Chris O’Neal - Vice President, Strategy, Corporate Development and Investor Relations Steve MacAdam - President and Chief Executive Officer Milt Childress - Senior Vice President and Chief Financial Officer.

Jeff Hammond - KeyBanc Capital Markets Ian Zaffino - Oppenheimer Justin Bergner - Gabelli & Company.

Good morning. My name is Virgil and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industries’ 2016 Fourth Quarter and Year End Results Conference Call. [Operator Instructions] Thank you.

Chris O’Neal, Vice President, Strategy and Corporate Development and Investor Relations, you may begin your conference..

Thank you, Virgil. Good morning and welcome to EnPro Industries’ quarterly earnings conference call. I remind you that our call is also being webcast at enproindustries.com where you can find the slides that accompany the call.

Steve MacAdam, our President and CEO and Milt Childress, our Senior Vice President and CFO will begin their review of our fourth quarter performance and outlook in a moment.

But before we begin our discussion, I will point out that you may hear statements during the course of this call that express a belief, expectation or intention as well as those that are not historical 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 our Form 10-K for the year ended December 31, 2015 and our Form 10-Q for the quarter ended March 31, 2016.

We do not undertake to update any forward-looking statements made on this conference call to reflect any change in management’s expectations or any change in assumptions or circumstances on which such statements are based.

Our earnings release and conference call presentation materials contain additional disclosures regarding non-GAAP financial information, collective references to EnPro and our subsidiaries, the deconsolidation of Garlock Sealing Technologies, or GST, and pro forma illustrative financial information presented as if GST were reconsolidated for financial reporting purposes.

These disclosures are important to understanding comments we will make on today’s call and we urge you to read them carefully.

Just as we did in the last few quarters, we are providing pro forma segment sales and pro forma segment profit information in conjunction with the ACRP settlement agreement announced on March 17, 2016 to provide investors with additional pro forma information illustrating each segment’s results as if GST had been reconsolidated with EnPro based on confirmation and consummation of the joint plan reorganization as described in our earnings release.

Given where we are in the bankruptcy process and due to requests from investors for this type of information, we believe this disclosure of pro forma operating results is instructed to investors as it reflects the performance of all of our subsidiaries.

Until the ACRP process is completed, however, our published GAAP financials in Forms 10-Q and 10-K will continue to reflect GST on a deconsolidated basis. Finally, I want to announce that EnPro Industries will be hosting an Investor Day on March 28 at Le Parker Meridien Hotel in New York City.

The objectives of this meeting are to, one, provide a compressive overview of EnPro in each of our operating divisions and two, share our strategy to create shareholder value as we plan for emergence from the ACRP. We believe that the day will be informative for anyone that wants to understand our business and strategy better.

The presentation will start at 9 o’clock a.m. and will also be webcast at enproindustries.com. I hope you will join us. And now, I will turn the call over to Steve..

Thanks, Chris. Good morning, everyone. I continue to be pleased with our team’s effort to deliver the best possible performance in market conditions that remain very challenging.

While the economic climate has required us to focus on cost reduction and restructuring activities over the past 2 years, we have also maintained a clear focus on investing in foundational capabilities that are important to sustaining future success.

We have accelerated the pace of innovation in our company, upgraded our facilities, developed our talent base, improved our productivity, built our commercial capabilities, and upgraded several of our major IT systems. Our goal is to build the great company that delivers value for our investors throughout the economic cycle.

And I am confident that we will see substantial benefits as our primary markets stabilize and ultimately recover.

For the quarter, despite our successful efforts to reduce cost, restructure or exit underperforming units, gain supply chain savings and achieve production efficiencies, our total pro forma adjusted EBITDA declined by 21% from the fourth quarter of last year on a pro forma sales decline of 12%.

The quarterly sales decline resulted from lower volumes across nearly all the markets we serve and was negatively affected by 4 fewer business days compared to a year ago due to year-over-year differences in our accounting quarters.

The lower EBITDA, compared to a year ago, was the result of several factors, including the lower sales, a sizable charge for Power Systems EDF contract that was primarily currency-related and overall company unfavorable currency translation.

As shown on Slide 6, year-over-year difference in EDF charges that reduced number of business days currency translation, had a combined negative effect on quarterly pro forma adjusted EBITDA of approximately $6 million, which equates to over 60% of the year-over-year quarterly decline.

