Enpro Industries, Inc. 2013 Form 10-K Summary
Business context and reporting period
EnPro designs, manufactures, services and markets engineered industrial products through three segments: Sealing Products, Engineered Products, and Engine Products and Services. The company operated 62 primary manufacturing facilities in 13 countries and had approximately 4,600 continuing-operations employees at December 31, 2013.
This filing reports the fiscal year ended December 31, 2013, with comparative results for 2012 and 2011. The quarterly data included in the filing shows fourth-quarter 2013 net sales of $275.5 million and net income of $5.2 million.
Three subsidiaries—GST LLC, Anchor and Garrison—have been deconsolidated since their June 5, 2010 Chapter 11 filings related to asbestos claims. Their results are excluded from EnPro’s consolidated operating results after the filing date.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $1,144.2 million | $1,184.2 million | Down 3% |
| Gross profit | $381.3 million | $400.1 million | Down 5% |
| Gross margin | 33.3% | 33.8% | Down 50 bps |
| Operating income | $86.4 million | $107.5 million | Down 20% |
| Income before taxes | $35.8 million | $63.5 million | Down 44% |
| Net income from continuing operations | $27.4 million | $41.0 million | Down 33% |
| Diluted EPS | $1.17 | $1.90 | Down 38% |
| Operating cash flow | $69.9 million | $118.2 million | Down 41% |
The 2013 effective tax rate was 23.4%, compared with 35.3% in 2012, primarily reflecting a greater proportion of earnings from lower-tax foreign jurisdictions and tax-related items. Net income benefited from the lower tax rate, but this was more than offset by lower operating performance and higher other expense.
- Sealing Products: Sales were $622.9 million, up 2%; segment profit was $97.1 million, up from $88.8 million. Operating margin increased to 15.6% from 14.6%, supported by acquisitions, pricing and cost actions.
- Engineered Products: Sales were $356.4 million, down 2%; segment profit was $17.6 million, down from $20.5 million. Margin declined to 4.9% from 5.6% due to lower volumes and higher CPI restructuring costs.
- Engine Products and Services: Sales were $167.6 million, down 22%; segment profit was $14.0 million, down from $39.2 million. Margin fell to 8.4% from 18.3%, primarily because of lower engine, parts and service revenue and unfavorable mix.
Capital expenditures were $30.7 million, while total investing cash outflows were $41.5 million, including $2.0 million for a Singapore industrial-seals distributor. Cash and cash equivalents ended at $64.4 million, compared with $53.9 million at year-end 2012; substantially all cash was held outside the United States.
Total assets were $1.39 billion. Reported long-term debt, including current maturities, was $165.1 million, and notes payable to GST were $259.3 million. The balance sheet also included a $236.9 million investment in GST and a $46.9 million income-tax receivable from GST.
Material changes versus the prior comparable period
- Revenue declined $40.0 million, primarily because of lower Engine Products and Services revenue, unfavorable volume changes and foreign-exchange effects.
- Total segment profit decreased $19.8 million to $128.7 million. Pricing and acquisitions helped offset volume reductions and higher costs, but did not fully offset the decline.
- Operating cash flow decreased $48.3 million, reflecting lower segment profit, $11.3 million of additional pension contributions and increased working-capital requirements.
- Net interest expense increased to $44.3 million from $42.8 million, principally because of higher PIK interest on the GST notes, partially offset by lower revolver borrowings.
- Other expense increased to $15.3 million from $9.9 million, driven principally by environmental reserves and higher asbestos-related bankruptcy activity.
- Restructuring costs increased to $6.7 million from $5.0 million. Actions included facility consolidations and workforce reductions, including 98 positions announced in 2013.
- The company acquired a small Singapore industrial-seals distributor for $2.0 million. No material acquisition-related pro forma information was required.
- Pension underfunding improved materially, with the reported pension liability decreasing to $47.4 million from $112.7 million, aided by contributions and investment performance; 2013 U.S. pension contributions were $22.5 million.
