege. But because of temporary development in the (torch) system they substantially increased GSTs cost of defects.
Late last quarter GST won an appeal in the Federal Court in Delaware and gained access to statements filed by plaintiff’s lawyers in previous asbestos bankruptcy cases, a prominent company defendant’s who filed Chapter 11 during the bankruptcy waive of the early 2000s. In those statements the plaintiff lawyers disclosed the identities of claimants who claimed injury from exposure to bankrupt defendant’s asbestos containing products.
We believe that those filings together with the ballots cast in the bankruptcy cases and claims made against the Asbestos Trust based on exposures to the product of these bankrupt former defendants will demonstrate conclusively that certain leading asbestos firm were engaged in a widespread practice of concealing their claims exposures to other products in order to drive up GST's litigation costs and inflate settlement demands made against GST. As we have said in the past, we remain hopeful that GST and the claimant representatives can reach a settlement in 2013 that will provide finality and certainty to GST's asbestos related payments and will allow us to reconsolidate GST's financial results.
However, we have no assurance that the ultimate resolution of the case will come through settlement, nor can we anticipate when the case might be resolved. For the ultimate value of GST that might be preserved.
Obviously, settlement discussions are a sensitive topic especially in light of the approaching trial date and as a result we can’t make any additional comments on them. Now I'll turn the call over to Alex.
Alex Pease
Thanks Steve. As Steve noted, our reported sales declined about 8% from the first quarter of 2012 as we saw weaker demand across our markets and recognized lower engine revenues.
If we adjust for the Motorwheel acquisition, sales were down 12% with all of our businesses working in softer market conditions. Nearly half of the $37 million in organic decline year-over-year came from motor engine revenues from Fairbanks Morse engine and driven by the transition to percentage of completion accounting which we've discussed with you previously.
The remainder of the comparison is against the period when demand was much higher in our other businesses. By geography excluding Fairbanks Morse, demand was down about 10% year-over-year in both Europe and North America which together make up about 80% of our sales.
Looking at measures of profitability, gross margins were 32.8% in the first quarter of 2013 compared to 34.4% in the first quarter a year ago. The drop in gross margins reflects the combination of low volumes and a less profitable product mix as demand remains soft in many of our aftermarket businesses.
It also reflects accounting adjustments at FME which I'll explain later. Pricing discipline continued to offset a portion of the effect of weaker markets.
SG&A expense of $72.6 million was slightly lower in the first quarter of 2013 than in the first quarter of 2012. Although as the top-line fell, SG&A increased as a percentage of sales.
Corporate costs made up about $9.1 million of SG&A expense and were the same as in the first quarter of last year. Now, lets take a detailed look at our operating performance in the first quarter, beginning with the Sealing Products segment.
Including Motorwheel sales in the segment were $146.6 million, down about 2% or $2.9 million from the strong start that we saw in the first quarter of 2012. Excluding the $12.1 million that Motorwheel contributed sales in the segment were down 10% primarily, because of less activity in our semiconductor and construction markets.
Sealing Products segment profits were down 5% or $1.2 million. Profits in the segment benefited from Motorwheel, which contributed $2 million and the reversal of a $1.5 million earn-out accrual associated with an acquisition we made in 2009.
Before the contribution of the Motorwheel in a small restructuring charge, segment profits were down 15% as volumes declined particularly, in some of our higher margin aftermarket products. Segment margins were 14.5% a little more than half a point below the first quarter of 2012 when they were 15.1%.
Both quarters included restructuring charges which totaled about a $100,000 this year and about $400,000 in the first quarter of 2012. Turning to the businesses within the segment, sales of the consolidated Garlock operations declined on lower industrial demand in North America and Europe.
Delays in U.S. construction markets due to harsh winter weather and continued weak demand for products sold into European infrastructure projects.
Profits and margins were also lower as modest price increases and cost reductions were not sufficient to offset the effect of lower volumes. In the Technetics Group, sales a year ago benefited from very strong demand in the semiconductor market, which softened considerably after the first half of last year.
Technetics sales to the market in the first quarter of 2013 were down sharply, when compared to the high level a year ago. In its nuclear markets Technetics saw a steady demand for products manufactured in its French operations, but little demand in the U.S.
as consumers their worked from inventories built in previous quarters. Profits declined slightly at Technetics driven predominantly by weak semiconductor volume.
Margins improved over the first quarter of 2012 primarily, due to the reversal of the $1.5 million earn-out accrual, I mentioned earlier. At STEMCO, excluding the contribution from Motorwheel, sales declined as they continued to deal with sluggish aftermarket demand for its core wheel-end products and low levels of demand for brake products.
Based on current market indications, aftermarket demand at STEMCO is likely to remain light for the foreseeable future. A $2 million contribution from Motorwheel helped STEMCO post improved profits compared to the first quarter of last year.
