Nov 1, 2013
Executives
Don Washington – Director, IR Stephen E. Macadam – President & CEO Alexander W.
Pease – SVP & Chief Financial Officer
Analysts
Ian Zaffino – Oppenheimer Todd Vencil – Stern Agee Joe Mondale – Sidoti & Company Gary Farber – C.L. King James – KeyBanc Capital Market
Operator
Good morning. My name is Rob and I will be your conference operator today.
At this time, I would like to welcome everyone to the EnPro Industries’ Third Quarter 2013 Earnings 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 for EnPro, you may begin your conference.
Don Washington
Thank you, Rob and good morning everyone. Welcome to our quarterly earnings conference call.
I’ll remind you that the call is being webcasted in enproindustries.com, where you can also find the slides that accompany our call. Steve Macadam, our President and CEO and Alex Pease, Senior Vice President and CFO will begin their review of our third quarter performance and our outlook for the remainder of the year in just a moment.
But before we begin, I will need to point out that you may hear statements during the course of this 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, 2012 and the Form 10-Q for the quarter ended June 30, 2013. We don’t undertake to update any forward-looking statements made on this conference call to reflect any change in management’s expectations or any change in assumptions or circumstances on which such statements are based.
You should also note that EnPro owns a number of direct and indirect subsidiaries. From time to time, we may refer collectively to EnPro and one or more of its subsidiaries as we, or to the businesses, assets, debts or affairs of EnPro or a subsidiary as ours.
These and similar references are for convenience only, and should not be construed to change the fact of EnPro and each subsidiary is an independent entity, with separate management, operations, obligations and affairs. I want to remind you that our financial results reflect the deconsolidation of Garlock Sealing Technologies LLC 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 this as the Asbestos Claims Resolution Process or ACRP and issues during the call today.
GST’s summary results are presented separately in our earnings release and we’ll discuss those as well. And now I’ll turn the call over to Steve.
Stephen E. Macadam
Thanks Don. Good morning everyone.
I’m going to start the discussion about the third quarter with a few comments about the ACRP since I suspect that’s a topic of high interest to many of you. As you may remember I missed this call last quarter because I was actually attending GST’s Estimation Trial which was held in order for the judge to make an informed decision about the appropriate number and value of pending and future measure on the claims against GST.
The courtroom portion of the trial concluded on August 22, after 17 days of live testimony. Both GST’s legal team and I were generally pleased with the way GST’s case was presented.
Significant evidence was presented on both sides of the science issue, but the GST team presented what I believe was compelling evidence that GST’s products could not have been a substantial contributing cause of claimants’ mesotheliomas. More over GST’s representatives presented what I believe a very, very convincing case on estimation of the liability.
The estimation case demonstrates the GST’s settlements had little to do with actual legal liability, but instead were influenced by the necessity of avoiding high cost of litigation which were further inflated by the unfair and abusive practices of the plaintiffs' bar. In cases against GST these practices included the suppression of evidence of their clients’ exposures to many sources of highly friable, extremely dangerous asbestos products mainly factored by large companies mostly insulation that had filed for bankruptcy relief.
Despite the substantial limitations placed on GST’s ability to discover evidence of these abuses, the pervasiveness and impact on GST were well chronicled in the evidence presented at the trial. The case is now in the post-trial briefing stage with final briefs due in late November.
We are uncertain as to when the judge will render his decision, but we do not expect the decision from the court before the first quarter of 2014. Even then our court decision will be very important but not to terminate it.
There are many potential impediments to the adoption of the plan of reorganization including the Pos which may make confirmation difficult in absence of the consensual resolution. In the meantime both we and GST have indicated repeatedly that we’re willing to find an accepted reasonable compromise that would bring finality and certainty to that situation.
However, we’ve also demonstrated that we’re patient and that we’re not going to accept a settlement that’s not in the best interest of our company and our shareholders. Even though settlement remains a possibility for the ultimate outcome with ACRP and is our strong preference.
We can’t be sure that the case will be resolved in that fashion. We’re committed to preserving the GST business and the significant portion of its value for our shareholders, but we can’t predict how much if any of GST’s value might be preserved in an ultimate resolution.
Now let’s turn to our operating environment. Although our results for the quarter didn’t compare favorably to the third quarter of last year, there are some factors that we shouldn’t overlook.
First is the effect of the performance of Fairbanks Morse in the engine products and services segment on our total sales and segment profit. If we exclude FME from the comparison and look only at the performances of our sealing products and engineered product segments sales in the third quarter of this year were actually slightly better than they were in the third quarter of last year because of an increase in the sealing product segment.
On that basis segment profits were the same in the third quarter of this year as they were a year ago, while segment margins were slightly less than a year ago because of a small increase in restructuring expense. The point here is that the performance of most of our businesses held steady from the third quarter of a year ago.
There are number of positive developments in the quarter, the Garlock family of companies including both the consolidated and deconsolidated operations performed well. Despite generally soft market conditions and a slight reduction in sales compared to the third quarter of last year cost of those businesses were lower and operating profits and margins were strong.
The Technetics Group reported flat sales in profits compared to the third quarter of last year. That experienced a noticeable improvement in the business climate as the quarter progressed.
Semiconductor bookings strengthened in the last weeks of the quarter and the book-to-bill ratio in that segment at the end of the quarter was 1.7. And it appears bookings will remain strong through the rest of the year and into the middle of next year.
Technetics also reported improved bookings in its aerospace, nuclear and oil and gas segments. Stemco reported increased demand across all product lines even though growths remain slow and likely to be tilted towards the OEM market for the rest of the year.