For the year, pro forma adjusted EBITDA was $185.6 million compared to $199.5 million in 2015.

As illustrated by the chart on the right side of Slide 6, our performance for the year was in line with guidance provided during our third quarter earnings call, when we communicated that we expected pro forma adjusted EBITDA to be at the lower end of a flat to low single-digit performance decline compared to 2015, excluding the cost associated with the AVL lawsuit and any charges in the fourth quarter related to EDF.

In the fourth quarter, customer demand in many markets that we serve continued to be weak. With the notable exception of food and pharma and semiconductor markets, many of the markets that we serve experienced negative year-over-year trends and our sales closely tracked to that activity.

While commodity prices improved somewhat in the fourth quarter, we did not see an improvement in demand from our customers in the oil and gas, metals and mining and refining markets. Those customers continued to both limit capital spending and delay preventative maintenance in favor of maximizing equipment productivity.

In addition to markets that are tied to these basic materials industries, sales remain depressed in the gas turbine equipment, heavy-duty trucking and general industrial. Our nuclear volume was down year-over-year due to some large orders that we shipped in the fourth quarter of 2015 and aerospace demand was relatively flat.

Our sales in semiconductor and food and pharma remained quite strong in the fourth quarter. For the second quarter in a row, our semiconductor business set a record for the highest quarterly sales since we formed the Technetics Group in 2011. And the Rubber Fab acquisition in the food and pharma space continued to exceed our expectations.

The column on the far right of Slide 7 provides directional guidance on how we currently see our end markets performing in the first quarter of ‘17, which you can see is indicating a somewhat positive trend.

Before turning the call over to Milt to discuss our financial results in more detail, I want to highlight several positive developments during the quarter, including progress on the ACRP, additional program wins in the Power Systems segment, results of our cost reduction efforts and strong performance of Garlock’s Rubber Fab acquisition.

The ACRP remains on schedule. Since March 17, 2016, when we announced the comprehensive settlement, we have been working on the legal and administrative steps necessary for approval of the plan for reorganization, and I am pleased to announce that since the last earnings conference call, we achieved several significant milestones.

In November, we entered into a definitive agreement with the Worker’s Compensation boards for each of the 10 Canadian provinces or the provincial boards, to resolve claims that the provincial boards may have for recovering a portion of the amounts the board paid or will pay under asbestos injury recovery statutes in Canada.

The settlement provides for payment of $20 million on the fourth anniversary of the effective date of the joint plan. The settlement is consistent with our previously disclosed expectations and is discussed in detail in our press release dated November 18 of last year.

On December 16, we announced that GST and Coltec obtained the asbestos claim votes necessary for approval of the consensual joint plan reorganization. The solicitation process for this approval was completed on December 9 as detailed in our press release dated December 19. The 96% vote easily cleared the required approval level of 75%.

On January 30 of this year, we announced that the anticipated corporate restructuring of EnPro’s Coltec subsidiary was completed on December 31.

As planned, Coltec merged with and into a new indirect EnPro subsidiary, Holdco LLC and that company as the successor to Coltec, filed a prepackaged Chapter 11 bankruptcy petition with the Bankruptcy Court on January 30 of this year.

Holdco’s Chapter 11 proceedings will be administered jointly with GST’s pending Chapter 11 proceedings, again consistent with our previously communicated plan. The purpose of this step is to provide complete protection from asbestos claims for all of EnPro upon completion of the process.

As I close out my comments on the ACRP, I would like to reiterate that we are still on track to have the confirmation hearing during the week of May 15. And pending court approvals and absent appeal, expect to reconsolidate GST sometime in the third quarter of this year, which is consistent with the timeline that we have previously communicated.

I am pleased to announce that Fairbanks Morse continued its string of recent program wins in the fourth quarter. The company was selected for two significant projects with a combined value of $58 million. The first is for engines on the U.S. Navy’s LHA-8 Amphibious Assault Ship, which will be built by Huntington Ingalls Shipbuilding.

LHA-8 will be equipped with six engines for auxiliary propulsion and ship service and is scheduled for completion and delivery in 2023. Fairbanks Morse expects to ship the engines in 2019.

Power Systems also won a program with the South Florida Water Management District, to convert six opposed-piston engines from diesel to dual fuel, install new controls and complete compliance testing. This project will begin in 2017 this year and is expected to be completed in 2020.