But with weak demand for more profitable aftermarket products STEMCOs margins declined from those recorded in the first quarter of 2012. Because we acquired Motorwheel in mid-April of 2012, it will not have a meaningful effect on year-over-year comparisons of our second quarter 2013 results.
In the Engineered Products segment, sales were $91.8 million, 9% below the first quarter of 2012 as both GGB and CPI continue to deal with weak markets in Europe and North America. As was the case in the Sealing Products segment, the comparison is against significantly stronger markets in the first quarter of 2012 especially in Europe.
Although CPIs margin performance has improved according to plan, it was not enough to offset the effect of low volumes and higher costs at GGB and profit in the segment fell by $3.2 million to $5.8 million. Segment margins were 6.3% of sales compared to 8.9% a year ago when high margin industrial volumes at GGB were much stronger.
Margins in the segment also reflect about $800,000 in restructuring expense of CPI as moved towards completion of our restructuring there. Last year, we spent about $900,000 on restructuring in the first quarter.
Although GGBs market strengthened somewhat, after a weak finish in the fourth quarter of 2012. GGBs first quarter of 2013 sales were down sharply compared to the first quarter of last year.
European automotive demand was well below the level of the year ago, while industrial demand lagged in both Europe and North America. Despite the unfavorable year-over-year comparison in the first quarter, we expect modest growth in GGBs North American markets during 2013.
The combination of declining volumes and an increase in expenses at GGBs primary manufacturing facility in France let to lower profits and a decline in profit margins. The increasing expenses reflects costs associated with implementing a new ERP system and with producing product samples for customer testing using a new formulation of PTFE one of GGPs most important raw materials.
The vast majority of the expenditures for these items was recorded in the first quarter. We don’t expect them to continue in any substantial way beyond the second quarter.
Sales at CPI would lower as volumes were down and refinery in petrochemical markets in the United States and the natural gas market in Canada. CPIs European volumes were up slightly as its operations in Germany and Holland benefited from export sales to markets in other regions of the world.
And as the service businesses continue to grow. I’m happy to say that CPIs profits and margins improved significantly over the first quarter of 2012 even though restructuring costs were about the same in each quarter.
CPIs SG&A expense was down by more than $2 million in the first quarter of last year. Adjusted for restructuring, CPIs margins were the highest they have been since the third quarter of 2011.
Although CPIs performance is still not to the level we expect. The first quarter’s result confirms CPIs cost initiatives are beginning to be effective.
Sales were down in the Engine Products and Services segment by $13 million or about 20%. As we mentioned earlier, Fairbanks Morse recognized about $18 million and completed contract revenues in the first quarter of last year but none in the first quarter of this year.
Percentage of completion revenues were higher than a year ago offsetting a portion of this decline. FME also benefited from the increased sales of environmental upgrade packages which were quiet small in the first quarter of 2012 (not) much carry lower margins in FMEs traditional government aftermarket business.
Profits in the Engine Products and Services segment were down about $7 million to 9.7% of sales. The decline reflects the number of factors including the less profitable product mix I mentioned higher than anticipated cost on a contract to refurbish several engines for the Canadian Coast Guard and accounting adjustments primarily for the treatment of foreign exchange hedges.
This factors account for the majority of the year-over-year decline in margins that we saw in the first quarter. Although the product mix may continue to reflect increased sales and environmental upgrade packages and increased sales to commercial markets, we anticipate that FMEs margins will return to higher levels in the second quarter and beyond.
As we mentioned last quarter, we believe some service revenue was pulled into the fourth quarter of 2012 from the first quarter of 2013, in anticipation of sequestration but otherwise we believe that it had not affect on the funding required to maintain the navy’s fleet. In fact, parts and service orders at the end of the first quarter were at normal levels.
FMEs backlog was about $142 million at the end of March, about $8 million below the level at the end of last year. Longer term, it’s clear that FMEs new engine sales could be affected by constraints put on the Navy Shipbuilding program by Congress’ federal budget issues are sorted out.
In the face of this uncertainty, FME is pursuing a number of commercial opportunities both in the market for new engines and in the aftermarket. FME is also anticipating an early retirement program that would help to adjust the size of its work force.
We expect the program will result in a second quarter restructuring charges of about $2 million but lead to annualize savings of over $3 million. Looking at earnings for the quarter, we reported GAAP net income of $8.6 million down from $13.8 million in the first quarter of 2012.
On an EPS basis that translates to $0.39 of diluted GAAP earnings compared to $0.64 last year. Two factors are important to understanding the comparison between the quarters.
First is the effect of economic conditions and the other circumstances on our pretax income which were substantial. Our markets were comparatively weak this year against the first quarter of last year when demand was stronger than it was at any other time in the past year.
