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 Engine Products and Services. This unaudited filing covers the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Comparability is affected by the June 2010 deconsolidation of Garlock Sealing Technologies LLC, Anchor Packing Company, and Garrison Litigation Management Group (collectively, GST) following their Chapter 11 filings. Quincy Compressor is presented as a discontinued operation.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $263.7 million | $250.8 million | $533.3 million | $479.0 million |
| Gross profit | $99.3 million | $91.7 million | $193.3 million | $180.3 million |
| Gross margin | 37.7% | 36.6% | 36.3% | 37.6% |
| Operating income | $27.9 million | $20.7 million | $59.3 million | $31.8 million |
| Income from continuing operations | $12.2 million | $44.5 million | $27.4 million | $50.1 million |
| Net income | $12.2 million | $45.2 million | $27.4 million | $144.2 million |
| Diluted EPS | $0.56 | $2.20 | $1.26 | $7.02 |
Q2 sales increased approximately 5%, while six-month sales increased approximately 11%. Operating margins were approximately 10.6% in Q2 2011 versus 8.3% in Q2 2010, and 11.1% for the first six months versus 6.6% in the prior-year period.
- Segment sales: Q2 Sealing Products sales were $135.6 million, Engineered Products $102.1 million, and Engine Products and Services $26.5 million. Six-month sales were $251.3 million, $196.4 million, and $86.7 million, respectively.
- Segment profit: Q2 segment profit was $39.4 million versus $39.2 million; six-month segment profit was $80.3 million versus $73.4 million. Q2 segment margin declined to 14.9% from 15.6%; six-month margin was 15.1% versus 15.3%.
- Cash flow: Continuing-operations operating cash flow was $12.6 million in the first six months, versus a $16.2 million use in 2010. Investing cash flow was a $165.9 million use, including $155.3 million of acquisitions and $11.6 million of capital expenditures.
- Liquidity: Cash and cash equivalents were $54.7 million at June 30, 2011, down from $219.2 million at December 31, 2010. The senior secured revolving credit facility had $79.1 million of availability after $4.1 million of letters of credit.
- Debt: Current maturities of long-term debt were $139.9 million, primarily reflecting the currently convertible debentures. Notes payable to GST totaled $237.4 million, including $227.2 million principal and $10.2 million of 2010 PIK interest added during the first half.
- Balance sheet: Total assets were $1.21 billion and shareholders’ equity was $523.5 million at June 30, 2011. Accounts receivable and inventories increased to $189.2 million and $113.5 million, respectively, from $142.1 million and $77.0 million at year-end.
Material changes versus the prior comparable period
- Acquisitions of Rome Tool & Die, Pipeline Seal and Insulator, and Mid Western required $155.3 million of cash and added approximately $70 million of sales during the first half. The acquisitions added $54.6 million of goodwill and $67.9 million of identifiable intangible assets.
- Sealing Products sales increased 20% in Q2 and segment profit increased 14%, supported by acquisitions, higher volumes, pricing, market-share gains, and favorable foreign exchange.
- Engineered Products sales increased 33% and segment profit increased 81% in Q2, reflecting acquisitions, higher volumes, pricing, and foreign exchange.
- Engine Products and Services sales declined 57% in Q2 because no engines were shipped versus eight in Q2 2010; segment profit declined to $5.6 million from $12.7 million.
- Prior-year results included a $54.1 million pretax gain from GST deconsolidation and $94.1 million of discontinued-operation income, including the Quincy disposal gain. These items explain much of the decline in reported net income and EPS.
- Interest expense increased to $10.0 million in Q2 and $19.9 million for six months, primarily because interest on borrowings and notes payable to GST was no longer eliminated after deconsolidation.
Guidance, outlook, risks and unusual items
- Management expected Sealing Products and Engineered Products to benefit from stronger markets and increased volumes. Acquired businesses were expected to contribute approximately $100 million of sales in the second half of 2011 and be modestly accretive to full-year earnings.
- Engine Products and Services sales were expected to exceed 2010 levels, but profit was expected to be slightly lower because of product mix. All eight remaining 2011 engine shipments were scheduled for the third quarter, making quarterly results potentially uneven.
- Management expected an effective tax rate of 31% to 34% for the remainder of 2011, subject to discrete tax events and changes in earnings mix.
- The $172.5 million of convertible debentures became convertible beginning July 1, 2011, through September 30, 2011, subject to the stated conditions. Conversion could require substantial cash payments and create liquidity pressure; the filing states the company may not have sufficient cash or financing capacity for conversion or change-of-control repurchases.
- GST remains in Chapter 11 and is accounted for using the cost method. EnPro’s $236.9 million GST investment is subject to impairment review, and the ultimate value depends on the bankruptcy process and plan of reorganization. GST reported $469.0 million of liabilities subject to compromise at June 30, 2011.
- At June 30, 2011, $160.0 million of insurance coverage was believed available for current and future asbestos claims. The recorded asbestos liability at the petition date was $472.1 million, and the bankruptcy outcome remains uncertain.
- Environmental liabilities were accrued at $13.9 million for 15 sites. EnPro also has contingent liabilities relating to divested businesses, retiree benefits, product liability, and other legal matters.
- EnPro estimated $18.0 million of 2011 U.S. pension contributions, had contributed $5.7 million in cash through June, and contributed a $21.4 million GIC to the plans in July. Management expected no additional 2011 contribution but indicated significant contributions may be required in 2012 and later.
- After quarter-end, EnPro acquired Tara Technologies and PI Bearing Technologies for approximately $72 million, funded with cash and $40 million of revolving-credit borrowings.
Most important facts for investors to verify
- Whether operating cash flow and liquidity can support acquisitions, working-capital needs, pension obligations, and potential cash settlement of convertible debentures.
- The terms, timing, and cash impact of any conversion or repurchase of the $172.5 million convertible debentures.
- Progress and ultimate resolution of GST’s Chapter 11 proceedings, asbestos liabilities, available insurance, and the recoverability of EnPro’s $236.9 million GST investment.
- Whether the Engine Products and Services shipment schedule occurs as planned and whether its product mix pressures full-year profitability.
- Integration, purchase-price allocation, goodwill, intangible-asset valuation, and earnings contribution from 2011 acquisitions, including the post-quarter acquisitions.
- Changes in working capital, particularly receivables and inventories, and the company’s ability to maintain required borrowing availability and fixed-charge coverage under its credit facility.
- Future pension funding requirements, environmental exposures, tax-audit outcomes, and other retained liabilities from divested businesses.