The agency currently operates an additional 43 Fairbanks Morse opposed-piston engines that may provide opportunities for future conversions. These two programs cap off a very successful year of commercial activity for our Power Systems segment.

During the past 12 months, Power Systems expanded its presence in the power generation market and won 100% of the government marine programs on which it bid. Additionally, each program will provide aftermarket parts and service revenue for many years in the future.

As you might expect, I am very pleased with these accomplishments as they are a reflection of the compelling value proposition that Fairbanks Morse provides its customers. On our second quarter earnings call, we announced that as a result of soft conditions. We were moving forward to reduce costs across all segments and the corporate office.

Since the second quarter, our plan has been to reduce pro forma operating costs by approximately $20 million on an annualized pro forma basis, relative to the run rate of the first half of last year.

It’s important to note that our focus, as I alluded to earlier, has been to achieve this reduction without weakening the capabilities that we have developed over the past several years to support long-term value creation.

We completed the majority of the actions early in the third quarter, with only a small number of reductions in European locations remaining at the start of the fourth quarter. All the actions associated with the program were completed by the end of the fourth quarter.

Excluding restructuring costs, SG&A costs that were added with the Rubber Fab acquisition and the positive impact related to unusual items that affected SG&A, our pro forma SG&A was $6.3 million lower in the fourth quarter than it was in the same period last year.

The majority of these reductions have come from personnel related costs and purchased services, manufacturing footprint rationalization plus benefits from the exit of underperforming sites in both sealing products and engineered products that were all completed in the last 12 months.

Finally, in April, we completed the Rubber Fab acquisition to support Garlock’s growth strategy in the hygienics products market. You may recall that Rubber Fab is a leading supplier of critical process consumables for the pharmaceutical, bio-processing and food and beverage sectors.

The acquisition has added a number of innovative and differentiated products to Garlock’s hygienic products portfolio and provided enhanced distribution and customer access. We continued to be very pleased with the performance of this business as customer feedback has been favorable and the financial results have continued to exceed our expectations.

Rubber Fab grew sales approximately 11% in 2016 and exceeded our justification case for EBITDA during the period after closing. We are maintaining our focus on the hygienic market and are continuing to look for additional growth opportunities. Now, I will turn the call over to Milt..

Thank you, Steve. As discussed before, the pro forma segment results that I will discuss are prepared as if GST had been consolidated on the basis described in our earnings release.

As a reminder, most of the difference between consolidated and pro forma segment information is in sealing products, with only small differences in engineered products and power systems stemming from foreign operations of those segments included in GST foreign subsidiaries.

It’s important to note that the pro forma results do not represent a projection of the financials as of the expected future date of reconsolidation. Before I begin, I want to note the point that Steve made earlier about the accounting calendar. In the fourth quarter of 2016, we had four fewer business days compared to the fourth quarter of 2015.

We estimate this 6.2% decrease in the number of days to a quite roughly to $20 million of sales and at least $3 million in pro forma adjusted EBITDA. I will reference this factor in my comments, while reviewing our results, but will not quantify the impact by segment, given the imprecision of the estimate.

Our pro forma fourth quarter sales of $319.6 million were down 11.5% from the same period of 2015. Net of a small divesture, acquisitions contributed $4.1 million and foreign currency translation reduced sales by $3.1 million. Excluding the impact of these factors, pro forma sales for the quarter were 11.8% lower compared to a year ago.

The organic sales decline was driven primarily by continued weak demand that we are facing across many of our end markets.

A planned exit from unprofitable customers in the heavy duty trucking air springs product line, restructuring activities over the past in Engineered Products segment and the difference in the accounting quarters as mentioned previously. I will provide more color about the market in a moment, while reviewing quarterly results by segment.

Pro forma gross profit for the quarter of $106 million was 12% lower than in the fourth quarter of 2015 and pro forma gross profit margins were relatively flat despite the 11.5% decline in sales, down only 16 basis points year-over-year to 33.2%. Total pro forma SG&A declined in the fourth quarter of 2016 by $5.4 million to $83.2 million.

Excluding restructuring costs, acquired SG&A costs associated with the Rubber Fab acquisition and other unusual items in the quarter, pro forma SG&A was $6.3 million lower than the prior year. The decrease was driven by focused cost reductions and site exits.