In addition, the issues that described GGB and FME reduced our pretax income by about $3 million. The second factor is the low 11.4% tax rate we’ve recorded in the first quarter of this year.
Legislation passed early this year renewed certain tax provisions that had previously expired. The renewal was retroactive and created a significant tax benefit for us in the quarter.
Although we expect to return to a higher tax rate in each of the remaining quarters of this year, our effective rates for the full year should be in the range of around 30%. Our adjusted EPS was $0.56 in the first quarter compared to $0.91 in the first quarter of last year.
After-tax adjustments that increased our $0.39 of first quarter 2013 GAAP earnings to ($0.56) or $0.21 of interest due to GST and $0.02 for restructuring expense. This was partially offset by a $0.06 reduction to adjust the tax accrual.
As you can see, our free cash flow was lower in the first quarter of 2013 than in the first quarter of 2012. The reduction was the result of several factors, in addition to the effective lower earnings; we made sizable pension contribution in the first quarter of this year but none in the first quarter of last year.
We spent more on ERP software this year. We paid cash taxes in the first quarter of this year, while we enjoyed the benefit of a tax refund in the first quarter of last year and lastly capital spending increased as we purchased the manufacturing facility that we formerly leased.
We paid about $5 million for this facility which was well below market price in longer term, this investment would help us reduce expenses. We ended the quarter with a cash balance of $48.5 million down just over $5 million from our balance at the end of last year.
On the balance sheet, you’ll see a significant increase in current maturities of long-term debt to about $151 million. As a result of the gains, we saw on our share price over the first month of 2013, the conversion rights to our convertible debentures were triggered on April 1, which required us to move the debentures into current liabilities.
As long as the debentures meet the conditions for conversion, which are measured quarterly, they will be recorded as a current liability. We have no indication to any holders likely to convert prior to the maturity date in October 2015.
Before I close, let’s take a look at GSTs results in the first quarter of 2013. Third-party sales at GST were down about 2% to $56.5 million because of software demand in certain foreign markets served by GST.
However, EBITDA-A and operating profit improved as GST benefited from lower cost. EBITDA-A came in at 25.1% of sales, while operating profit margins came in at 22.5% of sales.
GST reported adjusted net income which excludes intercompany interest in ACRP related expenses of $8.6 million, an increase from $7.3 million in the first quarter of last year. GST recorded a $10.4 million in ACRP related expenses in the first quarter, an increase of about $3 million over the first quarter of last year.
We expect those expenses will continue at the high rate as parties prepare for the upcoming estimation trial. GST continues to generate cash and had about $150 million in cash and long-term investments at the end of the quarter.
Now, I’ll turn the call back over to Steve.
Steve Macadam
Thanks Alex. I’ll close with a few thoughts on our outlook for the second quarter and how we see the rest of 2013 shaping up then we’ll open it up for questions.
Although 2013 is off to a slow start after the first quarter, we do see signs recently of the seasonal increase in activity that’s typical this time of year as customers in the refining and petrochemical markets prepare for spring outages and as other industries ramp up their maintenance cycles. With these improving trends hold, we believe our sales in the second quarter of 2013 will return to the level we saw in the second quarter of 2012.
Our aftermarket businesses with the possible exceptions of STEMCOs should see higher seasonal volumes in the second quarter, which should benefit both profits and margins. Revenue at Fairbanks Morse should be inline with or slightly better than the second quarter of last year.
However, we expect demand from our European automotive and industrial markets and from our semiconductor markets to remain soft. Performance of all of our businesses should continue to reflect cost reductions and efficiency improvements we previously put in place.
For the rest of the year, we remain cautious. Our European market showed no sign of strengthening and in North America, we see only the prospect of slow growth.
Our expectations for North America are based on signs of modest improvement in industrial market and in process industries. We also see indication such as forecast of freight movements in trailer builds and our heavy duty truck business may improve later in the year.
While, this environment may support limited growth in our Sealing Products and Engineered Products segment is not likely to offset what we anticipate, would be a full year decline of approximately 15% in the sale at the Fairbanks Morse engines for the year. As we’ve said, at (inaudible) expects a significant increase in the number of engine shipments this year but budgeted revenue associated with this engine was recognized last year under percentage completion accounting.
In summary, our markets were made in challenge but we’re confident that we have the right combination of businesses and strategies to be successful even in these tough conditions. Now, we’ll open the line up for your questions.
Operator, could you instruct the participants to (inaudible) question? Please.
Operator
(Operator Instructions) And our first question comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is now open.
Jeff Hammond - KeyBanc Capital Markets
Hi, good morning, guys.
Steve Macadam
Yes.
Alex Pease
Good morning, Jeff.