We’re enthusiastic about Stemco’s product line expansion and go-to market strategy and I’m confident that strategy is proving effective and delivering very good results. At GGB sales in Europe were up compared to the third quarter of last year because of better pricing and we’re encouraged that conditions maybe beginning to improve in GGB’s European markets based on our order rate.
Offsetting those positives in the quarter, CPI in the engineered product segment continued to perform below our expectations and the engine products and services segment, the combination of sequestration and the navy’s reduced maintenance schedule affected the performance of Fairbanks Morse significantly. Alex will help you understand the dynamics behind the results in those businesses, but in both cases we’re addressing issues that affect their performance both for the short term and the long term.
At CPI, we named Ken Walker, who some of you have met as President during the third quarter. Ken spent several years in-charge of GGB’s North American operations before being named President of GGB in 2010 and has been leading GGB’s turnaround over the past three years.
While GGB continues to report to Ken, his current primary focus is to bring the benefits of his operating experience and strong commercial background to CPI. He has been responsible for CPI since August and has begun broad based assessment of CPI’s international markets, its customers, operations and commercial practices.
However, as we have noted before the results of our efforts at CPI aren’t likely to be fully realized until market conditions improve. At Fairbanks Morse engine we had anticipated softer demand for products and services primarily as a result of a reduction in the navy scheduled maintenance activity, however, the effect of sequestration was much more pronounced and we anticipate it and the combination of those two factors severely hampered government aftermarket parts and service sales in the quarter.
Longer term, we’re concerned over the prospects of new engine orders for navy ship building programs. Based on the navy’s current ship building schedule we see a drop in new engine orders in 2015 and that will remain at low levels for sometime after.
To offset this decline we continue to explore opportunities for FME in commercial markets and are taking steps to expand its product offering. On last quarter’s call we mentioned that FME had received a $21 million contract to supply five engines to an oil pipeline in South America.
We’re now pursuing other similar opportunities in oil and gas market and in power generation markets there and elsewhere. Power generation opportunities include a large life extension product for several nuclear power plants in France and other smaller projects.
Just last week FME received a $6 million contract for supply of the state of the art diesel generator system that will provide standby power to a large hospital. Unlike most of the engines we sell mow [ph] U.S.
Navy, the proposed engine design for these projects is a proprietary FME design is not subject to the restrictions of FME’s licensing agreement with MAN. Earlier this week FME announced an agreement with Achates Power to improve the efficiencies and reduce emissions of FME’s proprietary opposed-piston engines.
The opposed-piston engine known as the OP is a highly reliable, extremely durable and has been part of FME’s historical offering for many decades. We believe these upgrades to modern standards will make the OP engine more competitive in oil and gas and power generation markets.
In addition to the agreement with Achates, FME also signed an agreement with Isotta Fraschini an Italian manufacturer of high speed diesel engines used for marine proportion, power generation and other applications. This agreement gives us access to these engines for worldwide distribution.
At both CPI and FME we’re confident that we now have the right teams and are pursuing the right strategies to drive improvements in their performance. Now I’ll turn the call over to Alex to review our result in the quarter.
Alex?
Alexander W. Pease
Thanks Steve. Our sales in the third quarter were $276 million down $15.7 million or 5% from the third quarter of last year.
Excluding foreign exchange and a small contribution from an acquisition, sales were 7% below the third quarter of last year. The most significant factor in the decline was a drop in sales at Fairbanks Morse and part of the results of sequestration and the reduction in scheduled maintenance that Steve mentioned, but also because of lower engine sales.
The acquisition was a small Singaporean distributor of industrial seals that we completed in the first quarter of this year as we continue to advance our Asia growth initiatives. Excluding FME, sales were about the same as in the third quarter of last year as a decrease in sales at the engineered product segment primarily at CPI was offset by – offset an increase in the sealing product segment where Stemco reported higher sales across all of its product lines.
By geography, sales were down in Europe by 4% compared to the third quarter of last year and flat in North America when you exclude FME from the calculation. I’ll discuss the performance of our individual businesses in more detail when I cover the segment results.
At $29.4 million segment profits were 22% or $8.1 million below the third quarter of last year driven primarily by the drop in aftermarket parts and service sales by FME to the U.S. Navy.
The loss of these higher margin sales from Q3 2012 to Q3 2013 was the driving reason segment profit margins came in at 10.7% more than 2 points lower than a year ago when they were 12.9%. It’s worth reiterating Steve’s point that excluding FME, segment income was the same as in the third quarter of 2013 and segment margins were in line with the third quarter of last year.
We had about $1.3 million of restructuring expense at the segment level in the third quarter this year or about $400,000 more than in the last year's third quarter. Net income in the third quarter of 2013 declined to $5.6 million or $0.23 a share, from $11.3 million or $0.53 a share in the third quarter of 2012 primarily because our operating income was lower.
Excluding interest to GST and other selected items, net income was $13 million or $0.53 a share in the third quarter of 2013 compared to $17.2 million or $0.81 a share last year in the third quarter. Looking at our consolidated results, in the first nine months of the year, sales were about $869 million down about 4% from what we reported in the first nine months of last year.
Excluding the effects of foreign exchange and acquisitions, sales were down about 6%. Again, the change was primarily driven by lower revenues at FME due in part to lower completed contract engine revenues which we have described in detail in the past and also a reflection of weaker parts and service sales.
The remainder primarily reflects lower demand compared to the first nine months of last year especially in Europe and in our semiconductor markets. Segment profits were about 12% below the first nine months of last year.