Corporate expenses were $8.1 million in the fourth quarter and $8.7 million in the same period last year. Excluding restructuring cost of $2.2 million in the fourth quarter, corporate expenses were $5.9 million in the fourth quarter.

The year-over-year decrease was driven primarily by lower incentive compensation accruals and to a lesser extent, by savings in connection with the restructuring activities.

As Steve discussed earlier, in the fourth quarter, we completed all of the remaining actions related to the previously announced companywide reduction initiative, cost reduction initiative. As a reminder, this effort included reductions in both manufacturing costs and SG&A.

We estimate the annualized run rate of our pro forma operating costs in the second half of the year, exclusive of production volume differences, to be approximately $20 million lower compared to the run rate of the first half of 2016.

Excluding increases from acquisitions, our total headcount was 7% lower at the end of 2016, compared to the end of 2015 and 11% lower compared to the end of 2014. In connection with the cost reduction initiatives, we incurred $4.5 million of pro forma restructuring costs in the fourth quarter or a total of $14.1 million for the full year.

Pro forma adjusted net income, which adjusts pro forma net income for items, such as restructuring, legacy environmental reserves and tax effects associated with these items, all are shown in the reconciliation table in our earnings release was $11.5 million, down $6.5 million from a year ago.

Most of the year-over-year decrease was attributable to the continuation of the challenging market conditions that existed throughout much of 2016, year-over-year differences in results for power systems EDF contract that I will discuss later and the shorter quarter.

Pro forma sales in the Sealing Products segment were $204.7 million in the fourth quarter, down 8.3% over the fourth quarter of 2015.

Excluding the impact of the Rubber Fab acquisition, which contributed $4.6 million to pro forma sales and foreign exchange, which reduced pro forma sales by approximately $1.9 million, pro forma sales were down 9.5% in the fourth quarter.

Weak demand in nuclear, gas turbine equipment, heavy-duty trucking and general industrial and the shorter accounting quarter more than offset the strength in our semiconductor and food and pharma businesses. Additionally, we continued to experience weakness in refining, steel and mining.

For the second quarter in a row, semiconductor sales set a record for the highest sales of any quarter since the formation of Technetics Group in August 2011. Additionally, fourth quarter semiconductor orders were robust, marking second highest quarter for the division and leading a healthy semiconductor backlog heading into 2017.

Also during the fourth quarter, our Garlock business divested Franken Plastik, which was the small non-strategic business acquired as part of the PSI acquisition in 2011. Franken Plastik’s full year 2016 sales were approximately $7 million. Pro forma segment profit of $23.5 million was down 15.2% from the fourth quarter of last year.

Pro forma segment margins decreased to 11.5% from 12.4% during the same period a year ago. Excluding the impact of restructuring, the contribution from the Rubber Fab acquisition, foreign exchange and a zero – and a $700,000 contingent purchase price adjustment for the Fabrico acquisition, fourth quarter pro forma segment profit decreased 16.5%.

This decline was mainly driven by reduced volume related to market headwinds and the shorter calendar, partially offset by cost reductions. Pro forma segment SG&A costs were $48.5 million in the fourth quarter, compared to $48.8 million in the prior year.

Excluding SG&A costs associated with the Rubber Fab acquisition, restructuring costs and a $0.5 million positive net impact related to unusual items, pro forma segment SG&A costs were $1.7 million lower in the fourth quarter versus last year. The reductions were driven by a combination of restructuring and other focused cost reductions.

In the Engineered Products segment, fourth quarter pro forma sales of $63.9 million declined by 9% from the fourth quarter of 2015. The year-over-year sales decline is the result of planned site exits, completed during the past 12 months, weakness across most markets in the shorter calendar.

Despite the sales decline, pro forma segment profit of $2 million was up from negative $2.3 million in the fourth quarter of 2015, as a result of manufacturing efficiency gains, supply chain savings and other cost reductions related to the segments restructuring activities as discussed previously.

Pro forma segment margins were 3.1% in the fourth quarter versus a negative 3.3% in the prior year. Excluding the impact of restructuring costs and the effect of foreign exchange, fourth quarter pro forma segment profit increased $2.6 million from a year ago.

Pro forma segment SG&A costs in Engineered Products were $21.9 million in the fourth quarter compared to $25.3 million in the prior year. Excluding restructuring costs, segment SG&A costs were $1.9 million lower in the fourth quarter versus last year.

