Enpro Industries, Inc. — Fiscal 2011 Form 10-K 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 company operated 57 primary manufacturing facilities in 11 countries and generated approximately 49% of revenue outside the United States. This filing covers the fiscal year ended December 31, 2011; fourth-quarter 2011 results are also presented in the supplementary quarterly data.
Results exclude GST LLC, Anchor Packing Company and Garrison Litigation Management Group after their June 5, 2010 Chapter 11 filings. GST was therefore deconsolidated and accounted for as an investment, limiting comparability with periods before the filing.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $1,105.5 million | $865.0 million | +28% |
| Gross profit | $379.0 million | $324.0 million | +17% |
| Gross margin | 34.3% | 37.5% | Down 3.2 points |
| Operating income | $101.7 million | $54.4 million | +87% |
| Income from continuing operations | $44.2 million | $61.3 million | −28% |
| Diluted EPS from continuing operations | $2.06 | $2.96 | −30% |
| Net income | $44.2 million | $155.4 million | −72% |
| Operating cash flow | $78.6 million | $33.5 million | +135% |
Derived 2011 operating margin was approximately 9.2% and net margin was approximately 4.0%. The 2010 net income included $94.1 million from discontinued operations, primarily the $92.5 million after-tax gain on the sale of Quincy Compressor.
- Segment sales and profit: Sealing Products sales were $534.9 million and segment profit was $81.2 million; Engineered Products sales were $386.7 million and profit was $29.2 million; Engine Products and Services sales were $185.8 million and profit was $30.6 million.
- Total segment profit increased 15% to $141.0 million, but segment margin declined to 12.8% from 14.1%, largely because of acquired lower-margin businesses and weaker Engine Products and Services margins.
- Engine Products and Services recorded a $1.4 million estimated warranty expense and a $3.0 million estimated contract loss. The contract loss related to nuclear power plant emergency-power engines following the Japan tsunami and prior cost underestimation.
- Beginning in the third quarter, certain engine contracts used percentage-of-completion accounting, contributing $9.6 million of revenue and $1.5 million of operating income in 2011.
Material changes versus the prior comparable period
- 2011 sales growth reflected six 2011 acquisitions, higher volumes, market-share gains, selected pricing actions and favorable foreign exchange. Acquisitions contributed approximately 20 percentage points of consolidated sales growth and generated $155.8 million of reported sales.
- Acquisition spending was $228.2 million, including $99.2 million for PSI; approximately $2.2 million of acquisition-related costs were expensed. Acquisitions added $90.5 million of goodwill and $100.8 million of identifiable intangible assets.
- Sealing Products sales increased 35%, including contributions from acquisitions and stronger oil and gas, rubber, aerospace, semiconductor and truck markets. Its margin declined to 15.2% from 17.7%.
- Engineered Products sales increased 28% and profit increased 79%, with margin improving to 7.6% from 5.4%.
- Engine Products and Services sales increased 12%, but profit declined 14% and margin fell to 16.5% from 21.4% because of product mix, lower aftermarket activity, cost increases, warranty expense and the contract-loss provision.
- Net interest expense increased to $39.6 million from $25.9 million, primarily because GST-related notes became recognized after deconsolidation and because of new revolving-credit borrowings.
- There were no asbestos-related expenses in EnPro’s consolidated 2011 results, compared with $23.3 million in 2010. This does not eliminate the economic uncertainty associated with GST’s asbestos proceedings or EnPro’s $236.9 million investment in GST.
Cash flow, debt and liquidity
- Operating activities generated $78.6 million. Investing activities used $257.9 million, principally for $228.2 million of acquisitions and $31.5 million of capital expenditures. Financing activities used $9.4 million.
- Cash and cash equivalents declined to $30.7 million from $219.2 million, including approximately $3 million in the United States and $28 million outside the United States.
- At December 31, 2011, long-term debt including current maturities was $150.2 million, and notes payable to GST totaled $237.4 million. Total liabilities were $758.0 million and shareholders’ equity was $494.1 million.
- The senior secured revolving facility had maximum availability of $175 million. Actual borrowing availability was $123.2 million after $4.1 million of letters of credit and $4.0 million of borrowings. The maximum amount borrowed during 2011 was $41.3 million.
- The company had $172.5 million principal amount of 3.9375% convertible debentures, maturing October 15, 2015. None of the conversion conditions was satisfied at year-end. The company stated that conversion or change-of-control obligations could create significant cash requirements.
- U.S. defined benefit plans remained underfunded. EnPro contributed $5.9 million in cash and a $21.4 million guaranteed investment contract during 2011 and estimated 2012 U.S. pension contributions of approximately $13.4 million.
- The company has not paid cash dividends and does not expect to do so in the foreseeable future.
Guidance, outlook, risks and unusual items
Management anticipated strong 2012 sales growth from improved markets, higher volumes, market-share gains and a full year of contributions from 2011 acquisitions. Management expected segment margins to improve, while noting continued pressure from lower-margin original-equipment products and acquisition-integration costs, particularly in the first half of 2012. The estimated 2012 effective tax rate was 32% to 34%.
- Asbestos and bankruptcy: GST, Anchor and Garrison remain in Chapter 11. GST’s recorded asbestos liability at the petition date was $472.1 million, and insurance coverage believed available at December 31, 2011 was approximately $158.0 million. The ultimate liability, insurance recoveries, plan of reorganization and realizability of EnPro’s GST investment and related tax receivable remain uncertain.
- Pension and other obligations: The pension liability increased to $108.7 million, and future contributions may rise depending on investment returns, assumptions and legislative requirements.
- Operating risks: Cyclicality, competitive pricing, raw-material availability and cost inflation, particularly PTFE supply constraints, foreign exchange, international regulatory exposure and dependence on distributors could affect results.
- Customer concentration: The largest Engine Products and Services customer accounted for approximately 27% of that segment’s revenue in 2011, although no customer represented 10% or more of consolidated sales.
- Contingencies: Environmental liabilities were accrued at $12.6 million for 15 sites. The company also retains potential liabilities related to divested operations, including Colt Firearms, Central Moloney and Crucible-related obligations.
- Controls: Management and PricewaterhouseCoopers concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2011. The five identified 2011 acquired entities, representing 21% of consolidated assets and 14% of revenue, were excluded from management’s internal-control assessment.
Most important facts for investors to verify
- Reconcile continuing-operations performance with reported net income, particularly the absence of Quincy’s 2010 discontinued-operation gain.
- Assess the comparability of 2011 and 2010 results after GST deconsolidation and review the valuation of the $236.9 million GST investment.
- Evaluate acquisition integration, goodwill and intangible-asset balances, and whether expected margin improvements materialize.
- Review liquidity against the 2015 convertible-debt maturity, GST-related notes, pension contributions and other contractual obligations totaling $708.1 million.
- Monitor the GST asbestos plan, insurance recoveries and potential effects on EnPro’s assets, cash flows and future accounting.
- Verify the sustainability of operating cash flow after acquisition spending, working-capital investment and required pension contributions.