The decline was a result of lower volumes and less attractive mix at most of our operations, but principle at FME because of increased sales of lower margin environmental upgrades, a low margin engine refurbishment contract, expenses related to an early retirement program and weaker after market demand. Segment margin in the first nine months of the year were 12% compared to 13.1% in the first nine months of last year.
On a GAAP basis, we are $0.96 a share in the first nine months of this year compared with a $1.64 in the first nine months of last year. Excluding interest to GST on environmental reserve in the second quarter and other selected items we are in $1.94 in the first nine months of this year compared to $2.48 in the first nine months of last year.
The deconsolidated operations of GST continue to perform well. Third-party sales in those operations were about $53 million in the third quarter essentially flat with the third quarter of last year.
Operating margins were 27.8% as the business continued to benefit from price improvements and lower cost. In the third quarter of 2012, GST's operating margins were 22.6%.
GST’s EBITDA before asbestos related expenses improved to $16.4 million up 23% from the third quarter of last year. Adjusted net income at GST which excludes inter-company interest and ACRP related expenses was $9.2 million, an increase from $8.8 million from the third quarter of last year.
GST recorded almost $16 million in ACRP related expenses in the third quarter, double the amount in the third quarter of 2012. These expenses increased significantly because of the estimation trial.
Through the end of September, ACRP related expenses of GST totaled $40 million. As you know, GST is required to pay the expenses of all parties involved in the case.
Although post-trial activity continues we expect legal spending on the ACRP to moderate now that the testimony is complete. GST’s cash and investment balance was $173 million at the end of the quarter unchanged from the end of the second quarter.
Now let’s look at our consolidated third quarter results in more detail. Gross margins were 33.9% in the third quarter of 2013 down about 0.5 point from the third quarter of 2012.
The slight decline was mostly due to the performance of FME although gross margins continued to benefit from effective management of our supply chain in raw material costs. SG&A expense of $71.4 million in the third quarter was up compared to the third quarter of last year by about $2.6 million.
The increase reflects cost associated with the acquisition and investments to support growth in the pipeline market served by the Garlock family of companies. SG&A also includes $7.6 million in corporate cost.
I will also point out that we incurred about $1.1 million of ACRP related cost to the parent company at the parent company level for GST’s estimation trial. Those costs are included in the other operating expense line on our income statement and are the primary driver of $1.2 million increase from last year to this year.
Now let’s look at our segment's operating performances beginning with the sealing product segment. The segment sales were $157.9 million in the third quarter up about 4% from the third quarter of last year as Stemco recorded strong organic growth.
Excluding foreign exchange in the contribution of the acquisition, sales improved by about 2%. Sealing product segment margins were up slightly from a year ago to $24.2 million.
Stemco’s performance drove the increase as profits were flat at Technetics and down at the consolidated Garlock businesses. Segment margins were 15.3% in the quarter.
Excluding higher restructuring cost, segment margins were 15.4% or about the same as in the third quarter of 2012 in the same basis. Looking at the businesses within the segment, sales of the consolidated Garlock operations were about the same as the third quarter of last year.
Although volumes were down especially in Europe and in parts of the business that served the U.S. construction markets, sales benefited from modest price increases, the Singaporean acquisition and favorable foreign exchange.
However, these factors weren’t enough offset lower volume cost associated with the acquisition and increased SG&A when the segment profits and segment profit margins were lower at the consolidated Garlock operations. After several quarters of unfavorable year-over-year comparisons sales of the Technetics Group were flat compared to the third quarter of 2012.
Volumes were down in semiconductor markets in Europe, but a significant portion of the decline was offset by higher demands from nuclear markets. Technetics sales also benefited from price improvements.
Segment profits and profit margins at Technetics were about the same in the third quarter of 2013 as they were in the third quarter of 2012. Sales were up strongly at Stemco across all products line although conditions remain somewhat soft in Stemco's markets.
Sales improved for core aftermarket products, suspension system components and break products. With higher volumes and significant operational improvement in cost control, Stemco segment profits and profit margins also increased.
As Steve mentioned, we are encouraged by Stemco’s performance in a market that has offered limited opportunities for growth. In the engineered product segment, third quarter sales were $84.1 million down about 3% from the third quarter of 2012.
The entire amount of the decline came from CPI where volumes were lower in Europe and North America. Excluding foreign exchange, sales were down 5% in the segments.
Profits and margins were down in the segment primarily as a result of lower volumes at GGB and CPI and continued restructuring expense at CPI. The segment restructuring expense in the quarter was $1.1 million all at CPI.
In the third quarter last year, restructuring was $900,000 with most of the expense at GGB. Excluding restructuring expenses from the third quarter of both years, segment margins were 4.8% in 2013 compared to 5% in 2012.
At GGB, sales were flat with the third quarter of 2012 as better pricing offset the effect of lower volumes mainly in North America. Excluding restructuring from GGB segment profits in the third quarter of 2012, margins were about the same this year as last.
Sales were down at CPI as I mentioned because of lower volumes in North America and Europe. Even though CPI benefited from price increases, lower material cost and lower SG&A expense, the benefit didn’t offset the effect of lower volumes and higher restructuring cost and CPI reported a loss in the quarter.
I will look at the results of the engine products and services segment will complete our review of the segment's performance. As we noted earlier, sales in the segment were down 34% or $18 million.
Lower engine revenues accounted for portion of the decline. Last year in the third quarter the segment reported about $6 million in new engine revenue under completed contract accounting.
There were no completed contract revenues in the third quarter of this year and mass production from the redesign of the manufacturing floor reduced percentage of completion revenue by about $2 million in this year's third quarter. The segment also reported almost $10 million less in parts and service sales as a result of sequestration and the timing of engine maintenance schedules.