In the Power Systems segment, pro forma sales were $51.8 million, down 24.4% compared to the fourth quarter of 2015. The sales decline was largely due to lower aftermarket parts and service revenue and an engine shipment in 2015 accounted for, according to the completed contract accounting method, in addition to the effect of the shorter calendar.

Pro forma segment profit for the quarter was $1.5 million, down from $11.3 million from a year ago, primarily due to a weaker mix of aftermarket parts sales and a $5.9 million charge on the EDF contract related primarily to the strengthening of the U.S. dollar relative to the euro.

As a reminder, GAAP rules require that we evaluate the impact of the dollar to euro foreign exchange rates on the EDF contract each quarter, since we are in a loss position on the contract. Pro forma segment SG&A costs were $7.5 million in the fourth quarter, compared to $9.4 million in the prior year.

Excluding restructuring costs, segment SG&A costs were $1.8 million in the – lower in the fourth quarter versus 2015. In the fourth quarter, we repurchased approximately 70,000 shares for $3.9 million as part of the ongoing $50 million share repurchase program authorized by our Board of Directors in the fourth quarter of 2015.

Through the end of the fourth quarter of 2016, we had spent $35.7 million of the $50 million authorization. Additionally, we paid a $0.21 per share dividend in December. And yesterday, announced that we increased our dividend to $0.22 per share payable in March.

We remain committed to our strategy of creating shareholder value through earnings growth and a balanced approach to capital allocation.

As in previous quarters, we outlined on Slide 19, our pro forma net debt and leverage ratio, taking into account funding under the ACRP consensual agreement and reconsolidation and initial trust funding occurred at the end of the fourth quarter, our pro forma leverage ratio would have been approximately 2.4x EBITDA in contrast to the 5.0x leverage ratio indicated by our consolidated results.

As we pointed out last quarter, this pro forma leverage calculation does not include tax benefits of the planned funding that will be realized over time. As we provided during the last few quarters, we are including an update of our pro forma valuation relative to earnings.

As shown on Slide 20, our pro forma adjusted enterprise value to EBITDA multiple at the end of the fourth quarter was approximately 9.3 compared to a multiple of 13.7, indicated by our consolidated results. Now, I will turn the call back to Steve..

Thanks Milt. We will close with the discussion of the current market conditions and our outlook for 2017 and then take your questions. As we have discussed throughout our comments, demand in nearly all our markets remained soft in the fourth quarter, with semiconductor and food and pharma once again being notable exceptions.

Aside from those markets, the macroeconomic drivers that affect our business continued to suggest sluggish demand or a weak recovery over the next year.

While we are optimistic that tax reform and a less restrictive regulatory environment will eventually spur demand, we are concerned by the uncertainty of the timing and impact of such potential changes.

Given current microeconomic – macroeconomic forecasts, order patterns and customer feedback, we expect 2017 to be a year of low sales growth with adjusted EBITDA excluding future acquisitions, restructuring cost, the impact of changes driven by foreign exchange and any litigation or environmental charges, increasing from 2016 adjusted EBITDA of $185.6 million to 2017 adjusted EBITDA between $188 million and $193 million for the year.

I want to be clear that this guidance is based on demand levels we have been experiencing, not positive assumptions about demand improvement. We are managing costs consistent with a low growth economy, while we believe that – which we believe to be prudent given our experience over the last 2 years.

As we have described in the past, most of our businesses have relatively short order to shipment cycles, which, together with uncertainty related to policy reform, naturally limits our visibility of future demand and complicates our ability to forecast accurately.

Again, I want to emphasize that regulatory changes, market developments and company performance could cause our results to deviate either positively or negatively relative to this guidance.

While we are not providing guidance by segment, I do want to point out that 2017, we expect to recognize approximately $38 million of sales in the Power Systems segment at zero gross margins, in connection with the EDF and [indiscernible] contracts, exclusive of any future impact of foreign exchange on the EDF loss provision.

The [indiscernible] contract, which was signed in 2009, includes two engines recorded on the completed contract accounting method. Both of these engines are substantially complete and expected to ship in the first half of the year.

These two programs will result in margins for the year, being below the level of margins, normally expected for the segment.

