EnPro Industries, Inc. — Form 10-Q Summary
Business context and reporting period
EnPro designs and manufactures engineered industrial products through three segments: Sealing Products, Engineered Products and Power Systems. This unaudited filing covers the quarter and six months ended June 30, 2015, compared with the corresponding 2014 periods.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $298.4 million | $313.1 million | $575.9 million | $600.3 million |
| Gross profit | $101.3 million | $108.1 million | $191.1 million | $204.6 million |
| Gross margin | 34.0% | 34.5% | 33.2% | 34.1% |
| Operating income (loss) | $(20.3) million | $24.1 million | $(8.9) million | $41.5 million |
| Net income (loss) | $(37.3) million | $8.3 million | $(38.9) million | $9.6 million |
| Diluted EPS | $(1.66) | $0.32 | $(1.68) | $0.38 |
| Net cash from operating activities | — | — | $(2.4) million | $(13.8) million |
The Q2 operating loss included $47.0 million of goodwill and intangible-asset impairment, consisting primarily of a $46.1 million CPI goodwill write-off and a $0.9 million trademark write-off. Excluding this impairment, operating income was approximately $26.7 million.
- Q2 sales declined 4.7%; six-month sales declined 4.1%.
- Q2 segment profit was $31.5 million, compared with $35.1 million; six-month segment profit was $53.5 million, compared with $64.2 million.
- Q2 interest expense, net was $12.9 million, up from $10.1 million; six-month interest expense, net was $25.8 million, up from $21.0 million.
- Cash and cash equivalents were $77.5 million at June 30, 2015, down from $194.2 million at December 31, 2014.
- Operating cash use improved year over year, but investing cash use increased to $49.0 million, including $30.6 million for the ATDynamics acquisition, $16.2 million of capital expenditures and $2.3 million of capitalized software.
- Financing activities used $65.9 million, including $80.0 million of share repurchases, $9.4 million of dividends, $44.9 million paid to repurchase convertible debentures and $66.0 million of debt repayments, partly offset by new borrowings.
Segment performance and material changes
| Segment | Q2 2015 sales | Q2 2015 profit | Six-month sales | Six-month profit |
|---|---|---|---|---|
| Sealing Products | $173.0 million | $21.2 million | $333.9 million | $39.2 million |
| Engineered Products | $78.5 million | $4.0 million | $155.7 million | $7.4 million |
| Power Systems | $47.9 million | $6.3 million | $88.1 million | $6.9 million |
- Sealing Products sales decreased 1.4% in Q2, primarily from foreign exchange, the prior-year divestiture and softer oil and gas, truck aftermarket, nuclear and semiconductor demand. Six-month sales increased 1.1%, aided by acquisitions and truck-parts demand.
- Engineered Products sales fell 17.8% in Q2 and 16.9% year to date, reflecting foreign exchange and weak automotive, fluid power, agricultural equipment, compressor and natural-gas markets. Segment margin declined to 5.1% in Q2 from 9.3%.
- Power Systems sales increased 11.4% in Q2 and 4.8% year to date. Q2 profit benefited from stronger engine margins, pricing, material costs and a $1.2 million foreign-exchange-related reversal of a prior contract loss provision.
- EnPro acquired ATDynamics for $30.6 million in February 2015. On July 1, 2015, after the reporting date, it acquired the Veyance North-American Air Spring Business for $18.1 million in cash; management stated that the business had approximately $100 million of annual revenue.
Debt, liquidity and capital allocation
- At June 30, 2015, long-term debt was $367.0 million, current maturities were $2.3 million, and notes payable to GST totaled $283.2 million, including $271.0 million long term.
- The company had a $300 million senior secured revolving credit facility, with $68.3 million drawn, $9.6 million of letters of credit and $222.1 million of borrowing availability.
- EnPro had $300 million of 5.875% senior notes due 2022. Convertible debentures outstanding were approximately $2.2 million after March 2015 repurchases; they mature October 15, 2015 and were convertible during the period.
- All $77.5 million of cash and cash equivalents was held outside the United States, and management stated that it intended to permanently reinvest these funds outside the U.S.
- The company completed an $80.0 million share-repurchase program, buying approximately 1.2 million shares at an average price of $66.76, and paid $9.4 million of dividends in the first six months. A $0.20-per-share dividend was declared for payment in September 2015.
Guidance, outlook, risks and unusual items
- Management described market conditions as mixed: bookings were sound in nuclear, petrochemical and OEM truck parts, with strong Power Systems bookings and backlog, but oil and gas weakness, non-North-American volatility and weaker foreign currencies remained headwinds.
- Management expected a 2015 annual effective tax rate of 30% to 33%, excluding the effect of the largely nondeductible goodwill impairment and subject to discrete tax events.
- Management estimated 2015 pension expense of approximately $5.0 million and did not expect U.S. defined-benefit pension contributions in 2015 based on available information.
- The GST subsidiaries remain in Chapter 11 proceedings related to asbestos liabilities. The second amended plan had not been confirmed; confirmation hearings were scheduled to begin June 20, 2016. EnPro would guarantee $77.5 million of deferred GST contributions plus interest and potentially supplementary litigation-fund contributions.
- GST recorded an asbestos liability of $337.5 million and had $80.7 million of estimated remaining insurance coverage. The plan also contemplated possible supplementary contributions with a maximum aggregate amount of $132 million, although management assessed the low end of the reasonably possible loss for those contributions as zero.
- Environmental liabilities accrued by EnPro were $16.5 million. The company had accrued $3.5 million for the lower eight miles of the Lower Passaic River site, but stated that actual costs could be significantly higher; the aggregate remediation estimate cited in the filing ranged from $953 million to $1.731 billion before allocation among potentially responsible parties.
- The filing identifies additional uncertainty from foreign-exchange exposure, commodity prices, cyclical markets, the BorgWarner bearing claim, other discontinued-business liabilities and the potential impairment or realization risk associated with the $236.9 million investment in GST and the $83.3 million GST tax receivable.
Most important facts for investors to verify
- Whether CPI’s impairment signals further weakness in the oil and gas end markets or additional impairment risk for remaining goodwill and intangible assets.
- The company’s ability to maintain liquidity while funding acquisitions, dividends, share repurchases, debt maturities and potential GST-related obligations.
- The status, confirmation and ultimate funding requirements of GST’s second amended asbestos reorganization plan, including EnPro’s guarantees and potential derivative claims.
- Whether Engineered Products’ volume decline and margin compression stabilize, and whether Power Systems’ reported improvement is sustainable without favorable foreign-exchange effects.
- The collectability of foreign-held cash, the GST tax receivable and remaining asbestos insurance recoveries.
- The eventual allocation and magnitude of environmental liabilities, particularly for the Lower Passaic River and Onondaga Lake sites.