The drop in parts and service sales which are much more profitable than engine sales had a significant effect on profits and margins in the engine products and services segment. Profits were down about $8 million and profit margins declined to 6.6%.
FME backlog was $137 million at the end of September compared to $149 million at the end of June. As Steve mentioned, the team at FME is working aggressively to penetrate new engine markets as we anticipated decline in demand from navy ship building projects in the coming years.
Reported GAAP net income of $5.6 million or $0.23 a share for the third quarter. This compared the GAAP net income of $11.3 million or $0.53 a share in the third quarter of last year.
Our effective tax rate in the third quarter was 22.2%. The tax rate shifted down compared to the third quarter of last year as a higher portion of our pre-tax income came outside the United States and jurisdictions where tax rates are lower.
Based on our current expectations, our full year tax rates should be in the range of around 30%. Our adjusted EPS in the third quarter was $0.53 compared to $0.81 in the third quarter of last year.
After tax adjustments that increased at $0.23 of 2013 GAAP earnings to $0.53, a $0.03 of restructuring expense primarily at CPI, $0.21 of interest to GST, $0.03 for other non operating items and $00.3 to adjusted tax accrual. I shall also point out to you that our diluted share count was about 3 million shares or 14% higher in the third quarter of this year than it was in the third quarter of last year.
The count increased because of the accounting for a convertible debentures as their share price improved. We have an option in a warrant hedge designed to reduce the potential delusion to the holders of our common stock from conversion of the debentures.
Under GAAP accounting our diluted share count at the end of the third quarter included about 2 million shares that would be required to satisfy the conversion of the debentures plus about a million shares that we would be required to provide to a financial institution as part of the hedge. However, GAAP accounting does not allow us to record the benefit of the hedge which will enable us to call the shares required for conversion and would reduce the net delusion to about 1 million shares.
Our free cash flow was lower by about $20 million in the first nine months of 2013 than in the first nine months of last year. EBITDA was lower because of the decrease in our operating income.
Compensation related payments increased compared to last year and we made a larger pension contribution this year. Lower working capital need helped to offset some of these increases.
To the first nine months of 2013, capital expending was about the same as last year, but if we complete all our plans for investment in 2013, CapEx could exceed $40 million. We ended the first nine months of the year with a cash balance of about $75 million up about $21 million from our balance sheet at the end of 2012.
We continue to record our convertible debentures as the current liability because the gains we have seen in our share price triggered the conversion rates to the debentures. However, we have no indication that any holder is likely to convert prior to the maturity date in October 2015.
Now I will turn the call back over to Steve for outlook.
Stephen E. Macadam
Okay, thanks Alex. I’ll closely to look at what we expect in the fourth quarter and then we will open the line for your questions.
At this point in the quarter certain of our industrial markets are beginning to show signs of improvement. Year prepares to be gaining strength although activity is still at relatively low levels and we typically see no softness in the fourth quarter at GGB where we have our largest European exposure.
As I mentioned in my opening comments, our semiconductor bookings have improved asset booking to another high performance sealing markets. Demand in our heavy-duty truck market is stable although coming more from original equipment markets than the aftermarket.
Offsetting these positives, demand in our compressor products markets are softer than a year ago and we expect demand for aftermarket parts and service from our U.S. government markets to remain soft in the fourth quarter.
Under those conditions we expect sales in the fourth quarter of 2013 to be about the same as they were in the fourth quarter of 2012, but a higher proportion of the demand is expected to come from original equipments markets where our profit margins are lower. In addition we expect to see more restructuring cost in CPI.
As a result our segment profits and profit margins may decline from levels we achieved last year in the fourth quarter. Before I close, I will reiterate our commitment to leveraging the strength of our brands, exploring the opportunities provided by new products and new markets that we enter through acquisition and internal development, maintaining our cost discipline, our pricing practices and executing the enterprise excellent initiatives that support our continued success.
I am confident this commitment prepares us to operate in challenging markets and prepares us to capitalize on opportunities as our markets improve. Now we will open the line to your questions.
Operator
(Operator Instructions) Your first question comes from the line of Ian Zaffino from Oppenheimer, your line is open.
Ian Zaffino – Oppenheimer
Hi guys, thank you very much. Just two questions here, you spoke about the GGB order book being up, how much are we talking about being up, over what period, has any data changed recently in the past couple of days or weeks or if you could kind of elaborate a little bit more that would be great?
Thanks.
Stephen E. Macadam
Yes, Ian, I don’t know if I would comment on last few days or weeks. But for – I’m comparing over a year ago so we track the pace of order intake year-over-year on a weekly and monthly basis and I would say through July was certainly negative from last year and beginning maybe in August, September timeframe it started to turn positive versus last year and that has continued.
So we’re seeing more orders in GGB and that’s continued even up until the current time.
Ian Zaffino – Oppenheimer
Okay.
Stephen E. Macadam
Do you want to add anything to that Alex?
Alexander W. Pease
I was just going to say and if you look at the trend for most of the year it’s been fairly flat year-over-year, in August actually the orders were up 35% so that was fairly substantial jump in that month obviously remains to be seen at that level sustained. The other thing that I would point out is if you look at the German automotive market, across Europe the new registrations are still pretty flat, but if you look at the German Automotive market which is where we play pretty heavily, sales are actually up, I think the number is something like 6% predominantly for the export market, so both of those are some pretty indicators for us.
Ian Zaffino – Oppenheimer
Right. So it’s much more about the export market in German than it is about the domestic market per say?
