Enpro Industries, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
EnPro designs, manufactures, services and markets engineered industrial products through three segments: Sealing Products, Engineered Products and Power Systems. The filing covers the fiscal year ended December 31, 2015, with comparative results for 2014 and 2013. The company operated 60 primary manufacturing facilities in 14 countries and had approximately 5,400 continuing-operations employees.
GST LLC, Anchor Packing Company and Garrison Litigation Management Group were deconsolidated after filing for Chapter 11 protection in 2010 due to asbestos liabilities. Their results are excluded from EnPro’s consolidated operating results, although EnPro retains a $236.9 million investment in GST and related tax and other exposures.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $1,204.4 million | $1,219.3 million | (1.2%) |
| Gross profit | $395.5 million | $416.7 million | (5.1%) |
| Gross margin | 32.8% | 34.2% | Down 140 bps |
| Operating income | $37.6 million | $63.4 million | (40.7%) |
| Income before taxes | $(18.6) million | $32.6 million | Turned to loss |
| Net income (loss) | $(20.9) million | $22.0 million | Turned to loss |
| Diluted EPS | $(0.93) | $0.85 | Turned to loss |
| Cash flow from operations | $86.5 million | $32.2 million | +$54.3 million |
| Capital expenditures | $41.4 million | Not clearly stated on the same basis in the filing summary | — |
| Cash and equivalents | $103.4 million | $194.2 million | Down $90.8 million |
| Total assets | $1,503.5 million | $1,602.7 million | Down $99.2 million |
| Long-term debt, including current portion | $361.0 million | $321.1 million | Up $39.9 million |
2015 operating cash flow of $86.5 million was substantially above 2014, primarily because of lower pension contributions, lower cash taxes and lower working-capital requirements. Investing activities used $86.5 million, including $45.5 million for acquisitions and $41.4 million for capital expenditures. Financing activities used $85.2 million, including $85.3 million of share repurchases, $47.1 million for repayment or repurchase of convertible debentures and $18.0 million of dividends, partially offset by $62.2 million of net revolving-credit borrowings.
Cash was concentrated outside the United States: $102.7 million was held internationally and $0.7 million in the United States at year-end. The revolving credit facility had $228.4 million of availability after $62.2 million of borrowings and $9.4 million of letters of credit. EnPro was in compliance with its debt covenants.
Segment performance
| Segment | 2015 sales | 2014 sales | 2015 profit | 2014 profit | 2015 margin |
|---|---|---|---|---|---|
| Sealing Products | $705.6 million | $664.3 million | $84.3 million | $85.6 million | 11.9% |
| Engineered Products | $297.8 million | $357.6 million | $6.4 million | $26.8 million | 2.1% |
| Power Systems | $204.6 million | $200.1 million | $27.1 million | $28.5 million | 13.2% |
Sealing Products sales increased 6.2%, largely from the 2015 acquisitions, but underlying sales declined modestly after considering acquisitions, the GRT divestiture and foreign exchange. Engineered Products sales fell 16.7% because of weak oil and gas demand, lower bearing volumes and unfavorable currency effects. Power Systems sales increased 2.2%, driven by parts and service revenue.
Material changes versus the prior comparable period
- Net sales declined 1.2% as acquisitions and Power Systems growth were more than offset by foreign exchange and weaker industrial and oil-and-gas markets.
- Total segment profit declined 16.4% to $117.8 million. Engineered Products accounted for most of the deterioration.
- EnPro recorded a $46.1 million CPI goodwill impairment charge and additional intangible-asset impairment, reflecting prolonged weakness in oil and gas markets.
- 2015 restructuring expense increased to $6.6 million from $2.3 million in 2014. CPI restructuring included facility closures, asset write-downs and workforce reductions; additional 2016 costs were estimated at $2.7 million to $4.3 million.
- Interest expense increased to $52.1 million from $44.1 million because of higher average debt following the 2014 senior-notes issuance.
- Cash flow improved because 2014 included a $48.5 million U.S. pension contribution; no U.S. pension contribution was made in 2015.