Jeff Hammond - KeyBanc Capital Markets
I guess a couple of questions on the margins. One, I mean you mentioned CPI having kind of its best quarter since 2011 and being up, I guess what that implies as the GGB decrementals were pretty ugly, if you can just talk about why decrementals were so challenged in GGB and then…
Steve Macadam
Yeah.
Jeff Hammond - KeyBanc Capital Markets
Go ahead, yeah, go ahead.
Steve Macadam
Jeff see, well there is really, there is really two primary reasons in GGB, one is just a really tough comp, I mean last year’s first quarter, we were doing quite well even in Europe. We thought we were really off to a great year last year and as you will recall last year after the first quarter we saw a slow decline throughout the year.
So, when you look at the demand sequentially versus fourth quarter to first quarter. It’s kind of that where we expected to be honestly, we jumped a little bit from Q4 but we knew it was not going to even come close to returning to Q1 of 2012 level.
So, that’s the biggest factor. But then…
Jeff Hammond - KeyBanc Capital Markets
Okay.
Steve Macadam
The second factor is, really two cost things one that kind of surprises a little bit. We are in the middle of implementing an ERP system actually we just started implementing an ERP system in GGB in the first facility to go alive was Annecy, France, which is our largest facility globally in GGB and that happened in the first quarter.
And that, as you probably know it’s a very difficult transition to make and it affected operations. And so we were running more over time and we had other issues as we sorted through this pretty significant shift in their system.
That was completed in Q1 and is lined out now. But certainly had effect on the financials.
The other thing is, I think I talked to you guys about this in the past but as you know in GGB and in the rest of the company but this mostly impacts almost exclusively really impacts GGB. They are going, the PTSE industry so the folks to supply PTSE.
So, this is all (inaudible) and do parts of the world. They have agreed a number of years ago to change the formulation of PTSE voluntarily and removed (inaudible) PFOA from that material.
Well, indeed, that’s a big deal in GGB because their product goes into most of the variance that we make and as you know most of that is in OEM business. So that all takes new qualification in PPAPs with our customers.
And so they were making the transition in GGB in the first quarter that will continue a little bit into the second quarter but will be done by the middle of the year but its basically making just samples to send to customers so they can test the new formulation. And obviously when we have done that in Thorofare that was done last year, which is our U.S.
plant. And Annecy really the next in last significant place we do because only in the GGB locations where we actually make the strip.
And so anyway that that drove the lot of cost in Q1 for running that obviously you don’t charge your customer when you send them samples that we need them to requalify. So those two cost issues which were both kind of temporary or one time things that combined with the reduction in volume was what affected GGB.
Jeff Hammond - KeyBanc Capital Markets
Okay. And then can you quantify what you think as higher margins in FME and just in kind of this new environment and as we kind of transition, I mean, how should we view quote normal operating margins for FME going forward?
Steve Macadam
Well, I think FME should be in the 15% 16% range for the year. And that’s what we kind of expect going forward.
So again the effect in, we had these accounting issues, one was relative to how we manage FX hedges that we do quite frankly because we – when we sell a contract to a customer in FME for a new engine. So this would be for the government and as you know, we are license manufacture for MAN.
So some of the key components for those engines actually are produced in Germany by MAN over (inaudible) and then we make the rest of the parts and built the engine. And of course that’s so we are buying parts in Euros and then selling to the U.S.
government in dollars. So when we enter those contracts for delivery we buy forwards in currency that kind of protect the margin of those engines and as it turns out when the date for actually delivering those engines moves around which it does almost every time to some extent, it requires us to reset those engines and move them around.
And unfortunately we haven’t changed that we have done it to be honest with you operationally but our audit firm looked at that and said gee, we are not sure you should be really doing the accounting the way you are and so we shifted how we account for it but from a operational and execution standpoint we really didn’t change anything. So, that was a pretty significant number.
At FME and we had another accounting adjustment relative to the cost system, it also impacted Q1 that will not repeat. And then the other thing that happened in FME as Alex alluded to as we had a pretty large for us aftermarket service contract for the Canadian Coast Guard that was a fixed price arrangement and turns out, it probably shouldn’t have been.
So, we didn’t make our normal margins on that deal and so we did a bunch of work and did make a lot of money which we normally do make good margins on service work and aftermarket parts. So, anyway that also was completed that contact was completed, that work was completed in Q1.
So, that wouldn’t repeat. So, unfortunately FME with the lower revenue which was quite frankly driven by just this simple fact that last year, we shipped engines in Q1 that were still on the completed contract method.
So, we had a big junk of revenue a year ago, we are actually going to ship more engines in FME this year than we did last year by a pretty significant amount but all the engine this year now is going to be under the percent completion method. So, we recorded a lot of that revenue last year and in the last year, we also did have several engines that we, that were still on the old completed contract method.
So, it’s a funny comp to do in FME but with volume being down and these cost issues coming up and (wideness) we had a bit of anomaly in FME margins in Q1.