Stephen E. Macadam
Yes, I think that’s right. I mean, I’ll actually start with the export of cars -- are consumed Europe.
Ian Zaffino – Oppenheimer
Okay. And then, the other question would be on the FME declines, how much of that is let’s just say baseline demand declines versus any type of maybe the stocking or burning off of spare parts are afforded before kind of January 1 or if you could --?
Stephen E. Macadam
Yes, let me give you some color on that this is obviously a big deal and we don’t have visibility on what the stocking levels are, but let me see if I can give you a little bit more detail on what time. So we sell spare parts and service -- aftermarket parts and service from FME in three segments, commercial, nuclear we kind of separate and the government which is basically the navy.
So first let me handle the easy one. While commercial has been actually up because we’ve been emphasizing that a lot, but that’s the smallest portion by pretty wide margin, the largest portion is the government.
But in nuclear, we’ve actually had difficult situation only on a comp basis, because this year we anticipate to sell maybe 20% then we did last year of aftermarket parts into the nuclear. But we’re little bit under the three year rolling average in nuclear but last year it was a stellar year for the year.
So last year was a record year for us, we sold more than we would ever – sold in any given year. That’s just normal variability, so in nuclear side, we have – we’re working against the difficult comp.
But then, the big one which is the navy is really driven by preventative maintenance schedules for navy ships. And of course, our engines are on every navy ship right, so how it affects our demand is, are the ships scheduled for preventative maintenance they call it avails for short of availability.
So when the ship comes in for some level of preventative maintenance, right. If that ship has our engines there is work that are done on that engines.
Now there is three types of these preventative maintenance projects if you will, minor, major and then big midlife re-dos that sometimes take a year or more with the ship in port and of course that’s major work is done, is done on the engine. So just to give you a sense, in 2012 we did – the engines on ships that were worked on in these things, there were 30 engines affected in minor preventative maintenance efforts, there were 40 in major and there were 20 of these midlife re-dos and obviously the midlife ones are several times larger revenue for us and even a major, and the majors we use like about 2x of minor.
This year we did about the same number of minors, half the number of majors and none of the midlife re-dos and that was just per kind of the ships that were scheduled to be worked on and where our engines are. So next year, we expect that to be back more to normal, last year was pretty good year relative the average, this year was really bad year compared to the average, next year will be more about at the average even when you look at that mix of minor, major and these midlife.
So we knew that was going to affect us, but it was kind of like the sequestration effort compounded that effect, so not only did we see the broad based reduction from sequestration but these two things are related. So we do expect the effect of sequestration to continue, but I would say we’ve had the total reduction in annualized government parts and service has been roughly 20% and we would attribute probably two-thirds to three quarters of that to this avail schedule and somewhere between 25% and 30% are to be sequestration.
Is that helpful?
Ian Zaffino – Oppenheimer
Yes that’s actually really helpful, I appreciate that. Thanks a lot guys.
Stephen E. Macadam
All right.
Ian Zaffino – Oppenheimer
Take care.
Operator
Your next question comes from the line of Todd Vencil from Stern Agee, your line is open.
Todd Vencil – Stern Agee
Thanks, good morning, guys.
Stephen E. Macadam
Hi, Todd.
Todd Vencil – Stern Agee
Staying with FME for a second Alex, you mentioned a couple of things that I didn’t completely get down and see, but that was a really breakout of the sequestration versus the avail issue so that’s helpful. First of all, well, Alex, can you go through, you mentioned in the impact on the percentage completion from factory rearrangement or something, can you go through that again?
Stephen E. Macadam
Let me take that, you can tell the impact. But what we did, the shop was little soft with work anyway, Todd.
So what we did and this is in the assembly shop, we changed the manufacturing floor configuration so that the flow for how we build engines is different to make is much more efficient for how we assemble engines and that had the – basically that had the shop kind of offline for a couple of weeks while we moved because it’s pretty big, I mean, it’s a big shop obviously we’re handling these big engines and they kind of go from stand to stand depending on what steps in the assembly process are happening. So we basically lost – we deferred some production time and we still meet the schedules and so forth, but we spent a couple of weeks doing that.
We’re preparing to doing that work and that took out or really moved a couple of million bucks of revenue out of the quarter. Okay?
Todd Vencil – Stern Agee
Got it, that’s helpful. And was there – how should we think about the profit impacts associated with that couple of million dollars of revenue?
Alexander W. Pease
Well, let me just go through what I mentioned in the script, Todd. So basically, as Steve was going through, we had this loss production from the redesign of the manufacturing floor and that impacted about $2 million of revenue, our typical engine margins is in kind of a 5% to 8% range.
Last year in the third quarter we had $6 million of engine revenue under the completed contract, this year we had no engine revenue of completed contract. Again if you use a proxy of call it 5% to 8% operating margin on a new engine that probably gives you about the margin impact.
Does that help or do you want me to give you some –
Todd Vencil – Stern Agee
No, that’s really helpful. And that 5% to 8% is that operating or EBITDA?
Alexander W. Pease
Generally I would call that an operating margin. It’s the ballpark because it very much depends – this engine that Steve mentioned, the $6 million engine at the hospital is quite a bit higher margin than that because it is much – it's got a lot more bells and whistles on it, we have margins that are lower margin than that because they’re much more plain vanilla, but I give you that as sort of a ballpark.
