Enpro Industries, Inc. — Form 10-Q Summary
Business context and reporting period
EnPro designs, manufactures, services and markets engineered industrial products across Sealing Products, Engineered Products and Power Systems. The filing covers the unaudited quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods. The company operated 66 primary manufacturing facilities in 13 countries.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $306.6 million | $302.6 million | $882.5 million | $902.9 million |
| Gross profit | $101.4 million | $106.2 million | $292.5 million | $310.8 million |
| Gross margin | 33.1% | 35.1% | 33.1% | 34.4% |
| Operating income | $24.9 million | $27.6 million | $16.0 million | $69.1 million |
| Net income (loss) | $11.4 million | $8.6 million | $(27.5) million | $18.2 million |
| Diluted EPS | $0.51 | $0.33 | $(1.21) | $0.71 |
| Cash flow from operations | Not separately provided | Not separately provided | $32.0 million | $(9.9) million |
Q3 operating margin was 8.1%, compared with 9.1% in the prior-year quarter. Nine-month operating margin was 1.8%, compared with 7.7% in 2014, primarily because of a $47.0 million goodwill and intangible-asset impairment charge related to CPI.
- Q3 sales increased 1.3%; acquisitions contributed growth, while foreign exchange, the GRT divestiture and weaker organic demand offset much of the benefit.
- Sealing Products sales rose 10.3% to $186.3 million, while segment profit declined 2.2% to $22.5 million. Reported segment margin was 12.1%.
- Engineered Products sales fell 18.2% to $72.1 million and segment profit fell 75.0% to $1.5 million, reflecting weak oil and gas, compressor and bearing demand and unfavorable currency effects.
- Power Systems sales increased 5.6% to $49.1 million; segment profit declined 4.2% to $9.2 million.
- Nine-month sales declined 2.3%, with Sealing Products up 4.2%, Engineered Products down 17.3% and Power Systems up 5.1%.
Cash, debt and liquidity
- Cash and cash equivalents were $92.0 million at September 30, 2015, down from $194.2 million at December 31, 2014. All reported cash was held outside the United States.
- Operating activities generated $32.0 million in the first nine months, compared with a $9.9 million use in 2014. The improvement primarily reflected lower pension contributions and income taxes paid, partly offset by higher interest paid.
- Investing activities used $72.2 million, including $45.5 million for acquisitions, $23.4 million for capital expenditures and $3.6 million for capitalized software.
- Financing activities used $59.3 million, including $80.0 million for share repurchases, $13.8 million of dividends, $44.9 million to repurchase convertible debentures and $123.1 million of debt repayments, partly funded by $177.7 million of new debt.
- Long-term debt was $376.7 million, compared with $298.6 million at year-end 2014. Notes payable to GST were $283.2 million, including $271.0 million classified as long-term.
- The $300 million senior secured revolving facility had $78.0 million of borrowings and $9.7 million of letters of credit outstanding, leaving $212.3 million of availability.
- The remaining approximately $2.2 million of convertible debentures were converted after quarter-end; EnPro expected to pay approximately $2.2 million in cash and issue approximately 20,000 shares.
Material changes versus the prior comparable period
- Revenue was modestly higher in Q3 but lower for the first nine months, reflecting market weakness and currency pressure.
- Q3 net income increased despite lower gross and operating profit, primarily because other expense was lower and the effective tax rate fell to 6.3% from 34.4%.
- Nine-month results moved from $18.2 million of net income to a $27.5 million loss, principally due to the $47.0 million CPI impairment, higher interest expense and weaker Engineered Products performance.
- Interest expense increased to $39.0 million for the first nine months from $32.3 million, primarily due to higher average indebtedness.
- EnPro acquired ATDynamics and the Veyance North American air spring business for a combined net cash purchase price of $45.5 million. The acquisitions were included in Sealing Products.
- EnPro repurchased 1.2 million shares for $80.0 million, or an average of $66.76 per share, and began paying regular quarterly dividends.
Guidance, outlook, risks and unusual items
- Management reported soft market conditions, global economic volatility, sluggish oil and gas demand and continuing effects from the strong U.S. dollar. Demand remained sound in nuclear, petrochemical and engine parts and service markets.
- Management projected an unusually low 2015 effective tax rate of 8% to 12%, compared with 28% to 30% excluding discrete items.
- On October 13, 2015, EnPro approved a CPI restructuring involving facility closures and workforce reductions. Expected costs were $7.8 million to $10.0 million, with approximately 90% expected in the fourth quarter of 2015 and the remainder in the first half of 2016. Expected future cash costs were $4.1 million to $5.3 million.
- The company recorded a $6.2 million loss provision in Q1 on a Euro-denominated EDF engine contract because of currency movements; a $1.2 million favorable foreign-exchange impact was recorded in Q2, with insignificant impact in Q3. The contract remains unhedged for future currency movements.
- GST, Anchor and Garrison remain in Chapter 11 bankruptcy proceedings related to asbestos claims. Approximately 180,000 proofs of claim were filed by the October 6, 2015 bar date, including approximately 10,000 alleging mesothelioma. Current claimants overwhelmingly voted against the proposed plan, while the future claimants’ representative supported it. Confirmation was scheduled to begin June 20, 2016.
- The proposed GST plan would require $30.0 million from Coltec at consummation, $77.5 million of additional GST contributions over seven years and an EnPro guarantee of specified future contributions. Potential supplementary litigation-fund contributions could total up to $132 million, although management assessed the low end of the reasonably possible loss range at zero.
- GST recorded $337.5 million of asbestos-related liabilities and had $80.0 million of remaining insurance coverage believed available for asbestos claims and expenses. The plan and related guarantees remain subject to court approval, creditor actions, appeals and funding risks.
- Environmental liabilities accrued by EnPro totaled $17.1 million. The company also faces potentially significant but presently unquantifiable environmental exposures, including the Lower Passaic River and Onondaga Lake sites.
Most important facts for investors to verify
- Whether CPI’s restructuring produces the expected savings and whether additional impairments or restructuring costs occur.
- The sustainability of cash generation after acquisitions, dividends, share repurchases and higher interest costs.
- Debt covenant compliance, revolver availability and the ability to fund U.S. obligations given that cash was held outside the United States.
- The final outcome, timing and funding requirements of the GST bankruptcy plan, including EnPro’s guarantees and potential derivative asbestos claims.
- The magnitude and allocation of environmental liabilities beyond the $17.1 million recorded reserve.
- Whether weak oil and gas, compressor, bearing and other cyclical markets recover, and the extent to which currency movements continue to affect revenue and margins.
- The extent to which the low projected tax rate depends on discrete benefits, foreign earnings mix or renewal of expired U.S. tax provisions.