Enpro Industries, Inc. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 11, 2020. Although the request identifies 2019 Q4, this is an annual Form 10-K; quarterly data are included separately. Results have been recast to classify Fairbanks Morse as a discontinued operation.
Business context
EnPro designs, manufactures and services engineered industrial products through two continuing segments: Sealing Products and Engineered Products. Continuing operations had 49 primary manufacturing and service facilities in 13 countries and approximately 5,300 employees. International sales represented approximately 48% of net sales.
- Sealing Products: gaskets, seals, semiconductor-component refurbishment, sanitary fluid-transfer products and heavy-duty commercial vehicle components.
- Engineered Products: self-lubricating bearings and precision compressor components and services.
- Fairbanks Morse, formerly the entire Power Systems segment, was classified as discontinued operations following the December 2019 sale agreement and was sold on January 21, 2020.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $1,205.7 million | $1,274.1 million | Down 5.4% |
| Gross profit | $403.8 million | $418.5 million | Down 3.5% |
| Gross margin | 33.5% | 32.8% | Up approximately 70 bps |
| Operating income | $56.6 million | $85.8 million | Down 34.0% |
| Income from continuing operations | $7.8 million | $(4.7) million | Improved |
| Net income | $38.3 million | $19.6 million | Up 95.4% |
| Basic EPS from continuing operations | $0.38 | $(0.22) | Improved |
| Basic total EPS | $1.86 | $0.94 | Up 97.9% |
| Operating cash flow from continuing operations | $130.8 million | $212.8 million | Down 38.6% |
| Capital expenditures | $21.6 million | $36.1 million | Down 40.2% |
Continuing-operations pretax income was $4.3 million versus $15.1 million in 2018. The 2019 income tax benefit was $3.5 million, producing an effective tax rate of negative 79.3%; the result was materially affected by a $15.0 million release of foreign valuation allowances. Restructuring and impairment costs increased to $35.1 million from $22.2 million.
Segment results
| Segment | 2019 sales | 2018 sales | 2019 segment profit | 2018 segment profit |
|---|---|---|---|---|
| Sealing Products | $911.5 million | $954.4 million | $93.8 million | $85.2 million |
| Engineered Products | $298.3 million | $323.9 million | $29.3 million | $40.1 million |
- Sealing Products sales declined 4.5%, primarily from weakness in heavy-duty trucking and general industrial markets. Reported segment margin improved to 10.3% from 8.9%, but underlying profit declined after adjusting for acquisitions, divestitures, foreign exchange and other items.
- Engineered Products sales declined 7.9% and segment profit fell 26.9%, primarily because of lower automotive and general industrial volumes.
- Heavy-duty trucking was a significant weakness. EnPro exited several underperforming Stemco product lines and recorded substantial impairment and restructuring charges.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $121.2 million at December 31, 2019, including $120.3 million held outside the United States.
- Long-term debt, including the current portion, was $629.3 million versus $464.9 million in 2018. Debt consisted primarily of $345.3 million of 5.75% senior notes due 2026, $133.9 million drawn on the revolving facility and $149.1 million under a new term loan.
- The revolving credit facility had $248.7 million of borrowing availability after outstanding borrowings and letters of credit. EnPro was in compliance with all credit agreement covenants at year-end.
- Contractual obligations totaled $879.6 million, including $634.0 million of debt principal, $163.2 million of interest, $42.3 million of operating leases and $40.1 million of other liabilities.
- Continuing operations generated $130.8 million of operating cash flow but used $331.1 million in investing activities, mainly reflecting $310.5 million spent on acquisitions.
- EnPro repurchased approximately $15.0 million of common stock and paid $20.9 million of dividends in 2019. The remaining authorization was $35.0 million at year-end.
Material changes and unusual items
- EnPro acquired The Aseptic Group for $39.3 million and LeanTeq for $271.2 million in cash, net of cash acquired, plus rollover equity. Combined acquisition consideration was approximately $338.5 million including the rollover equity.
- Fairbanks Morse was sold for an aggregate purchase price of $450.0 million, subject to adjustments. The company reported approximately $30.5 million of after-tax discontinued-operation income from Fairbanks Morse in 2019. Management expected a pretax disposition gain of approximately $280 million.
- EnPro recorded a $16.3 million pretax loss on the sale and exit of the Rome, Georgia brake products business.
- Motorwheel long-lived assets were impaired by $21.0 million. Additional 2019 charges included impairments and exit costs for ATDynamics, Aeris, BatRF and other Stemco product lines.
- The company adopted the lease accounting standard in 2019 and recognized approximately $27 million of operating lease right-of-use assets and liabilities at adoption; the 2019 year-end operating lease liability was $37.7 million.
- Backlog of continuing operations was $190.7 million at December 31, 2019, down from $216.9 million. Approximately 5% was expected to be filled after 2020, but management cautioned that backlog is not highly predictive because of short lead times and seasonality.
Outlook, commentary and risks
Management expected weakness in heavy-duty trucking to continue through 2020, while anticipating cost reductions and stronger earnings in semiconductor, food and pharmaceutical businesses to offset market headwinds. Management planned to reshape Stemco’s product portfolio and cost structure, continue disciplined acquisitions and maintain dividends and share repurchases. The filing also cautioned that the effects of COVID-19 could disrupt operations, suppliers, customers and broader economic conditions.
- Key operating risks include cyclical industrial, semiconductor, automotive and trucking markets; raw-material costs and tariffs; foreign exchange; supply-chain disruption; intense competition; product liability and warranty claims; cybersecurity; and international regulatory and compliance exposure.
- Environmental and retained-liability risks are significant. Environmental reserves totaled $36.0 million at year-end, including reserves related to the Lower Passaic River, Onondaga Lake, Arizona uranium mines and Water Valley, Mississippi.
- The Lower Passaic River matter has potentially large aggregate remediation estimates, but EnPro stated that its ultimate allocation cannot presently be estimated and could materially exceed the $2.8 million accrued for the lower eight miles.
- Water Valley reserves totaled $9.2 million after 2019 settlements and additional remediation provisions. A $4.5 million county and hospital settlement was paid in the first quarter of 2020.
- A BorgWarner claim against GGB France had a reasonably possible loss range of approximately €0.4 million to €6.6 million, plus potentially undetermined proceeding expenses; a court ruling was expected in the second quarter of 2020.
- Management and the auditors identified a material weakness in internal control over financial reporting related to income-tax accounting. The weakness contributed to a revision of 2018 income-tax expense of approximately $5.0 million and was not fully remediated at December 31, 2019.
Most important facts for investors to verify
- Reconcile continuing operations with total company results after the Fairbanks Morse divestiture and assess the expected use of approximately $380 million of after-tax sale proceeds.
- Review post-sale leverage, including repayment of $143.9 million of revolving borrowings from Fairbanks Morse proceeds and the remaining term loan and senior notes.
- Evaluate whether the expected improvement in semiconductor, food and pharmaceutical markets can offset continued heavy-duty trucking weakness and the loss of Fairbanks Morse earnings.
- Assess the sustainability of the 2019 tax benefit, including the $15.0 million valuation-allowance release and the unresolved income-tax control weakness.
- Monitor Stemco restructuring results, impairment risk and the ability to restore segment margins after product-line exits.
- Review environmental, product-liability and litigation exposures, particularly the Lower Passaic River and Water Valley matters, where management cannot estimate the full potential loss range.
- Confirm integration performance and valuation assumptions for LeanTeq and The Aseptic Group, including LeanTeq’s redeemable non-controlling interest and acquired intangible assets.