Stephen E. Macadam
Yes, one thing Todd, that I know you guys will talk more about this probably in the first quarter call as we talk about 2014, but when we shifted to percentage in completion, you guys will remember we said any program this is not an engine, we said any program that is already on completed contract we are going to finish that program out and a program is a particular shipped program, right? And then, any new program we start we are going to do it as a percent completion program and so what that did is that is going to cause a couple of years of can't really difficult period-over-period comparisons because of the number of completed contracts versus percent completion.
So this year, for the full year, total percent completion will be 90% of our total new engine revenue plus or minus. Next year is actually going to swing back because we are going to be shipping, we are going to be finishing some engines that have been our programs that are multi-year programs, so next year is more likely to be back to about 50:50.
So even though this year we are shipping the total of 13 engines, next year we will ship 22 engines little under half of those will be on percent completion – sorry, little more than half on percent completion, little less than half on the old completed contract method. So we will give you more clarification on that as we get into the next year.
But the total if you – I know you got stripped away all that complexity, the total new engine revenue for next year is going to be probably about what it was for this year. Okay.
Todd Vencil – Stern Agee
Got it.
Stephen E. Macadam
The mix will change quite a bit. I am giving you the estimate for full year this year versus next year when I am making that comparison.
Todd Vencil – Stern Agee
Got it. Now that makes a lot of sense, I appreciate that.
Stephen E. Macadam
Yes. Now that assumes that -- what I just gave you also assumes that none of these new commercial efforts that we have launched actually get over the goal and so it's a pretty conservative number, we are actually pretty optimistic that we are going to get more commercial engine.
So that’s just kind of what's in the backlog today.
Todd Vencil – Stern Agee
Got it. Looking at engineered products, we were moving so nicely towards Alex’s double digit operating margins there.
We took a step back I guess in the quarter. Was that again, I mean, if I am hearing you right, it sounds like that was just sort of mostly driven by weaker business at CPI and A) am I right and B) how are you thinking about margins of that business from here?
Alexander W. Pease
Yes, I mean it was all due to CPI, look GGB continues to perform very well as a business despite of very, very weak market. I mean this week, it's hard to estimate, it's hard to understand, I mean, I know you guys probably cover a lot of European activity but if you live in the U.S.
and after my time, all my time in Europe, it's hard to understand how they have been really, really struggling through this slow demand in Europe and very, very slow recovery. If you look at the automotive registration numbers, I don’t know where they’re going to come out for the year on average, but I mean they are going to be in some of those countries, numbers that you haven’t seen for several decades, right.
So it's a dismal, it has been, the year has been a dismal demand environment for our European business for GGB and if as you know for GGB it's two-thirds of the business is Europe. So we are very optimistic now that we have seen some improvement in that.
It hasn’t been a dramatic step change, I mean, I kind wish out to and share the August number because I think that was a bit of an anomaly, we are definitely seeing an improvement trend but I don’t – I would sign up for 30%, 35% ongoing trend. But I would – I think, I would sign up for a solid 10% to 20% improving order rate that we will have going forward.
I mean, if you were asking that’s just a prediction that’s not a forecast. But I am pretty optimistic about it and as you guys know as we have said all along, GGB just leverages so nicely.
So I would not – I think we will be in double digit margins in GGB for next year. I feel pretty good about that if we continue to see the improvement that we have seen in the European markets.
Now CPI is tough to say, I mean, Ken has now been in place since August. We have made a number of people changes in that business.
We have got another facility to consolidate here in the fourth quarter in Western Canada. We have got, he is doing the complete review of things and we are going to try to get – we are going to try to get it so we start into next year with kind of -- so we get see many Christmas as much as this restructuring and big changes behind this as we can this year.
So you should not anticipate a good fourth quarter for CPI. They will lose money.
It's never a strong quarter seasonally because it's cold in a lot of these regions and so we are trying to get ourselves positioned to be on a pretty steep improvement curve next year for CPI. And at this point Todd, I don’t have enough visibility to give you a good sense of what our margin expectations are, but I can commit to doing that in the first quarter call, the call we do the first next year.
We will talk about where we see because by that time Ken will have been in place long enough, so obviously he will have a plan for 2014, will know if we have been successful in getting the restructuring behind this and we will give you guys as much clarity as we have about engineered products margins. I know that that’s been a frustrating aspect of our company for investors industry to understand, it's been frustrating for us and that’s basically what I will tell you at this point.
Todd Vencil – Stern Agee
That’s helpful. Thanks a lot.
Stephen E. Macadam
Yes.
Operator
Your next question comes from line of Joe Mondale from Sidoti & Co. Your line is open.
Joe Mondale – Sidoti & Company
Good morning, guys. Thanks a lot for all the information, everything has been very helpful on the call today.
I just had a couple of questions. One, in terms of the FME, I was wondering if you guys have been seeing anything in terms of nuclear parts and services, any improvement related to some of that Fukushima related regulation or any of that such and should we expect that in 2014?
Stephen E. Macadam
Well, we haven’t seen a huge impact on our domestic parts and service business for nuclear, it's kind of –this year has been cranking along about like average. We sold, as I said last year was a record year that’s in the U.S.
Now there isn’t – I mentioned in my part of the script Joe, the French nuclear system is run by EDF, as you probably are aware they have, I think 56 or 58 nuclear power stations in France. It's still the predominant source of power generation in France.
It's a huge share of their energy mix. And they continue to be committed to and in fact, you may have seen recently it was announced that EDF was going to build and operate the new reactor in the U.K.
It was announced a few weeks ago. Anyway, EDF has decided to add basically backup power in each one of those nuclear stations.
And so, we are partnered with Westinghouse France and we are bidding on and have been for, it's been a long selection process with a number of consortium companies. Westinghouse France is our partner because it obviously includes a generator set and controls and so forth.