Liquidity, debt and outlook
EnPro had $117.1 million of borrowing availability under its $175 million senior secured revolving credit facility at December 31, 2013, after $7.6 million of borrowings and $4.8 million of letters of credit. The facility generally matures in July 2015, subject to provisions that could extend maturity to March 2016 if the convertible debentures are refinanced, paid or defeased.
The $172.5 million principal amount of 3.9375% convertible debentures matures October 15, 2015. Because the stock-price conversion condition was satisfied, the debentures were convertible during the first quarter of 2014 and could require earlier cash settlement of principal. Management disclosed that available liquidity might not be sufficient for a large conversion or change-of-control repurchase without refinancing or other funding.
Management reported improved European demand and semiconductor-related demand entering 2014. It expected the effective tax rate to remain below the U.S. statutory rate, but noted that expired U.S. tax provisions would significantly increase the 2014 annual effective tax rate. The company expected approximately $20.4 million of U.S. defined-benefit pension contributions and approximately $5 million of GAAP pension expense in 2014.
Management continued to evaluate acquisitions but provided no quantitative revenue or earnings guidance. Backlog was $293.8 million at year-end 2013, compared with $288.9 million at year-end 2012; approximately 8% was expected to be filled after 2014. Management cautioned that backlog is not highly predictive because of short lead times and seasonality.
Risks, contingencies and unusual items
- GST asbestos bankruptcy: GST’s recorded asbestos liability was $466.8 million at December 31, 2013, compared with the $472.1 million estimate at the petition date. On January 10, 2014, the Bankruptcy Court estimated GST’s present and future mesothelioma liability at $125 million, but the estimate excludes other disease claims and administrative costs and does not resolve the bankruptcy.
- GST had $121.1 million of estimated remaining insurance coverage, including expected collections of $20 million in 2014, $20 million in 2015, $18 million in 2016, $13 million in 2017 and $11 million in 2018, plus $39.1 million expected upon conclusion of the bankruptcy process. Collection timing and ultimate recoverability are uncertain.
- GST incurred $44.6 million of Chapter 11 fees and expenses in 2013 and $102.0 million cumulatively through year-end 2013. EnPro’s proposed or future funding obligations under a confirmed plan were not determinable; a prior proposed plan contemplated a $30 million EnPro contribution, but GST planned to submit a revised plan.
- Environmental reserves increased to $15.1 million from $11.3 million. EnPro accrued $6.3 million for the former Trent Tube site and estimated remediation costs of $7 million to $10 million, reduced by approximately $0.75 million of trust assets.
- The BorgWarner claim involving GGB France bearings remained in a technical review process, and the filing did not provide a reasonably estimable loss range.
- Fairbanks Morse Engine faces potential declines in U.S. Navy engine demand and military shipbuilding activity. Other risks include cyclical markets, raw-material inflation, international operations, foreign exchange, customer concentration in the engine segment, supply-chain disruption, intellectual-property matters and acquisition integration.
- Goodwill impairment testing identified no impairment, but CPI’s estimated fair value exceeded carrying value by only 24%. Its valuation depends on restructuring savings, customer price and volume opportunities and future market conditions.
- Operating leases represented $51.8 million of future minimum payments. Total contractual obligations were $651.3 million, excluding pension and postretirement obligations.
Most important facts for investors to verify
- Whether GST reaches a consensual or court-approved plan of reorganization, including total funding requirements, appeals and any potential claims against EnPro or Coltec.
- The timing and collectability of GST insurance recoveries and the potential impairment of EnPro’s $236.9 million GST investment and $46.9 million GST tax receivable.
- EnPro’s ability to refinance or otherwise fund the $172.5 million convertible-debt principal if conversion or change-of-control provisions accelerate payment.
- Whether the Engine Products and Services segment can recover from the 2013 revenue and margin decline as U.S. government and Navy demand changes.
- Progress from restructuring programs at Technetics, CPI and Fairbanks Morse Engine, including whether projected savings offset volume and pricing pressure.
- Actual 2014 tax expense following expiration of specified U.S. tax incentives and actual pension contributions relative to the estimated $20.4 million.
- Resolution and cash cost of the Trent Tube and other environmental matters, as well as the unresolved BorgWarner claim.