Jeff Hammond - KeyBanc Capital Markets
Okay. Thanks for the color.
I’ll jump back in queue.
Steve Macadam
Okay. Thanks Jeff.
Operator
Our next question comes from the line of Todd Vencil from Sterne, Agee. Your line is now open.
Todd Vencil - Sterne, Agee
Thanks. Good morning, guys.
Steve Macadam
Good morning, Todd.
Alex Pease
Hi, Todd.
Todd Vencil - Sterne, Agee
Hey Steve, you got to be careful with Canadian Coast Guard --
Steve Macadam
Are you Canadian?
Todd Vencil - Sterne, Agee
I’m not.
Steve Macadam
Well, anyway it was a good piece of work we didn’t executed the way we should. So, it’s not the Canadian Coast Guard’s fault its our fault but anyway we learned from it and it’s behind us, so we’re moving forward, so.
Todd Vencil - Sterne, Agee
Fair enough. One clarification on the discussion on the engine margins, and thanks for all of that.
You said, you think FME is going to be the 1%5 to 16% range for this year and that’s why you expect going forward. I mean obviously this year is going to be blended down pretty significantly by 1Q.
So, I mean do you think you can get 15% to 16% this year and that’s what next year looks as well or is next year more like whatever the last recorded this year look like?
Steve Macadam
Yeah, that would be the latter.
Todd Vencil - Sterne, Agee
Okay.
Steve Macadam
Next year, it would look like the next three quarters, yes.
Todd Vencil - Sterne, Agee
So that just mathematically given your 15% decline in sales coming for this year or something like that for FME you’re looking at like 17%, 18% margin for the rest of the year if my math is, right?
Steve Macadam
Yeah, that’s right. That’s right.
Todd Vencil - Sterne, Agee
Okay. Fine.
Steve Macadam
And look what the revenue for FME, I mean we think it’s going to be down in the order of magnitude of 15% so that drives down, it’s about $35 million for FME for the engine segment, right. But, but we book $25 million last year completed contract revenue.
And all of the engines this year will be 100% completion.
Todd Vencil - Sterne, Agee
Sure.
Steve Macadam
So we, as I think we told you guys in the call last time 2012 was a funny year in FME because we benefited on the revenue side, right for new engines only, right. We benefited from completing and shipping the number of engines that were still on 100%, still on the completed contract method, right so we get all of the revenue even though some of the work have been done in the previous year and we also got the revenue for present completion from what we did in the shop for engine (leadership) this year.
So, it’s a tricky comp. So, you got to be, you got to be careful.
So, but we feel pretty good about unless, but for now that the shipment schedule for completed engines doesn’t affect this near as much as its used to. If you remember one of the reason why we shifted because we had to, we now have the visibility and the ability to do at based on percent completion, but if you remember before you’ve been tracking this for a while, remember if we had an engine that we’re supposed to ship-in Q2 and got moved to Q3, it either will move all the revenue from one quarter to the next, that won’t happen going forward but we got to be careful of this year-over-year comp just because 2012 was the main year where we had both methods kind of underway if you will because when we decided to make the shift, you will also remember this.
We didn’t decide, we just drop the curtain and change engines that were already had work going on, we said we are going to change it prospectively on all the engines that we’re starting from the day forward and we’re going to finish the accounting and the engines that were already underway under the old method. So, as a result of that in the back half of 2011 and to all through 2012, we had this hybrid of both going on if that’s clear.
Todd Vencil - Sterne, Agee
Yeah, no. Absolutely thanks, thanks a lot.
Alex Pease
One other thing on the margin question you asked, don't forget we did mention in the remarks that we anticipate $2 million of restructuring charge next quarter which went down…
Todd Vencil - Sterne, Agee
Okay.
Alex Pease
The second quarter margins that end of the year, should finish in the order of magnitude of what’s Steve mentioned but the second quarter would be slightly lower than that high teen’s number we quoted.
Todd Vencil - Sterne, Agee
And 2Q as you factor out the restructuring which as we do should be in that range as well?
Alex Pease
Right.
Todd Vencil - Sterne, Agee
In that restructure okay.
Alex Pease
Exactly.
Steve Macadam
Hey, Todd, just so you don’t miss it no one on the call. There were a good news buried in Alex comments on FME actually because at the end of last year we were very concerned about this – the effect of impact of sequestration on our parts and service business and we were very sure that some of the demand for parts got pulled into the end of last year because the Navy got – they got key for ships around and they were worried the budgets we were going to get that, right so, we saw some artificial orders if you will or some (indiscernible) orders that hit January and February but once we got the March, things are kind of back to normal in our backlog actually looks decent for that.