So we would supply the engine, they would supply the installation, the generator, the control and they would be essentially the integrator. And we expect the decision before the end of the year on whether we win a portion of that work.
It could, I mean, we are doing pretty well in terms of hanging in there. I hate to predict it because it's one of these binary things where we are either going to get decent chunk and several engines or we are going to get nothing.
But we will know by the end of the year. We also have – so that’s the nuclear question but that’s clearly driven, all that decision was driven by the Japan disaster and their decision to add additional backup power to each one of these sites.
Now the U.S. has not, NRC has not decided to do that.
They also have not decided to not do that. There is a lot of activity at the NRC looking at what should happen to nuclear safety in the U.S.
So that’s how I am going to answer that question.
Joe Mondale – Sidoti & Company
Okay, great, thanks. And just overall sort of clarity on the segment sort of what your outlook is, it sounds like the aftermarket parts and services actually will be potentially up next year and engine sort of flat, so are you actually thinking about next year is actually being somewhat of a better year and sort of the effects of sort of a sequestration and such more taking at toll in 2015 and beyond?
Stephen E. Macadam
Well, a lot of it will be obviously dependent on – and some of these things I’ve mentioned or not. We are -- if we don’t, and we just go in with what we know we have now, and the recovery to some extent of the services and so forth.
We expect a year to be slightly better than this year I would say and margins to be a little bit better than where we are going to end this year. Now you may have noticed and if you haven’t noticed, I would encourage you to look at it, FME announced a few days ago a partnership deal that we signed with a company called Achates Power which is a startup company that is technology company that is really got an incredible amount of intellectual property and done a lot of work to improve the fuel efficiency, power ratio, emission performance of opposed-piston engines.
It's actually quite exciting. We are the only guys that make an actual opposed-piston engine in our size range.
And of course, Achates is mostly focused on and they’re partnered with a number of heavy-duty truck companies because they have been able to demonstrate in their facility on bench scale engines improvement in fuel performance, fuel efficiency, on the order magnitude of 15% to 20% with better emission performance than the current four stroke diesel engines and to be able to make them cheaper because they are fewer parts and so forth. So this is the big deal for us and we will be spending some cost next year, this – we have already started with this and we have been working with them for a number of months.
We have an agreement with them which gives us exclusive rights to this technology for OPs in our size range which is obviously much larger than the truck engine. And we will have some cost associated with R&D of that for next year but I can, I mean I don’t want to get you guys too excited because I am really excited about this.
It is a multi-year effort because it would take us a couple of years to get the actual technology developed and incorporated into our engine, but it could be a game changer for us in terms of it better from a fuel efficiency and emission standpoint and cost standpoint, then comparable engines in our size range and we could be in the market with something like that in few years. So we are pretty excited about it and I think we announced, it was yesterday or the day before Don,
Don Washington
Two days ago.
Stephen E. Macadam
Yes.
Joe Mondale – Sidoti & Company
Okay. Thank you and then just lastly I want to finish with CPI.
I was just wondering if you could actually provide a little more detail or just update us on the actual restructuring efforts that you are making there and also I thought North America refining was a market in that business that’s really been struggling, but it seems like there could be signs that market could be improving down the line. Just wondered if you could comment on that?
Stephen E. Macadam
Well, the restructuring activities have been really two. One has been facility consolidation to get our cost and to reduce our cost and become more efficient in how we operate.
And second has been in headcount changes for a number of reasons. And so those are really the two components and that’s what we saw in the third quarter and we will see again in the fourth quarter.
Joe Mondale – Sidoti & Company
Okay.
Stephen E. Macadam
We also have -- we are also reviewing some of the inventory that we had in place in Western Canada of kind of sparse program that we’ve run and that maybe included in some of our restructuring in Q4. We’ve got a team that’s reviewing kind of a quality of that, it’s a sparse program where we would take equipment out of the field and refurbish it, replace it, refurbish the old and then hold the old until it’s needed again and obviously with the market being much slower that the pace it which that moves in and out is also reduced.
So we are reviewing that and will have more detail on that, we are going to get that done by the end of the year. So those are the components of the restructuring job.
Your other question, the other part of your question --
Joe Mondale – Sidoti & Company
Oh yes, I was just wondering on, I remember last quarter I think Alex was referring to North America refining not being as strong as hope there we just sort of --
Alexander W. Pease
Yes, I think it’s kind of where we’ve seen it obviously, we are hopeful that in the turnaround season we typically see as usually in Q2 and Q3 which drives a lot of this type of work.
Stephen E. Macadam
Joe, I wouldn’t change my comments materially from what I made last quarter where for the CPI business that refining segment continues to be weak along with the natural gas.
Joe Mondale – Sidoti & Company
Okay. All right.
Thank you.
Operator
Your next question comes from the line of Gary Farber from C.L. King, your line is open.
Gary Farber – C.L. King
Yes, good morning. Just couple of questions would you speak about operating income being down year-over-year does that include charges associated with CPI?
Stephen E. Macadam
Yes, it would. It would include the charges with CPI when we give you the adjusted EPS numbers, we would back out, I think it was three pennies of restructuring.
Gary Farber – C.L. King
Can you give a sense of this one how bigger or smaller will be?
Stephen E. Macadam
In Q4?
Gary Farber – C.L. King
Yes.
Stephen E. Macadam
We are not exactly sure Gary, took us this inventory thing side, I really not make an estimate.
Gary Farber – C.L. King
Okay. Another question was, I mean, obviously lot of things going on at the company, just the acquisition market, is that even on the play right now?