I would like to close the call reiterating one more time that while we have acted to reduce cost in response to global economic conditions in our primary markets, we remain steadfast in maintaining a clear focus on investing in foundational capabilities that are important to sustaining future success.

I remained quite excited about the future of EnPro as we approach a new post-ACRP era, with a substantially leaner, more innovative and more globally competitive company.

Our goal is to build a great company that delivers value to our investors throughout the economic cycle and I am confident that we will see substantial benefits as our primary markets stabilize and ultimately recover. And now, I will turn – we will open the line up to your questions..

[Operator Instructions] Your first question comes from the line of Jeff Hammond from KeyBanc Capital Markets. Please go ahead..

Hey, good morning guys..

Good morning, Jeff..

Good morning, Jeff..

So just maybe just to flush out the guidance a little bit. One, in your 1Q to 1Q comments, I think on Slide 7, you pointed a number of errors that were down in 4Q kind of going to flat.

It just seemed like as we go into 1Q, I don’t know if that’s easy comps of if you are seeing some stabilization there? So maybe just talk about maybe what’s changing there? And then just on the guide, I guess, the 185, if I’m right, includes the $3 million charge in the FX losses, which I guess wouldn’t repeat.

So maybe just bridge where some of the negative year-on-year impact is in the guidance?.

Why don’t you take the numbers, and I can talk about the markets..

Yes. You want me to add. Yes, Jeff, you are right. We have got – in terms of your assumptions that the EDF charge for the quarter – not just for the quarter, but for all the year, is included in the calculation of adjusted EBITDA. And it is also net as you point out the $3 million charge related to ABL that we had earlier in the year.

So that calculation, your assumption on the calculation is correct. When you look at the changes year-over-year that we are seeing, once again, as Steve said in his outlook comments, it’s based on market conditions as we see them today.

We are hopeful that we will see more expansion as we approach the second half of the year, but based on our experience, we are managing in a prudent fashion. So our guidance is provided in that context. One of the year-over-year changes that we will expect is some increase in expenses year-over-year in conjunction with incentive comp.

I mentioned earlier in my comments on corporate expense, but it has repercussions throughout the entire company, not just at the corporate level, because we had significantly lower incentive comp expenses this year given our performance compared to the year ago. And so we would expect some normalization there.

So that will be a year-over-year increase. We also are closely monitoring our situation in Fairbanks. We are assuming it’s neutral from an FX standpoint so that there is no further charges at EDF.

But as Steve mentioned, it’s going to be another below average year in power systems, because of the $38 million in revenues that are essentially at zero margin. We are expecting to see some good solid earnings growth in all of our businesses, in all of our segments.

And then one other point on power systems that I will note is we are expecting in conjunction with the new engine development in power systems, for R&D spending – R&D spending to increase year-over-year. As you know, this is what we referred to as OP2.0 engine.

And as you know, over the past couple of years, our R&D expense has been higher than prior to recent years due to this effort. We are very excited about this opportunity, continue to be, but there is going to be a fairly significant ramp up in R&D spend in 2017 according to our current plans..

Jeff is that enough or would you....

No, that’s helpful.

Just on the moving pieces on savings and inflation, can you just so on the $20 million, can you just talk about what hit in ‘16 and what your incremental carryover is in ‘17? And then I don’t know if you can quantify, Milt, these number of items that are inflationary instead of comp, R&D, other?.

Yes. Well, we are convinced that the savings, the annualized savings are real and have taken hold. And the best gauge of it, Jeff, is to look at our overall headcount. I provided those statistics during my comments. So – and the headcount is a large part of what drives cost in our company.

So, we had if you look at total headcount I probably will repeat what I have said earlier, but we are down from – if you look at –go back to a base of 2014, so over the past couple of years when we had a lot of restructuring activity, our headcount is down about 11%. So, we have taken comps. We have resized a number of our businesses.

We have had some facility consolidations, a number of moves. And so those are very real and will continue to get the benefit of it. We will have, going into ‘17, cost increases associated with compensation, increases that we will have of a modest amount.

As I mentioned, if we hit our targets for the year, we will have higher incentive compensation for the year. So, all of those things go into the mix and these costs are spread throughout the company, it’s in SG&A and it’s in manufacturing costs.

So as we have actual experience for ‘17, we will focus on way to kind of show you that that’s still there, but it’s embedded – it’s embedded in our – the benefits that we have realized are embedded in our budgets for the new year..

