Enpro Industries, Inc. — FY2016 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 Power Systems. The filing covers the fiscal year ended December 31, 2016; fourth-quarter results are also presented. EnPro operated 55 primary manufacturing facilities in 12 countries and had approximately 5,000 consolidated employees.
GST, Anchor and Garrison have been deconsolidated since their June 5, 2010 Chapter 11 filings. Accordingly, consolidated results exclude GST operating results, although EnPro reports its investment in GST and related intercompany balances.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $1,187.7 million | $1,204.4 million | Down 1.4% |
| Gross profit | $394.7 million | $395.5 million | Down 0.2% |
| Gross margin | 33.2% | 32.8% | Up approximately 0.4 points |
| Operating income (loss) | $(4.7) million | $37.6 million | Declined $42.3 million |
| Net income (loss) | $(40.1) million | $(20.9) million | Loss increased $19.2 million |
| Diluted EPS | $(1.86) | $(0.93) | Loss increased |
| Operating cash flow | $64.5 million | $86.5 million | Down $22.0 million |
| Capital expenditures | $35.8 million | $36.8 million | Down $1.0 million |
The consolidated operating margin was approximately negative 0.4%, and the net margin was approximately negative 3.4%. Results included an $80.0 million asbestos settlement charge, $13.4 million of restructuring costs, $55.1 million of net interest expense and $14.8 million of other expense, net. A $28.6 million income-tax benefit produced a 41.7% effective tax rate.
| Segment | 2016 sales | 2016 profit | 2015 comparison |
|---|---|---|---|
| Sealing Products | $705.6 million | $81.8 million | Sales flat; profit down from $84.3 million |
| Engineered Products | $277.1 million | $12.4 million | Sales down 7.0%; profit up from $6.4 million |
| Power Systems | $208.3 million | $17.0 million | Sales up 1.8%; profit down from $27.1 million |
Segment margins were approximately 11.6% for Sealing Products, 4.5% for Engineered Products and 8.2% for Power Systems. Sealing Products faced weakness in oil and gas, heavy-duty trucking, nuclear and general industrial markets, partly offset by acquisitions and stronger semiconductor and food and pharmaceutical demand. Engineered Products benefited from cost reductions and lower raw-material costs despite lower volume. Power Systems was affected by mix, manufacturing costs, a $7.6 million 2016 loss on the EDF contract and $2.7 million paid to settle the AVL litigation.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $111.5 million at year-end, including $0.8 million in the United States and $110.7 million outside the United States.
- Long-term debt, including current maturities, was $425.0 million, compared with $356.3 million in 2015. This included $294.1 million of 5.875% senior notes due 2022 and $130.0 million drawn on the revolving facility.
- Revolving-facility availability was $157.8 million after $130.0 million of borrowings and $12.2 million of letters of credit. EnPro was in compliance with its debt covenants at December 31, 2016.
- Notes payable to GST totaled $295.9 million, including current and long-term amounts, and bear 11% interest, with 4.5% capitalized as payment-in-kind interest. Contractual obligations show $323.2 million due within one to three years.
- Financing activities provided $22.0 million, principally from $67.7 million of net revolver borrowings, offset by $30.4 million of share repurchases and $18.1 million of dividends.
- EnPro repurchased approximately 0.6 million shares for $29.7 million in 2016 and paid $0.84 per share in dividends. The quarterly dividend was increased to $0.22 per share beginning in March 2017.
Material changes versus the prior comparable period
- Sales declined 1.4% and segment profit declined 5.6%, reflecting soft end-market demand and unfavorable foreign exchange.
- Net loss widened to $40.1 million from $20.9 million, primarily because of the $80.0 million asbestos settlement charge and higher interest and environmental costs.
- Operating cash flow declined to $64.5 million from $86.5 million, principally because of higher pension contributions, higher interest payments and lower segment profit.
- Engineered Products profitability improved substantially following restructuring, facility exits and cost controls, while Power Systems profitability deteriorated materially.
- EnPro acquired Rubber Fab for $22.6 million, sold Franken Plastik and CPI Thailand for combined proceeds of $3.7 million, and received the $2.9 million escrow balance from the prior GRT disposition.
- A company-wide cost-reduction program initiated in 2016 eliminated 192 administrative and manufacturing positions. Management expected approximately $18 million of annualized savings; approximately $9 million of operating-cost reduction was realized in the second half of 2016.
- Fourth-quarter 2016 sales were $286.9 million, gross profit was $90.6 million and net loss was $2.9 million, compared with fourth-quarter 2015 sales of $321.9 million, gross profit of $103.0 million and net income of $6.6 million.
Guidance, outlook, risks and unusual items
Management described demand in most markets as soft and expected sluggish demand or a weak recovery in the following year, while continuing cost controls, innovation, acquisitions and shareholder returns. Management projected a 2017 effective tax rate of 35% to 40%, approximately $3.6 million of U.S. pension contributions and approximately $4.2 million of pension expense.
The principal contingency is the asbestos restructuring. The Joint Plan contemplated $480.0 million of total contributions to an asbestos trust: $370.0 million from GST and Garrison, $30.0 million in cash from OldCo, a $20.0 million stock-or-cash option and a deferred $60.0 million contribution guaranteed by EnPro. GST had accrued $387.0 million and OldCo had accrued $110.0 million at December 31, 2016. The plan received approximately 95.85% approval by number and 95.80% by dollar amount of voting asbestos claims, but remained subject to court approval, objections and possible appeals.
OldCo filed Chapter 11 on January 30, 2017 and was expected to be deconsolidated thereafter. The confirmation hearing was scheduled for May 15, 2017. Management expected plan consummation and GST reconsolidation in the third quarter of 2017, assuming required approvals and no appeals; the filing text does not establish that this outcome occurred.
- Available insurance coverage for GST asbestos claims was approximately $62.0 million, but collection timing and coverage under certain historical Coltec policies remained uncertain.
- Environmental liabilities totaled $23.1 million at year-end. Significant matters included the Lower Passaic River Superfund site, for which the company had accrued $3.5 million while acknowledging potentially higher costs, and the Onondaga Lake and Water Valley matters, for which additional losses could not be reasonably estimated.
- The BorgWarner claim against GGB France had preliminary estimated damages of EUR 6.6 million to EUR 7.6 million, although the company cited defenses and accrued $0.4 million. A final expert report was expected in the first quarter of 2017.
- The EDF contract generated a $7.6 million loss in 2016, including $5.8 million recorded in the fourth quarter. The company had not hedged the contract’s future foreign-exchange exposure.
- Backlog was $347.7 million at December 31, 2016 versus $346.6 million at December 31, 2015; approximately 34% was expected to be filled after 2017. Management cautioned that backlog was not highly predictive because of short lead times and seasonality.
Most important facts for an investor to verify
- Whether the Joint Plan was confirmed and consummated, including the timing and funding of the $480.0 million asbestos trust contributions.
- The post-petition accounting, deconsolidation and eventual reconsolidation treatment for OldCo and GST.
- Actual cash availability after asbestos funding, debt service, pension contributions and possible Canadian settlement payments.
- Whether restructuring savings offset continued weakness in oil and gas, commercial vehicles, general industrial and other cyclical markets.
- Changes in environmental reserves and the ultimate exposure from the Passaic River, Onondaga Lake, Water Valley and Arizona uranium-mine matters.
- Final resolution and financial exposure related to the BorgWarner claim and the EDF contract.
- The sustainability of dividends and share repurchases given the 2016 net loss, increased borrowings and debt-covenant restrictions.