I think it’s quite frankly what’s going on with North Korea and so this is not the place that the Navy needs to get to cut on, we keep the ships running so, we feel actually and based on what we’ve been talking to the customer about so forth we feel that after the core aftermarket government demand for FME is going to solid for the rest of the year so, I didn’t want to make that wasn’t kind of lot in the conversation.
Todd Vencil - Sterne, Agee
So, I appreciate that and we get that question lot so it’s get out of the update so, thanks for that.
Steve Macadam
Yeah.
Todd Vencil - Sterne, Agee
Hey, Alex corporate expense outside of the segments which you mentioned was inline with the year ago. It was though higher than it has been running the past probably three other quarters of last year so, is there something seasonal in there or something else going on.
Alex Pease
There shouldn’t be anything seasonal, but I can think (inaudible) the top of my head. The expectation should be right on top of last year though.
Steve Macadam
Yeah, we really are in a increasing annually our budget is to not increase actually I believe annually we are going to take it down just slightly. So, there may be something related to timing, but yeah, there is no real dramatic change in the corporate expense line.
Todd Vencil - Sterne, Agee
Good, good, okay. And then may be (inaudile) again, may be I missed it, but I did apologize, but Steve if you kind of roll all this up and given on your comments about the fact that we get slow growth in North America and not really seen an improved trend in Europe.
How should will be thinking about sort of the full year comparison on the top-line of margin, I mean if we can sort of think about the whole think rolled up together.
Steve Macadam
Yeah, I mean, I think our expectation is for the year so, I’m going full year over full year that sealing an engineered products both would be up a few percentage points on the top-line. Now that includes fourth quarter of owning motor with over three quarters last year.
So, I’m not stripping out that the acquisition effect.
Todd Vencil - Sterne, Agee
That we have seen only not be up you know 2, 3%?
Steve Macadam
Then we think engineer to be up about 3 or 4%. So, that’s our, that’s our current look at it even with the, even with the first quarter I mean we tried to give the strict to heads up about the difficulty.
We saw coming in Q1 of the cope both in G primarily because the GGB and then also we knew what was going to happen in FME on the top line. So, when you look at our first quarter actually relative to our internal plan which we don't share with you guys, it’s pretty cost.
We were a little bit behind top line but quite frankly, not very much behind, certainly within the margin of error of our, of our you know our ability to look at thing. So, it, it was pretty to unclose and then, and then even on the operating income line if you, if you take up in that effect of this, of this one issues then that was articulated that meaning, you, you offset, it would $1.5 million gain we had on unlighting the, the earn out money for acquisition we did couple years ago which was a benefit to us (inaudible) that out even a life was, was more or less right at our internal, our internal plan.
Unfortunate, we had this one time things come up and buy and then relatively weak top line quarter that has a big impact on our earnings. So, that’s really were happened.
But in terms of the underlying business, I mean you know it’s rare when Q1 is that still a quarter for GGB and happened to be last year but you know as we look at GGB, there are still, there are still one in fine, we got the cost things behind this in the first quarter, Europe well it wouldn’t be a huge rebound, it’s, it’s also you know it’s, it’s stable and in the US, we believe to see a little bit of, of improvement. CPI is off to a decent start actually and we’re seeing a little bit up in some of those markets because we got a decent order book going into Q2 that we feel you know we feel decent about and is not stiller but it’s, it’s certainly better than in where we’d been and the cost improvement we made last year are, are in place.
We had a lot of disruption in the CPI business last year because all facility consolidations and restructuring that you get last year. That now behind us and the team is now very, very focus on the commercial activity and the businesses executing you know reasonably well.
So, I as Alex mentioned you know again you guys don't give to see at the, for CPI level and our internal plan but as Alex mentioned we’re, we’re track in against you know what we expected CPI to do. Q1 is always weak for CPI.
And in Garlock, we are fine, in Garlock in Q1 is not always a great quarter just because seasonal effects it really depends on the maintenance outage schedule and so forth and that really cranks up in Q2. So we got to get really through the summer before we know how the full year for Garlock is going to look.
But, again, the order book is okay. And even in STEAMCO, we saw certainly March, April numbers and volume in STEAMCO was hell a lot better than January and February.
So that’s also a bit. And if you read all the forecasting and about freight movement in new trucks and so forth it does point to an improving trend throughout the year.
So we are not hitting the panic button on this end to be honest with you. You got to understand the FME difference but I think I have said this before in previous years but I travel to the (inaudible) anyway and that tends to be concentrated more in the first half of the year because we give safety awards to those plants that have stellar safety performance which we against had a record in our safety performance last year.
So I have been out in the field a lot, since the beginning of the year and actually feel very good about our business we got some great things going on our factories. The teams are focused.
We are doing some very, very important things to strengthen our business around the systems work and the productivity improvement, in the commercial excellence program that we have got in place. But we got to deal with reality I mean Europe its going to take a while before Europe, I mean, I think it will take some years before Europe will get back to any kind of reasonable growth.