Okay. Thanks, guys..

Your next question comes from the line of Ian Zaffino from Oppenheimer. Please go ahead..

Hi, thank you. Just kind of wanted to drill down on maybe some of your M&A pipeline kind of what you are seeing, your thoughts on deploying cash at this moment, maybe using the strong dollar though.

Internationally kind of give us a sense of what you are doing there and how that foot would return to cash to shareholders and then also maybe also couple that with basically this pending settlement on the asbestos GST side? Thanks..

Well, we are contingent. Ian, this is Steve, I will let Milt talk about the cash flow and financing implications of the ACRP trust funding and so forth in a second. So we will cover that, but we continue to be active in the M&A market. We still looked at a lot of deals in 2016 and actually came close on a couple.

And for various reasons, one attractive deal that we were essentially going down the pike on, we found some stuff in due diligence that made us nervous and the seller wasn’t really – wasn’t willing to adjust the price. We thought it was too risky, so we backed out of that. But the pipeline is reasonably robust.

I would be surprised if we don’t do a few deals in 2017. The pricing, I am sure you are aware the pricing for in the M&A world continues to be a little challenging to us. We are trying to be very, very disciplined, but we still have seen pockets of where we can get good deals at reasonable valuations.

So, that’s just kind of – we don’t have a concerted strategy to go international, we also don’t have a strategy to not – we kind of do it based on a more strategic view of the fit of the business into our current product portfolio.

We want to be able to reach out and enter other markets that have perhaps some wind in our back, like the example of Rubber Fab and food and pharma and so forth. But that’s what drives our M&A activity more so than just using a strong dollar, for instance. So well, I will come back.

I do want to make a point to everybody on the call of maybe this is a good time to do it, since I just introduced it myself, but we made a lot of progress in 2016. First of all, we are happy to turn the page on 2016 and move out into 2017.

But as I look back, I just reported on this to the Board, the last few days, I mean we have – we exited a lot of facilities and got – and relocated and rationalized a lot of facilities. We were fighting hard that the EDF situation and really trying to get that program lined out. So from an operational standpoint, it’s more consistent and so forth.

We got the first engine delivered and approved and it’s now in place in France. And so just was a lot of work by the team to get that leveled out.

We ran into some real challenges for the Rubber Fab integration with us, because as you know, we had to separate that from Continental and Vance we had to move systems, we had to build the new facility in [indiscernible] and relocate. So that look across the divisions, the six divisions that we have, all segments.

Each one of them did some real heavy lifting in the year, in the face of extremely challenging macros and market conditions. So we got a lot done and that’s all behind us. So I actually feel really good about the company going forward. Now Jeff would say what is that not reflected in your guidance.

And I think the reason is just quite frankly, we want to be conservative and we want to not count on a recovery in the market to kind of like we did last year, I mean we thought last year as we went into the year, the first half was going to be reasonably flat and then there was going to be a recovery in the second half of the year.

And what we saw was the opposite, the first half was okay and the second half got a hell of a lot weaker than the first half. So anyway, we just don’t want to be going into this year with that expectation. And so we are kind of sizing our guidance around demand more or less staying where w have seen it.

And we are not far enough in the year yet, we do obviously watch our order pace very quickly closely, we are six weeks into the year and it feels okay, because there are parts of the business that seem to be responding alright.

But we are not far off into the year to have any confidence that the arrows, if you will, on the right of Page 7 are actually going to happen. Those are not our predictions. Those are publicly available indicators of those. And so we just don’t want to build expectation that demand is coming. We want to build a plan that we know we can deliver on.

And if markets turn out to be better, then we will beat those numbers..

Alright, great and that’s very helpful. Thank you..

[Operator Instructions] Your next question comes from Justin Bergner from Gabelli & Company. Please go ahead..

Good morning and thank you for taking my questions..

How are you doing, Justin?.

Good. Thanks.

First question is on guidance, I think about the framework has won whereby you are sort of taking the fourth quarter sales and EBITDA, maybe adjusting those upwards for the lost impact from the fewer business days and sort of taking that forward into 2017 with some perhaps additional zero margin power system sales and then headwinds on the EBITDA line from R&D and incentive comp, is that a reasonable way to think about how you are constructing your 2017 guidance?.

Yes. Justin, that’s right. And qualitatively, that’s right. Now, our fourth quarter and first quarter are always our most challenging quarters.

