Enpro Industries, Inc. — FY2012 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 filing covers the fiscal year ended December 31, 2012, with quarterly data including the fourth quarter. The company operated 61 primary manufacturing facilities in 12 countries and generated approximately 45% of revenue outside the United States.
Three subsidiaries—Garlock Sealing Technologies LLC, Anchor Packing Company and Garrison Litigation Management Group—have been in Chapter 11 proceedings since June 5, 2010, and have been deconsolidated from EnPro’s results since that date.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $1,184.2 million | $1,105.5 million | +7% |
| Gross profit | $400.1 million | $379.0 million | +6% |
| Gross margin | 33.8% | 34.3% | Down 50 bps |
| Operating income | $107.5 million | $101.7 million | +6% |
| Income from continuing operations | $41.0 million | $44.2 million | -7% |
| Diluted EPS from continuing operations | $1.90 | $2.06 | -8% |
| Operating cash flow | $118.2 million | $81.4 million | +45% |
| Total assets | $1,370.9 million | $1,252.1 million | +9% |
Net margin was approximately 3.5%, compared with 4.0% in 2011. Segment profit increased 5% to $148.5 million, but higher interest expense, taxes and other expense reduced earnings. The effective tax rate increased to 35.3% from 32.1%. Net income was $41.0 million in 2012; 2010 included $94.1 million of discontinued-operation income and is not directly comparable.
- Sealing Products: Sales of $609.1 million, up 14%; segment profit of $88.8 million, up 9%; margin declined to 14.6% from 15.2%. Acquisitions, including Motorwheel, Tara and PSI, contributed materially.
- Engineered Products: Sales of $363.0 million, down 6%; segment profit of $20.5 million, down 30%; margin declined to 5.6% from 7.6%, primarily because of lower European and industrial demand and unfavorable foreign exchange.
- Engine Products and Services: Sales of $214.6 million, up 15%; segment profit of $39.2 million, up 28%; margin increased to 18.3% from 16.5%, helped by engine revenue recognition and aftermarket demand.
- Fourth quarter: Sales were $279.3 million versus $271.4 million in the prior-year quarter; net income was $5.7 million versus $2.6 million; diluted EPS was $0.27 versus $0.12.
Cash flow, debt and liquidity
- Operating activities generated $118.2 million. Capital expenditures were $40.9 million, and investing activities used $125.6 million, including $85.3 million for the Motorwheel acquisition.
- Financing activities provided $29.5 million, including $28.3 million of net revolving-credit borrowings.
- Cash and cash equivalents were $53.9 million at year-end, held outside the United States. EnPro reported no U.S. cash and approximately $54 million of foreign cash.
- Long-term debt, including current maturities, was $185.3 million, compared with $150.2 million in 2011. Revolver borrowings were approximately $34.2 million, with $90.7 million of stated availability after letters of credit and borrowings.
- The company had $172.5 million principal amount of 3.9375% convertible debentures due October 2015 and $248.1 million of notes payable to GST, including $10.7 million of 2012 payment-in-kind interest. The GST notes bear 11% interest, with 4.5% capitalized.
- The company had a pension liability of $112.7 million and expects approximately $19.1 million of U.S. defined-benefit pension contributions in 2013.
- EnPro paid no dividends in 2012 or 2011 and does not expect to pay dividends in the foreseeable future.
Material changes versus the prior comparable period
- Sales growth was driven primarily by acquisitions and pricing, partly offset by a 3% unfavorable foreign-currency effect and lower volumes in Engineered Products.
- Motorwheel was acquired in April 2012 for approximately $85 million, funded with additional revolver borrowings. It contributed approximately $33 million of 2012 sales and $4.2 million of segment profit.
- Restructuring expense increased to $5.0 million from $1.4 million. Actions included facility consolidation, workforce reductions and the closure of a noncommercial GGB product line; 189 positions were targeted.
- Interest expense increased to $42.8 million from $39.6 million because of higher revolving-credit borrowings and GST-related debt.
- Backlog declined to $288.9 million at December 31, 2012, from $351.2 million. Approximately 16% was expected to be fulfilled after 2013, but management cautioned that backlog is not highly predictive for much of the business.
- The company’s 2012 goodwill impairment test found that CPI’s estimated fair value exceeded book value by only 10%, versus 37% in 2011. CPI had $55.4 million of goodwill and remains sensitive to operating forecasts and discount-rate assumptions.
Guidance, outlook, risks and unusual items
Management expected weak market conditions from the second half of 2012 to continue through the first half of 2013, with possible industrial-market improvement in the second half. First-quarter 2013 sales and segment profit were expected to be below the first quarter of 2012. Engine Products and Services sales were expected to decline 25%–30% in the first quarter and approximately 15% for full-year 2013, while Sealing Products and Engineered Products were expected to face soft demand and unfavorable mix.
- Asbestos and bankruptcy: GST’s recorded asbestos liability was $466.8 million at December 31, 2012, against estimated remaining insurance coverage of $141.9 million. A mesothelioma claims-estimation trial was scheduled for July 2013. The ultimate liability and plan of reorganization remain uncertain, and claimant representatives have asserted potential claims against EnPro and Coltec.
- GST’s proposed plan contemplated approximately $270 million of payments for present and future claims and a $30 million EnPro contribution, but the plan was opposed and was considered unlikely to be approved in its then-current form.
- Tax contingency: If the company loses the remaining disputed tax position related to GST, additional taxes of approximately $39.5 million, plus potential interest and penalties, could become payable.
- Environmental matters: EnPro had $11.3 million accrued for environmental contingencies at year-end. The filing does not provide a reliable estimate of potential losses above recorded amounts.
- Pensions: U.S. plans remained underfunded, requiring significant future cash contributions beyond 2013.
- Concentration and cyclicality: Engine Products and Services’ largest customer represented approximately 25% of segment revenue, and U.S. Navy demand was expected to decline. Industrial, energy, trucking, semiconductor and automotive markets are cyclical.
- Other risks: Raw-material inflation, foreign exchange, international operations, supply-chain disruption, acquisitions, intellectual-property licenses, goodwill impairment, derivative counterparties and debt-covenant or convertible-debt requirements could affect results and liquidity.
- The American Taxpayer Relief Act passed in January 2013 was expected to produce a significant first-quarter 2013 tax benefit and reduce the 2013 effective tax rate.
Most important facts for investors to verify
- Progress, claim estimates, insurance recoveries and potential EnPro obligations in the GST asbestos Chapter 11 proceedings.
- Liquidity available under the revolver and the company’s ability to address the 2015 convertible debenture maturity and GST note obligations.
- Required pension contributions and the effect of underfunding on future cash flow.
- Whether the projected 2013 recovery in industrial markets occurs and whether Engine Products and Services revenue declines as forecast.
- CPI’s operating performance and sensitivity of its goodwill valuation to volume, pricing, cost savings and discount-rate assumptions.
- Integration and returns from Motorwheel and the company’s broader acquisition strategy.
- Potential tax exposure of approximately $39.5 million plus interest and penalties, and the status of environmental and discontinued-operation contingencies.