So we are going to have to gain share, we are introducing new products. We just introduced a new product in GGB and just got our first just a couple of weeks ago, got our first sizeable order down in South America.
So very pleased with the GGBs team’ ability to bring in new customers introducing new products, we got to get this PFOA free PPPA conversion behind this that’s something we have been working on for two years to be honest with you. And (inaudible) late innings of that because we are running customer qualification but our development team had to do all the formulations with this new (inaudible) raw material that we are having to deal with.
But for a while it was hard to get examples from that PFG supplier. So yet there is still shifting to this, this is not something that we have the option to do we really have to do it.
And so it has been a huge burden for the GGB technology team and manufacturing team, which once we get that behind us they can turn all that resource and attention to developing new applications and so forth. So the GGB business is running very, very well operationally.
I know it is hard for you to see that when you see the low margins, you do not get to go to the plans like I do. But I feel very good about GGB and I feel good about the path that the CPI guys are on after all the restructuring of work last year.
So I am just kind of where I am on the outlook.
Operator
(Operator Instructions). Our next question comes from the line of Joan Mondale from Sidoti & Company.
Your line is now open.
Joan Mondale - Sidoti & Company
Lot of information so far, so I will try to keep it brief. Just one question, in terms of the engineer product segment, what is the seasonality through the year normally because the last two years we have seen quite a bit of a falloff in terms of the margin in the back half of the year.
But I know there has been a lot of cost and restructuring cost and a lot of cost associated. So what is that normal seasonality and I guess what you look for this year?
Unidentified Company Speaker
Yeah, it is very hard to peel the seasonality from the publicly disclosed up. Because you got to look and every year is either in a -- throughout the year a lot changes through those 12 months, Joe, so it is either -- you are either in a declining market or growing market etc.
But if everything were stable and if you could just -- it is impossible, but if you can take some snapshot of economic activity and levelize it throughout the year from the broader economy. The Engineered Products group would be stronger in Q2 and Q3 and weaker in Q1 and Q4.
Q1 driven mostly by CPI because they sell a lot of stuff into clod parts of the world where there is just not the level of maintenance and certainly not the level of project activity that CPI benefits from in Q2 and Q3, and then it begins to slow little bit in Q4. And driven in Q4 mostly by GGB because at the end of the year all the European auto plants shut down for the holidays.
And GGB's fourth quarter has always been weaker from a top-line prospective, right. The first quarter, I would say is not typically really week if not really strong.
It is kind of neutral, if you will, on average. Last year, it just happened to be kind of lights out in the first quarter I mean, it was we would run and full out in GGB globally in first quarter of last year.
It turned out, but lot of it was European guys thought things were going to recover quickly and it kind of just petered out as you know, so. But in aggregate engineer products, the strength is in Q2 and Q3 driven by those two factors.
Joan Mondale - Sidoti & Company
Okay. Perfect.
Then, does that also call for the margin profile, that segment as well?
Unidentified Company Speaker
Just from pure leverage standpoint absolutely.
Joan Mondale - Sidoti & Company
Okay.
Unidentified Company Speaker
And then, as you pointed out, fourth quarter of last year is when we took a fair bit of CPI restructuring cost because that is when we did the -- that is when we -- actually, we have been working on it for a while, planning and it was well lot of cost hit of consolidating the facilities that we did into Huston.
Joan Mondale - Sidoti & Company
Okay. Perfect.
And then, also, just looking at CIP, how does the backlog look at that business? And with natural gas prices climbing over the last several months, is it are you starting to sort of hear any words of projects or sort of warming up or how does that --
Unidentified Company Speaker
Yeah, it is better than last year. In CPI we do not have a long backlog.
It is a short order as the short cycle order business. However, we have a quote activity read, so when we get request for lot of quotes, we know that things are starting to pick up a little bit.
And we have seen that late in the quarter.
Joan Mondale - Sidoti & Company
Okay. Great.
Unidentified Company Speaker
Okay.
Joan Mondale - Sidoti & Company
And then, just one last question. In terms of sort of the current volume that you are just receiving just overall in the overall business, if we do not see any sort of improvement, how are you thinking about the overall footprints of the business and the cost structure?
Unidentified Company Speaker
Well, as Alex mentioned, we have already implemented or we are in the middle of implementing really an early retirement at FME. And so, that will happen in Q2.
We will take a $2 million restructuring charge. That will lead to little over $3 million or annualized savings.
So, for the year, we should be relatively neutral on that. It take us a little longer than the rest of the year to make up the $2 million, but it is still the right thing to do.
And in GGB we had a lot of tip and contract labor and worked a lot over time because of the ERP conversion that I mentioned and run in the PPAP sample for long side, our regular volume. So that will also happen.