And it’s frustrating for those watching from outside the company, it’s frustrating for us, because there is two things that really move our fourth quarter a lot, which have at least in the past few years, which is what happens in power systems, if there like – there was in 2015, a large completed contract shipment that was profitable for us.

And so when that doesn’t happen in the quarter, that’s a big deal. And there is a lot of – in the fourth quarter, power systems can swing a lot based on engine shipments, as well as just a normal volatility in aftermarket parts and service.

And the second thing is in Technetics Group, the nuclear shipments we have, which are our highest margins, some of our highest margin products, can move around a little a lot and the team is always working to get things out in the fourth quarter, which we were very successful at in 2015. And in 2016, we just didn’t have as many nuclear shipments.

And so that one factor tends to move Technetics a lot.

So when you take those two impacts out of our kind of seasonal pattern and you just look at the core within engineered and the core within sealing, our Q2 and Q3 are the strongest quarters versus Q1 and Q4 because of just normal weather reasons, automotive demand reasons, just on and on – trucking reasons, there is just not as much maintenance done in the winter months and so forth, right.

So all of those factors combined, so the only caveat I would say to your method is we never look at just the fourth quarter, we understand that just seasonally that’s low, but we did take, as you described, we did take kind of the pace and feel of that and essentially carried forward with the seasonal adjustments that we do just kind of naturally.

Let me say one more thing, because Chris handed me a noted that in my previous comments about how much work we did in 2016, I inadvertently referred to all the work we did on the air springs business, I inadvertently refer to that as Rubber Fab, I apologize.

Hopefully, those that track us know, I was referring – when I talked about extracting the business from Vance and Continental and the new facilities that we had to build in the new systems and so forth, that was all relative to air springs, which was an acquisition that we did in 2015, but most of the integration activity happened in 2016.

So I just wanted to clarify that in case anybody picked that up.

But Justin, let me go back to you, did that answer – did I answer your question?.

Yes. Thank you.

Just put one follow-up there would be, if EBITDA per quarter is going to go down from sort of $50 million to $47.5 million, I would assume from your earlier comments, that’s primarily incentive comp and R&D, but just wanted to check if there are other factors sort of mix, pricing or otherwise, in terms of that quarterly EBITDA run rate going down, as you get into ‘17?.

Yes. It’s a mix in a lot of things, Justin. As you might expect, we go through a fairly extensive bottoms up process of looking at our outlook for the year. And so it’s influenced by the number of initiatives that we have planned, it’s influenced by what we know about power systems and the engine backlog as we have discussed.

Obviously, it does adjust for incentive comp because at the beginning of the year, we are always looking at that more along – with the assumption, we are going to be meeting or exceeding our targets for the year. So there will be which we did not do in 2016. So there is always an adjustment there.

So there are a whole host of factors, so I want to be careful not to suggest, it’s just R&D and incentive comp, because it’s a fairly kind of detail look, that gives as the underpinning of providing that range for you..

But those are two of the bigger movers year-over-year?.

Let me make one comment on R&D. This is kind of a good news and bad news story. The good news is the OP2.0 performance in our most recent testing, which is 100% load and we feel like we really have all of the significant design elements worked out now.

The results of the engines performance have actually been better than we even thought or modeled when we entered this program. So we are actually quite excited about the product.

The big increase in R&D this year, we will peak out our spending for OP2.0 development this year, because we have to do endurance testing of the initial design and we are so excited about it, we are actually going to begin development of a spark ignited gas engine as well that will happen in parallel, of course we won’t see any of the benefits from OP2.0 until the beginning – or until 2018 at the earliest.

So this is the peak year of investment in R&D funding for OP2.0. They will – it will continue beyond this, but it will moderate somewhat in ‘18 and ‘19. And number one and obviously we will start to get some benefits from the sales of this new technology.

But gosh, as we have shared this internally, we haven’t gone public yet with – in the industry with the actual results that we are seeing in the engine, but do sharing that with our internal team and our internal commercial group, we are just more excited now than we have ever been about the potential of this new and quite frankly, distinctive technology.

But it is going to drive that peak in R&D spending in ‘17..

Great, thank you. My last question was on OP2.0, so you guys just already answered it. Thanks..

Okay, great..

[Operator Instructions] You have no questions in queue at this time..

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

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