And if it is or it isn’t just your sense of the market?
Stephen E. Macadam
Well, we continue to look at opportunities to strengthen each of our businesses and each, not each, not everyone of them, but in Stemco we’re looking at the couple of opportunities, in Technetics we’ve got a couple of opportunities that we’re looking at, so I would say our strategy there has been consistent as we said, going into the here we probably we would take a bit of pause this year, want to digest where we’ve got and try to get the safety or feed behind this, so we could take a clean look at where we stand. We are still hopeful but that that would be the case, but we have continue to cultivate these relationships along the way, so though it wouldn’t – we did one small deal earlier, we are probably going to get, I don’t know if we’ve got another small distributor in Asia for Garlock that we may get done by the end of the year or early next year and next year we should be -- we should be back at more the pace that you saw over the past four years excluding this year.
Gary Farber – C.L. King
Right and just for modeling purposes, share count should be consistent just going forward with, the share count reported this quarter and just also, how do you think about the tax rate going forward?
Stephen E. Macadam
It depends Gary, the share count is driven by the share price related to the convertibles, so right now diluted shares are at $23 million, but you shared -- I’m sorry 23 million shares, but you should basically back out 2 million shares from that number because the impact of the hedge that we have in place, and I’m sure you essentially get double dilution related to the hedge and I can talk you to the mechanics of how that works, but obviously as the share price goes up, the shares outstanding increases as long as we have the convertibles on the books. In terms of the tax rate for the full year we are anticipating 30%, but that would be low, that’ll be sort of harmless driven by one time effects that went into place.
This year, well they went into place retroactive to last year what we’ve booked in this year and more normal rate I think is in the 35% range.
Gary Farber – C.L. King
Okay and then just one last one, you made some comments in the beginning regarding the ACRP court decision, if it’s goes that route will take a while and it sort of sound like there was appeals process beyond that, is that the case? And can you sort of talk about what the process is even if the court did end up deciding this?
Stephen E. Macadam
Well Gary, Rick happens to be in the room, Rick is going to be leading that effort as you know, so I’m going to let Rick address that question.
Unidentified Company Representative
Hi, Gary. Obviously dependent on the judge’s decision either the company or the committee can appeal that decision, so the positions taken in the estimation trial by the parties were as you know dramatically different, so depending on where the judge comes down as soon as we get to that the party that doesn’t like the decision has lots of grounds for appeal, they were throughout the case and we believe our appellate rights are very, very strong, so it’s hard to predict whether there will be an appeal and what that appeal will look like until we know what the judge is going to do, but an appeal if party is not pleased and the appeal is almost a foregone conclusion.
So while we have had an estimation decision at some point that will leave us a long way toward resolution, there will be appeals that we will follow that just opinion on how people feel about that decision.
Gary Farber – C.L. King
Right, okay, thanks.
Stephen E. Macadam
Yes.
Operator
And your final question comes from line of Jeff Hammond from KeyBanc Capital Market, your line is open.
James – KeyBanc Capital Market
Hi guys this is James filling in for Jeff, how are you doing?
Stephen E. Macadam
Good.
Stephen E. Macadam
Good.
James – KeyBanc Capital Market
Can you just elaborate on what’s driving GST strength and also, how you might be outpacing recent trends in the truck market, given that heavy-duty bid schedules in North America have come down recently? Well, you guys are still crediting OEM activities, show gains and thought, any color would be helpful?
Thank you.
Stephen E. Macadam
Yes, that’s a great question. Let me handle in reverse order, so and Stemco was no question that we have had share gains because what we’ve done, if you study the history of Stemco you know that our core products are the wheel components of oil fields and Barrington hub caps so forth and over the past five years we have systematically added other product lines to the Stemco portfolio of products including some suspension components king pin and spring pins, bushing components and breaking systems we’ve added friction break shoes, not break drums through motorwheel, automatic break adjusters all those are new products and we’ve gained share from the position when bought or partnered with a company to have those products.
We’ve been consistently gaining share every year as we’ve incorporated those products into our go-to market strategy, that will continue and so even though we’ve seen a relatively weak aftermarket truck environment, we’ve been able to continue to grow sales pretty substantially. And what we just pointed out before as we continue to believe that aftermarket demand which is driven by ton miles and truck loading and so forth will be about where we have seen in the past which has been fairly weak from the market standpoint and that so that the mix is likely to be little bit more on the OE side than the aftermarket side.
We play predominately in the aftermarket. But yes, we have been gaining share pretty consistently in those product lines.
On the Garlock side, the business is doing well. We have – we are the leader in sealing signs globally.
We have had pretty significant success in growing our presence in other markets moving some of our technology and some of our products that have been successful in one region to other region. And I believe we are continuing to chip away at market share also, even though the sales have been slightly better, the costs this year have been very, very good.
We have managed costs effectively in that business. So margins have been better, even better than gains we have had.
So I feel very good about Garlock; both the deconsolidated and consolidated portions.
James – KeyBanc Capital Market
Got it. That’s it, thank you.
Stephen E. Macadam
Yes.
Operator
And now I will turn the call back to Don Washington for closing remarks.
Don Washington
I appreciate all of you who have dialed in today. Another few of you who are still in the queue for the Q&A I apologize that we have to ring off.
Both Steve and Alex are on obligations that delay, however if you would like to give me a call later today. You can reach me at 704-731-1527 and I will be glad to help you as I can.
Anyway thank you all for dialing in today and we look forward to talking to you soon.
Operator
Ladies and gentlemen this concludes today's conference call and you may now disconnect.