Enpro Industries, Inc. — 2017 Q1 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 three months ended March 31, 2017, compared with the same period of 2016. The company operated 55 primary manufacturing facilities in 12 countries.
GST and OldCo remained deconsolidated because of their Chapter 11 proceedings. OldCo, successor to Coltec, filed for Chapter 11 on January 30, 2017; the GST and OldCo cases are jointly administered.
Financial Performance and Key Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $295.8 million | $294.9 million | 0.3% |
| Gross profit | $101.6 million | $97.6 million | 4.1% |
| Gross margin | 34.3% | 33.1% | +120 bps |
| Operating income (loss) | $27.4 million | $(72.4) million | Improved by $99.8 million |
| Operating margin | 9.3% | (24.6)% | Improved by 3,390 bps |
| Net income (loss) | $6.4 million | $(46.8) million | Improved by $53.2 million |
| Diluted EPS | $0.30 | $(2.15) | Improved by $2.45 |
| Operating cash flow | $(19.6) million | $(28.4) million | Improved by $8.8 million |
| Capital expenditures and software | $12.0 million | $7.1 million | Increased by $4.9 million |
Net sales were essentially flat overall, with organic growth of 0.3% after acquisition, divestiture and foreign-currency effects. Sealing Products sales increased 4.1% to $179.3 million, Engineered Products sales increased 1.9% to $75.1 million, and Power Systems sales declined 15.2% to $42.4 million.
Segment profit increased to $36.0 million from $18.0 million. Segment margins were 11.3% for Sealing Products, 12.6% for Engineered Products and 14.6% for Power Systems. Improvement reflected cost reductions, better volumes and mix in Sealing and Engineered Products, lower Power Systems costs and warranty expense, and the absence of certain prior-year charges.
The prior-year results included an $80.0 million asbestos settlement expense. Q1 2017 also benefited from lower SG&A, which declined to $72.9 million from $85.6 million. Interest expense increased to $14.9 million from $13.3 million because of higher average debt. The Q1 2017 effective tax rate was 31.8%; management expects the full-year 2017 rate to be approximately 35% to 40%.
Liquidity, Capital Resources and Balance Sheet
- Cash and cash equivalents were $113.7 million at March 31, 2017, up from $111.5 million at December 31, 2016. All cash was held outside the United States.
- Operating activities used $19.6 million, reflecting working-capital investment, including increases in receivables and inventories.
- Financing activities provided $37.5 million, principally from the March 2017 issuance of $150.0 million of additional 5.875% senior notes due 2022. Proceeds were used primarily to repay revolving-credit borrowings.
- The $300.0 million revolving credit facility had $24.7 million outstanding, $12.2 million of letters of credit and $263.1 million of borrowing availability. EnPro was in compliance with all debt covenants.
- Long-term debt was $468.8 million, current maturities were $0.2 million, and notes payable to GST were $309.3 million. Short-term borrowings from GST were $32.1 million.
- Current liabilities exceeded current assets primarily because the $309.3 million GST notes were classified as current. Management stated that the notes are expected to be resolved through the anticipated Joint Plan and that liquidity was sufficient for future requirements.
- The company paid $4.7 million of dividends, declared a quarterly dividend of $0.22 per share, and repurchased approximately 61,000 shares for $4.0 million during the quarter. An additional $2.5 million of repurchases occurred through May 1, 2017.
Material Changes Versus the Prior Comparable Period
- EnPro returned to profitability, primarily because the prior-year period included the $80.0 million asbestos settlement charge and materially higher SG&A and restructuring costs.
- Segment profit doubled to $36.0 million, with the largest gains in Engineered Products and Power Systems.
- Power Systems revenue declined substantially because of engine shipment timing and lower aftermarket-parts volume, although segment profit improved due to cost savings, pricing, lower warranty expense and favorable EDF contract adjustments.
- OldCo was deconsolidated in Q1 2017, resulting in a $4.8 million investing cash-flow outflow and a $60.8 million asbestos liability associated with EnPro’s keep-well obligation.
- Environmental liabilities increased to $25.3 million from $23.1 million at year-end 2016, including an additional $3.3 million reserve for the Water Valley, Mississippi remediation matter.
- Accumulated other comprehensive loss improved to $(66.2) million from $(70.9) million, principally due to foreign-currency translation and pension-related adjustments.
Guidance, Outlook, Risks and Unusual Items
Management reported modestly strengthening market conditions and expected market growth, product mix and continued cost discipline to drive performance for the balance of 2017. It does not expect the unusually favorable year-over-year SG&A comparison from Q1 to continue for the remainder of the year.
- Management expects approximately $5 million of pension expense for 2017 and total U.S. pension contributions of approximately $3.6 million.
- Subject to court approvals and the absence of appeals, management anticipated consummation of the Joint Plan during Q3 2017 and reconsolidation of GST and OldCo thereafter.
- The Joint Plan contemplated initial cash contributions of $370 million by GST/Garrison and $30 million by OldCo, plus a deferred $60 million OldCo contribution guaranteed by EnPro. Management planned to fund the initial $400 million using cash at GST and OldCo, parent contributions and available revolver capacity.
- GST and OldCo had recorded asbestos liabilities of $387 million and $110 million, respectively. Available insurance coverage was approximately $62.0 million, although collection timing and ultimate recovery were not assured.
- Confirmation hearings for the Joint Plan were scheduled to begin May 15, 2017. Objections remained from a bankruptcy administrator, three insurers and the purchaser of the Quincy Compressor business. Approval, appeals, timing and funding remained material uncertainties.
- Environmental contingencies include the Lower Passaic River, Onondaga Lake, Arizona uranium mines and Water Valley, Mississippi matters. The company stated that it could not estimate a reasonably possible loss range for several of these matters beyond recorded reserves.
- A Mississippi lawsuit filed April 7, 2017 seeks remediation costs, punitive damages and attorneys’ fees relating to groundwater contamination. No separate loss estimate was recorded for the lawsuit beyond existing remediation-related reserves.
- A BorgWarner-related claim involving GGB France had a reasonably possible loss range of approximately €0.4 million to €6.6 million; the company retained a $0.4 million accrual.
- The EDF engine contract remains exposed to foreign-exchange movements, delivery penalties and execution risk. The company recognized a $0.5 million reduction in the loss reserve during Q1 2017.
Most Important Facts for Investors to Verify
- Whether the GST/OldCo Joint Plan received court confirmation and was consummated on the anticipated timetable.
- The actual cash funding required for the asbestos trust, including the $400 million initial contributions, the $60 million deferred contribution and the Canadian settlement obligation.
- Whether GST and OldCo were reconsolidated and the resulting effects on debt, liabilities, cash flows and earnings.
- Availability under the revolving credit facility after asbestos-related funding and compliance with leverage and interest-coverage covenants.
- Collection and timing of the $62.0 million of available asbestos insurance coverage and realization of the $91.9 million GST income-tax receivable.
- Progress and ultimate cost of environmental remediation, particularly the Water Valley litigation and the Lower Passaic River and Onondaga Lake matters.
- Whether Power Systems revenue weakness was temporary shipment timing or indicative of sustained demand pressure.
- Execution of the stated cost-reduction program and whether expected annualized savings of approximately $18 million are realized.