Enpro Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2016; comparative period was the three months ended March 31, 2015. The interim financial statements are unaudited. EnPro designs and manufactures engineered industrial products across Sealing Products, Engineered Products and Power Systems. GST subsidiaries remain deconsolidated following their 2010 Chapter 11 filings.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $294.9 million | $277.5 million | Up 6.3% |
| Gross profit | $97.6 million | $89.8 million | Up 8.7% |
| Gross margin | 33.1% | 32.4% | Up approximately 70 bps |
| Operating income (loss) | $(72.4) million | $11.4 million | Primarily reflects $80.0 million asbestos charge |
| Loss before taxes | $(87.1) million | $(5.6) million | Material deterioration |
| Income tax benefit | $40.3 million | $4.0 million | 46.3% effective rate in 2016 |
| Net loss | $(46.8) million | $(1.6) million | Loss per diluted share: $(2.15) vs. $(0.07) |
| Operating cash flow | $(28.4) million | $(21.5) million | Greater cash use |
| Capital expenditures and software | $7.1 million | $10.2 million | Lower spending |
- Segment sales: Sealing Products $172.2 million, up 7.0%; Engineered Products $73.7 million, down 4.5%; Power Systems $50.0 million, up 24.4%.
- Segment profit: Sealing Products $14.7 million versus $18.0 million; Engineered Products $2.1 million versus $3.4 million; Power Systems $1.2 million versus $0.6 million.
- Cash and working capital: Cash increased to $110.8 million from $103.4 million at year-end, despite negative operating cash flow, principally because financing activities provided $44.4 million.
- Debt and liquidity: Long-term debt was $414.1 million and notes payable to GST were $295.9 million at March 31, 2016. Revolver borrowings were $119.8 million, with $170.4 million of stated availability after letters of credit. The company reported compliance with its debt covenants.
- Other balance-sheet items: Total assets were $1.554 billion and shareholders’ equity was $406.4 million. Deferred tax assets and income tax receivables increased to $153.9 million, including a $106.3 million receivable from GST.
Material changes versus the prior period
- Sales growth was driven by acquisitions and Power Systems volume, partially offset by unfavorable foreign exchange and weaker demand in oil and gas, compressor parts and services, truck OEM, nuclear and semiconductor markets.
- Sealing Products margin declined to 8.5% from 11.2%, and Engineered Products margin declined to 2.8% from 4.4%. Power Systems margin improved to 2.4% from 1.5%, but results included approximately $3.0 million of AVL-related costs in 2016 and a $6.2 million EDF contract loss provision in 2015.
- The $80.0 million asbestos settlement expense increased total operating expenses to $170.0 million from $78.4 million.
- Corporate expenses decreased by $0.8 million, while net interest expense increased slightly because of higher average borrowings. Other expense improved primarily because Q1 2015 included a $2.8 million loss related to convertible debenture transactions.
- Financing cash flow changed from a $56.9 million use in Q1 2015 to a $44.4 million source in Q1 2016, reflecting higher borrowing and substantially lower share repurchases.
- The company repurchased approximately 0.2 million shares for $8.8 million and paid $4.6 million of dividends. The board authorized a $0.21-per-share dividend payable in June 2016.
Guidance, outlook, risks and unusual items
- Management described market conditions as soft, citing global economic volatility, sluggish oil and gas markets and the strong U.S. dollar. Demand was described as stable in automotive, aerospace, petrochemical, and engine parts and service markets.
- Management expects strategic acquisitions and operational-efficiency initiatives to provide longer-term benefits. Rubber Fab Gasket & Molding was acquired on April 29, 2016; its annual revenue was approximately $17 million, subject to purchase-price allocation.
- Management projected a 2016 effective tax rate of approximately 38% to 42% and full-year pension expense of approximately $5.5 million.
- The March 17, 2016 consensual asbestos settlement contemplates total trust funding of $480 million: $370 million from GST/Garrison and $110 million from Coltec and its successors. EnPro recorded the incremental $80.0 million charge in Q1.
- Implementation of the proposed Joint Plan remains subject to a 75% claimant vote, Bankruptcy Court and District Court approval, required restructuring consents, agreements with Canadian provincial workers’ compensation boards, and favorable tax treatment for the trust. Failure or delay could increase costs and prevent the anticipated permanent resolution of asbestos claims.
- GST recorded an asbestos liability of $387.0 million and EnPro/Coltec recorded $110.0 million related to contemplated contributions. Available GST asbestos insurance coverage was estimated at $80.0 million, but collection timing and availability are not assured.
- Environmental liabilities totaled $18.0 million. The company noted significant uncertainty regarding potential responsibility for the Lower Passaic River and Onondaga Lake Superfund sites and several uranium mine sites. The Lower Passaic River remedy’s aggregate estimated cost was as high as $1.38 billion, but EnPro’s allocation has not been determined.
- Fairbanks Morse agreed on April 21, 2016 to pay $2.7 million to settle the AVL litigation; the effect was recorded in selling, general and administrative expense.
- Operating cash was held outside the United States, and management stated that repatriation could create tax costs in some circumstances. The company also remains exposed to foreign exchange, interest-rate and commodity-price volatility.
Most important facts to verify
- Whether the proposed asbestos Joint Plan received the required claimant vote and court approvals, and whether the contemplated restructuring and trust funding were completed.
- The ultimate cash requirements and timing for the $110 million Coltec contribution, the $60 million deferred contribution guaranteed by EnPro, and any additional asbestos-related obligations.
- Whether operating cash flow improves sufficiently to support dividends, share repurchases, capital expenditures, acquisitions and debt service.
- The maturity and extension status of the $295.9 million GST notes payable, including the 11% interest rate and January 2017 stated maturity.
- Actual recovery of the $106.3 million GST tax receivable and realization of deferred tax assets.
- Potential exposure beyond recorded environmental reserves, particularly the Lower Passaic River, Onondaga Lake and Arizona uranium-site matters.
- Performance of Sealing Products and Engineered Products amid weak end markets, restructuring costs and currency pressure.