Enpro Industries, Inc. — Form 10-Q Summary
Business context and reporting period
EnPro designs and manufactures engineered industrial products through three segments: Sealing Products, Engineered Products, and Engine Products and Services. The filing covers the quarter and nine months ended September 30, 2013; financial statements are unaudited and should be read with the 2012 Form 10-K.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $276.0 million | $291.7 million | $868.7 million | $904.9 million |
| Gross profit | $92.1 million | $98.8 million | $295.5 million | $309.0 million |
| Operating income | $18.3 million | $28.8 million | $69.8 million | $87.4 million |
| Net income | $5.6 million | $11.3 million | $22.2 million | $35.3 million |
| Diluted EPS | $0.23 | $0.53 | $0.96 | $1.64 |
| Operating cash flow | Not provided | Not provided | $38.1 million | $55.9 million |
- Q3 gross margin was approximately 33.4%, compared with 33.9% in the prior-year quarter; operating margin was approximately 6.6% versus 9.9%; net margin was approximately 2.0% versus 3.9%.
- Nine-month segment margin was 12.0%, compared with 13.1% in 2012. Sealing Products improved to 15.6% from 14.8%, while Engineered Products declined to 6.4% from 6.8% and Engine Products and Services declined to 10.4% from 19.1%.
- Cash and cash equivalents were $75.1 million at September 30, 2013, up from $53.9 million at December 31, 2012. Approximately $69.2 million was held outside the United States.
- Operating cash flow was reduced by lower earnings and higher pension contributions. Investing cash use was $30.0 million, primarily for capital expenditures and internal-use software; 2012 investing cash use included approximately $85 million for the Motorwheel acquisition.
- Revolver availability was $86.3 million after $35.3 million of borrowings and $4.8 million of letters of credit. The facility has maximum availability of $175 million and generally matures July 17, 2015.
- Convertible Debentures had $172.5 million of principal outstanding, bear a 3.9375% coupon, and mature October 15, 2015 unless converted. Because the conversion condition was met, $154.6 million was classified as current maturities at September 30, 2013. The effective interest rate is approximately 9.5%.
- Notes payable to GST totaled $259.3 million and bear 11% interest, including 4.5% capitalized PIK interest. Long-term debt had a carrying value of $190.9 million and fair value of $354.3 million.
- Total assets were $1.422 billion and total liabilities were $848.9 million at September 30, 2013. The pension liability was $98.8 million.
Material changes versus the prior comparable periods
- Q3 sales decreased 5%, and nine-month sales decreased 4%. The principal driver was weaker Engine Products and Services revenue, including lower parts and service activity related to U.S. government sequestration, maintenance timing, and production downtime.
- Sealing Products sales increased 4% in Q3 and segment profit increased 3%, supported by heavy-duty truck demand, pricing, a small product-line acquisition, and favorable foreign exchange.
- Engineered Products sales declined 3% in Q3, primarily because of lower European automotive and North American CPI demand; segment profit declined 17%.
- Engine Products and Services sales declined 34% in Q3 and segment profit declined from $10.4 million to $2.3 million. Margin fell from 19.6% to 6.6%.
- Other expense increased materially because of higher environmental reserves and increased activity in GST’s asbestos liability estimation trial. A $6.25 million environmental liability was accrued in Q2 for the former Trent Tube site; total environmental accruals were $15.5 million at September 30, 2013.
- Effective tax rates were 22.2% in Q3 and 27.0% for the first nine months, versus 35.4% and 34.8%, respectively, in the prior-year periods. The reduction reflected a greater proportion of foreign earnings and tax benefits from the American Taxpayer Relief Act of 2012.
- GST-related reorganization expenses were $38.2 million in the first nine months of 2013, compared with $22.7 million in 2012.
Guidance, outlook, risks and unusual items
- Management expected fourth-quarter sales to be approximately comparable with Q4 2012. Operating profit was expected to reflect a greater mix of lower-margin original-equipment sales.
- Management anticipated a 2013 effective tax rate of 29% to 31%, subject to changes in earnings mix, tax law, acquisitions, and other discrete events.
- Management estimated 2013 U.S. defined-benefit pension contributions of $22.5 million, including $17.4 million contributed through September 30, and expected full-year pension expense of approximately $10.5 million.
- GST, Anchor, and Garrison remain in Chapter 11 proceedings related to asbestos claims and have been deconsolidated since 2010. EnPro carried a $236.9 million investment in GST and a $47.3 million GST-related income-tax receivable.
- GST recorded $466.8 million of asbestos liabilities, but management stated that ultimate costs could differ materially and potentially range up to the total value of GST. GST’s proposed plan contemplated approximately $270 million of payments and an EnPro contribution of $30 million, but the plan was opposed by claimant representatives and its approval was uncertain.
- An asbestos estimation trial concluded in August 2013; a Bankruptcy Court decision was not expected before the first quarter of 2014, and appeals or additional plan-confirmation hurdles could follow.
- GST reported $123.1 million of remaining insurance coverage believed available for asbestos claims, in addition to $18.8 million collected during the first nine months of 2013. Collection timing and availability remain uncertain.
- Other risks include cyclical demand, raw-material prices and availability, foreign-exchange exposure, pension funding, environmental matters, legacy liabilities, and potential claims seeking to impose derivative responsibility on EnPro or affiliates.
Most important facts for an investor to verify
- Whether the decline in Engine Products and Services demand and margins is temporary or reflects a sustained change in government, aftermarket, and engine activity.
- The conversion, refinancing, or repayment plan for the $172.5 million of convertible debentures and the effect on liquidity and potential share dilution.
- The outcome of the GST asbestos estimation proceeding, any competing reorganization plan, potential EnPro obligations, and the recoverability of the GST investment and tax receivable.
- The timing and collectability of the stated $123.1 million of asbestos insurance coverage.
- Future environmental remediation costs, particularly the Trent Tube site, relative to the $15.5 million accrued liability.
- Actual pension contributions and required funding in 2014 and beyond.
- Cash held outside the United States and any tax or liquidity effects if repatriation becomes necessary.