Enpro Industries, Inc. — Form 10-Q Summary
Business context and reporting period
EnPro designs, manufactures, services and markets engineered industrial products through three reportable segments: Sealing Products, Engineered Products and Power Systems. The filing covers the unaudited quarter and six months ended June 30, 2016, compared with the same periods in 2015. GST-related entities remain deconsolidated because of their Chapter 11 proceedings.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $313.2 million | $298.4 million | $608.1 million | $575.9 million |
| Gross profit | $107.9 million | $101.3 million | $205.5 million | $191.1 million |
| Gross margin | 34.4% | 34.0% | 33.8% | 33.2% |
| Operating income (loss) | $29.1 million | $(20.3) million | $(43.3) million | $(8.9) million |
| Net income (loss) | $3.6 million | $(37.3) million | $(43.2) million | $(38.9) million |
| Diluted EPS | $0.17 | $(1.66) | $(1.99) | $(1.68) |
Q2 sales increased 5.0% year over year, while six-month sales increased 5.6%. Q2 operating income benefited from the absence of the $47.0 million goodwill and intangible impairment recorded in Q2 2015. Six-month operating results included an $80.0 million asbestos settlement charge in 2016, compared with the $47.0 million impairment charge in 2015.
Q2 segment profit was $37.0 million versus $31.5 million, with margins improving in Sealing Products to 13.3% from 12.3% and Engineered Products to 7.3% from 5.1%; Power Systems margin declined to 12.8% from 13.2%. Six-month segment profit was $55.0 million versus $53.5 million.
- Sealing Products Q2 sales rose 7.0% to $185.1 million, primarily from acquisitions, while organic sales declined 7.6%. Segment profit increased to $24.6 million.
- Engineered Products Q2 sales declined 5.6% to $74.1 million, but segment profit increased 35.0% to $5.4 million due to cost savings, pricing and efficiency improvements.
- Power Systems Q2 sales increased 14.2% to $54.7 million, driven by aftermarket parts, and segment profit increased 11.1% to $7.0 million.
Operating activities used $3.0 million of cash in the first six months, compared with $2.4 million used in 2015. Investing activities used $46.8 million, including $17.3 million for capital expenditures, $2.0 million for internal-use software and $28.3 million for acquisitions. Financing activities provided $73.8 million, principally from net revolver borrowings, partly offset by $17.7 million of share repurchases and $9.1 million of dividends.
Cash and cash equivalents were $118.5 million at June 30, 2016, up from $103.4 million at year-end 2015; all cash was held outside the United States. Revolver availability was $128.4 million after $161.5 million of borrowings and $10.1 million of letters of credit. Long-term debt was $455.9 million, and notes payable to GST were $295.9 million, with an additional $27.6 million of short-term borrowings from GST. The company was in compliance with its credit-facility covenants.
Material changes versus the prior comparable period
- Revenue growth was led by Power Systems and acquired businesses, particularly the Air Spring Business and Rubber Fab; foreign currency translation reduced reported sales.
- Cost-reduction and restructuring activities improved segment profitability. Management expects approximately $18 million of annualized savings from the company-wide initiative, with approximately $4 million of additional restructuring costs expected in the second half of 2016.
- Q2 2016 net income improved substantially because the prior-year period included a $47.0 million impairment charge. Conversely, six-month net loss worsened because of the $80.0 million asbestos settlement charge.
- Interest expense increased because of higher average indebtedness. Environmental remediation costs also increased, and the company recorded a $2.7 million settlement with AVL in the first quarter.
- Rubber Fab was acquired on April 29, 2016; the company paid $28.3 million for acquisitions during the first six months.
Guidance, outlook, risks and unusual items
Management reported continued market weakness in several served industries but expressed confidence in the company’s competitive positions and expected demand to improve as markets recover. The company remains focused on cost reduction, research and development, bolt-on acquisitions, dividends and share repurchases.
- Management expects a 2016 effective tax rate of approximately 38% to 42%, subject to geographic mix and discrete tax items.
- Estimated 2016 pension expense is approximately $6.0 million, and approximately $14 million of contributions to U.S. defined-benefit pension plans are expected in the third quarter.
- The EDF engine contract remains exposed to euro-dollar movements, delivery penalties and execution risk. EnPro recorded an additional $1.7 million loss provision in Q2 2016.
- The Joint Plan for resolving GST and Coltec asbestos claims requires approval by at least 75% of asbestos claimants and approval by the Bankruptcy Court and District Court. The disclosure statement was approved July 29, 2016; voting was scheduled to end December 9, 2016, with the confirmation hearing scheduled to begin May 15, 2017. Management expected GST to be reconsolidated in late summer 2017, but stated that timing and consummation were not assured.
- The Joint Plan contemplates $480 million of total funding for asbestos claims, including $370 million from GST/Garrison and $110 million from Coltec. EnPro has recorded an asbestos liability of $110.0 million related to Coltec’s contribution.
- Environmental liabilities totaled $20.0 million. The company identified material uncertainty regarding potential costs at the Lower Passaic River and Onondaga Lake sites, uranium mine sites and other legacy locations; losses beyond recorded amounts generally could not be estimated.
- At June 30, 2016, GST reported $387.0 million of accrued asbestos-related claims and $62.0 million of remaining insurance coverage believed available for asbestos claims, subject to collection and competing-claim risks.
Most important facts for investors to verify
- Whether the GST/Coltec Joint Plan receives the required claimant and court approvals and the timing and funding of its implementation.
- Whether the recorded asbestos liabilities and proposed contributions fully capture ultimate obligations, including contingent guarantees and potential non-derivative claims.
- Revolver utilization, the January 2017 maturity of the GST notes, refinancing or extension progress, and compliance with leverage and interest-coverage covenants.
- Cash accessibility, because the company held all reported cash outside the United States and intends to permanently reinvest those funds abroad.
- Achievement of the projected $18 million annualized cost savings and the effect of restructuring charges on future margins.
- Exposure to weak end markets, foreign currency movements under the EDF contract, environmental claims, the BorgWarner matter and other legacy contingencies.
- The sustainability of dividends and share repurchases given negative year-to-date operating cash flow, increased debt and pending asbestos-related funding obligations.