And so far, in the rest of the businesses, we have not seen demand to be weaken after doing any kind of what I would describe of major downsizing. We will continue to manage overtime in contract labor.
But we do not see at this point that again things change. But at this point, we do not see going back to -- the more we ran a few years ago in Europe, where we were doing all the short work weeks and all that kind of stuff, we do not -- our demand is still strong enough so that we don’t need to do that.
Operator
Our next question comes from the line of Jeff Hammond from KeyBanc Capital Markets.
Jeff Hammond – KeyBanc Capital Markets
Hey guys just a couple of follow-ups on the Asbestos litigation one can you just update us on where you are at with the questionnaires and two just on these bankruptcy trust so you can now see in to the ballets. I mean how is that make you think about current and future claim trends?
What were that just simply to show how that impacted your settlements amounts?
Stephen Macadam
Yes, that’s it what it for Jeff.
Jeff Hammond – KeyBanc Capital Markets
Okay.
Stephen Macadam
It is approved. See the other side want to use the most recent history of GST settlement decide the overall liability, okay.
And remember the liability is for pending and future claims. So, all those claims that have already been resolved backing backwards those are done anyway.
So, when we file the company, when they file Chapter 11, they were said a claims that were still unsolved and then the difficulty in these cases is projecting forward what the claims look like going forward. So, that’s probably talking about the other side we would like to use the most recent years settlement history, right.
We are of course they would because it has been higher than any other time in Garlock, right. Well, why it was hired?
It was hired for we believe hired for the reason that when the other companies filed bankruptcy in the early 2000 like Owens Corning and many were already bankrupted like Johns-Manville and all the other major asbestos company that actually didn’t produce dangerous products. All filed for Chapter 11.
As you know when you are in Chapter 11, all the claims are stake, okay. So, these guys were offline.
So, what are the plaintiff lawyers due to go get their money, right. They go, they turn to these peripheral defendants like us, who really didn’t make anybody sit and have a dangerous product, right.
And all by the way they coached their clients to not to mention all the insulation companies that they were exposed to and all etcetera, etcetera. Even though subsequently they have got claims with them.
They board in their company’s bankruptcy proceedings. They have signed 2019 statements form and then subsequently we believe they seek money in the trust system, while they are denying exposure to those companies when they’re suing Garlock, when they’re suing GST.
And happened in that time period is our litigation cost went up because we had to prove that these claimant in fact did have these other exposures, while their lawyers coaching them to deny it and it raise the settlement demand because the truly culpable companies were in the court room with us, right. And so that’s what the our whole strategy of getting all the balance which we have got, getting the 2019s which we now have a ruling to be able to get when the process are getting those and some additional evidence that we have been allowed to get, which is still subjective to confidentiality order by the court around actual trust payments.
We believe all this will prove to the court. This is what in fact inflated the settlement numbers for GST.
Not the fact that they are. Why would their liability go up?
Nothing changed on the GST side. It changed in the tort system environment because there was all this evidence can see going on.
That’s what changed the game.
Jeff Hammond – KeyBanc Capital Markets
Okay, perfect. And then just update on the questionnaires, and what that has done to the current claim number?
Stephen Macadam
Well, when we went in to the bankruptcy we had I think 5800 open mesothelioma claims or something like that. And through the process reviewing all those and pulling that bodes that weren’t relevant or those that weren’t legitimate etcetera, etcetera.
It was down. It was reduced down about there is about 3500 active pending claims on the day of the filing, okay.
You’re with me.
Jeff Hammond – KeyBanc Capital Markets
Yes.
Stephen Macadam
Yes. That doesn’t mean by the way that doesn’t mean they were all legitimate by any stretch.
But we at least know it down for 5800 to 3500. Most of 3500 on legitimate either.
Jeff Hammond – KeyBanc Capital Markets
Okay, that’s helpful. And then just quick question on Stemco, I mean you said after market weak and should be weak for the foreseeable future.
But I guess it the weather was kind of more normal this year or worse after mild winter and I think we are seeing at least stable decent freight trends. I mean why such a do that would?
Steve Macadam
No, let me clarify. I think that we believe that Stemco’s levels of demand will look like last year.
So when I say this over the first quarter they were down substantially we think they will go back to tracking at the levels of last year so sequentially it will be a fairly decent path. But year-over-year I just mentioned year-over-year we are not expecting the aftermarket to be a lot stronger, the rest of this year than it was last year, you with me.
It will be stronger than Q1 no question.
Jeff Hammond – KeyBanc Capital Markets
Okay. Thanks guys.
Operator
There are no further questions in queue at this time. I will turn the call back over to the presenters.
Don Washington
All right everyone thank you very much for dialing in of course if you have further questions please don’t hesitate to contact me. 704-731-1527 and we look forward talking to next quarter thanks.