Enpro Industries, Inc. — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. The filing is an annual Form 10-K, not a standalone quarterly filing; fourth-quarter data is presented in the unaudited quarterly table. EnPro designs and manufactures engineered industrial products through Sealing Products, Engineered Products and Power Systems. It operated 63 primary manufacturing facilities in 13 countries and generated approximately 45% of sales outside the United States.
Financial performance and position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $1,219.3 million | $1,144.2 million | +6.6% |
| Gross profit | $416.7 million | $381.3 million | +9.3% |
| Gross margin | 34.2% | 33.3% | +0.9 percentage points |
| Operating income | $63.4 million | $86.4 million | -26.6% |
| Income before taxes | $32.6 million | $35.8 million | -8.9% |
| Net income | $22.0 million | $27.4 million | -19.7% |
| Diluted EPS | $0.85 | $1.17 | -27.4% |
| Operating cash flow | $32.2 million | $69.9 million | -53.9% |
Net margin declined to approximately 1.8% from 2.4%. The 2014 results included a $30.0 million asbestos settlement charge, a $27.7 million gain on the sale of the GRT business and $10.0 million of losses from convertible-debt exchange and repurchase transactions. The effective tax rate was 32.4%, compared with 23.4% in 2013.
- Sealing Products: Sales of $664.3 million, up 6.6%; segment profit of $85.6 million, down 11.8%; margin declined to 12.9% from 15.6%. Growth in trucking, semiconductor, aerospace and China was offset by weaker oil and gas demand and higher manufacturing and administrative costs.
- Engineered Products: Sales of $357.6 million, up 0.3%; segment profit of $26.8 million, up 52.0%; margin improved to 7.5% from 4.9%, supported by pricing, cost reductions and lower restructuring costs.
- Power Systems: Sales of $200.1 million, up 19.4%; segment profit of $28.5 million, up 104%; margin increased to 14.2% from 8.4%, primarily from shipment of three engines, stronger parts and service activity and lower procurement and warranty costs.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $194.2 million at December 31, 2014, including $114.9 million in the United States and $79.3 million outside the United States.
- Operating cash flow of $32.2 million was reduced by $48.5 million of U.S. pension contributions and higher income-tax payments. Investing activities used $74.7 million, including $61.9 million for acquisitions, $41.8 million of capital expenditures, $10.5 million of capitalized software and $39.3 million of proceeds from the GRT sale.
- Financing activities provided $177.0 million. EnPro issued $300.0 million of 5.875% senior notes due 2022 and amended its revolving facility to provide $300.0 million of capacity. Availability at year-end was $294.3 million after letters of credit.
- Long-term debt, including current maturities, was $321.1 million, compared with $165.1 million in 2013. Notes payable to GST totaled $271.0 million and accrue interest at 11%, with 4.5% capitalized as payment-in-kind interest.
- Contractual obligations totaled $903.8 million, including $324.4 million of long-term debt, $309.2 million of notes payable to GST, $141.9 million of long-term-debt interest and $46.3 million of operating leases.
- The company contributed $48.5 million to U.S. defined-benefit pension plans in 2014 and expected no U.S. pension contribution in 2015 based on available information.
Material changes versus prior periods
- Sales increased due to 4.8% organic growth, a 1.4% favorable foreign-currency effect and higher Power Systems engine revenue. Segment profit increased 9.5%, but corporate expenses rose $9.6 million.
- EnPro acquired Fabrico, the remaining interest in Stemco Crewson and Strong-Tight for $61.9 million, all within Sealing Products. It sold substantially all GRT assets for $42.3 million and recorded a $27.7 million gain.
- Convertible debenture principal was reduced to approximately $23.4 million through stock exchanges and a cash tender offer. Approximately 3.0 million common shares were issued in the exchange transactions.
- Comprehensive income declined to a loss of $26.5 million from income of $64.8 million, primarily due to a $48.5 million after-tax other comprehensive loss from pension and foreign-currency items.
- Backlog increased to $385.9 million at year-end from $293.8 million, although approximately 34% was expected to be fulfilled after 2015 and management cautioned that backlog is not highly predictive for much of the business.
Outlook, contingencies and unusual items
- Management reported firm order activity in semiconductor, aerospace and trucking markets, a healthy first-quarter Power Systems backlog and strength in automotive and general industrial markets. Risks included economic volatility outside North America, lower oil and gas project and maintenance spending, and weakening foreign currencies.
- Management expected a 2015 effective tax rate of 30% to 34%, approximately $5.0 million of pension expense and no expected U.S. defined-benefit pension contribution based on then-current information.
- GST, Anchor and Garrison have been deconsolidated since their 2010 Chapter 11 filings related to asbestos claims. EnPro carried an investment in GST of $236.9 million and an income-tax receivable from GST of $73.0 million.
- A second amended GST reorganization plan filed in January 2015 contemplated at least $367.5 million of funding, including $30.0 million from Coltec, $77.5 million of deferred GST contributions over seven years and a $30.0 million litigation fund. EnPro would guarantee the deferred and certain contingent contributions. The plan had not been confirmed at filing, and the maximum potential supplementary contributions to the litigation fund were $132 million over 40 years.
- The company recorded a $30.0 million liability for Coltec’s proposed plan contribution. Confirmation, consummation, releases and the ultimate asbestos exposure remained uncertain.
- Environmental liabilities accrued at year-end were $17.3 million. EnPro also accrued $3.5 million for the Lower Passaic River matter, while acknowledging that actual costs could be significantly higher and that the upper range could not be estimated. Other Onondaga Lake-related losses were not estimable.
- A BorgWarner claim against GGB France remained in technical review and litigation proceedings; the filing did not provide a reasonably possible loss range.
- After year-end, EnPro acquired ATDynamics for $29.0 million, adopted a $0.20-per-share quarterly dividend policy and authorized up to $80.0 million of common-share repurchases.
Fourth-quarter information
| Metric | Q4 2014 | Q4 2013 |
|---|---|---|
| Net sales | $316.4 million | $275.5 million |
| Gross profit | $105.9 million | $85.8 million |
| Net income | $3.8 million | $5.2 million |
| Diluted EPS | $0.15 | $0.22 |
Important facts for investors to verify
- Whether the GST second amended reorganization plan was confirmed and consummated, including the final asbestos funding obligation, guarantees and releases protecting EnPro and Coltec.
- The collectability and timing of GST insurance recoveries and the $73.0 million GST tax receivable.
- Compliance with the revolving-credit and senior-note leverage, interest-coverage and dividend covenants, particularly after the 2014 debt refinancing.
- Whether oil and gas weakness, currency depreciation and raw-material costs pressure Sealing Products and CPI margins in 2015.
- The sustainability of Power Systems revenue and profit given dependence on government and U.S. Navy programs and completed-contract engine shipments.
- The ultimate cost of environmental matters, especially Lower Passaic River and Onondaga Lake, for which the filing does not provide a clear upper loss estimate.
- Whether goodwill at CPI remains recoverable; its 2014 estimated fair value exceeded book value by only 10%, with forecasts dependent partly on restructuring and oil-and-gas market recovery.