- EnPro acquired ATDynamics and the Veyance North American air spring business for $45.5 million net of cash acquired. Approximately $6 million of additional Air Spring consideration was expected in 2016.
- The company repurchased approximately $85.3 million of common stock and began paying quarterly dividends of $0.20 per share in 2015.
- Backlog declined to $346.6 million at December 31, 2015 from $385.9 million a year earlier; approximately 19% was expected to be filled after 2016.
Guidance, outlook, risks and unusual items
Management reported soft global industrial conditions, lower oil prices, reduced demand in several markets and continued effects from the strong U.S. dollar. Aerospace, European automotive, engine parts and service were described as stable, while semiconductor markets showed signs of strengthening. Management expected continued cost reduction, footprint optimization, product innovation and strategic acquisitions to support longer-term growth, but did not provide a consolidated revenue or earnings forecast.
Management expected a 2016 effective tax rate of approximately 30% to 34% and 2016 pension expense of approximately $7.7 million. It anticipated no required 2016 U.S. defined-benefit pension contribution and approximately $0.4 million of foreign-plan contributions.
- Asbestos bankruptcy: GST’s second amended plan had not been confirmed. It contemplated at least $367.5 million of funding, including a $30 million Coltec contribution and $77.5 million of deferred GST contributions guaranteed by EnPro. Potential supplementary litigation-fund contributions could total up to $132 million over 40 years, although management estimated the reasonably possible loss at the low end of $0.
- Approximately 180,000 asbestos proofs of claim were filed by the October 2015 bar date, including about 10,000 alleging mesothelioma. Current claimants overwhelmingly voted against the plan, while the Future Claimants’ Representative supported it. Key bankruptcy hearings were scheduled for March and August 2016.
- GST recorded $337.5 million of asbestos liabilities and had $80.0 million of remaining insurance coverage believed available for claims and expenses, subject to collection and competing-claims risks.
- A multi-year €89.2 million engine contract generated a cumulative $8.8 million loss provision, including $6.9 million related to the unperformed portion, due largely to U.S. dollar appreciation against the euro. The contract was not hedged.
- Environmental liabilities totaled $16.8 million. EnPro accrued $3.5 million for the lower eight miles of the Lower Passaic River site, but aggregate remediation estimates ranged from approximately $953 million to $1.731 billion and final responsibility allocations had not been determined. Other environmental exposures, including Onondaga Lake, were not reasonably estimable.
- EnPro reserved $1.1 million for probable minimum losses related to EPA notices concerning uranium mines in Arizona; the potential range of loss was not estimable.
- BorgWarner claims against GGB France and an AVL lawsuit against Fairbanks Morse remained unresolved; the filing states that a reasonably possible loss range for the BorgWarner matter could not be estimated.
- The company identified a primary casting supplier failure in December 2015 and was qualifying replacement sources, creating a potential risk of production delays.
Most important facts an investor should verify
- Whether GST’s proposed asbestos plan was confirmed, modified or rejected after the scheduled 2016 hearings, and the resulting cash obligations or guarantees for EnPro and Coltec.
- The realizability of EnPro’s $236.9 million GST investment and $100.6 million GST income-tax receivable.
- Current debt balances, covenant headroom, the maturity and refinancing plan for the $300 million senior notes, and the January 2017 maturity of the $283.2 million GST notes payable balance including PIK interest.
- Whether CPI restructuring actions produce the anticipated $4 million to $5 million of annualized savings and whether further impairment charges occur.
- Actual 2016 performance in oil and gas, commercial vehicles, industrial markets and Power Systems, including the euro-denominated engine contract.
- Final acquisition consideration and integration results for ATDynamics and the Veyance air spring business.
- Developments in the Lower Passaic River, Onondaga Lake and Arizona uranium-mine environmental matters, for which potential losses were materially uncertain.
- The availability and location of cash, given that nearly all year-end cash was held outside the United States and management intended to permanently reinvest those funds abroad.