Enpro Industries, Inc. — First-Quarter 2012 Form 10-Q
Reporting period: Quarter ended March 31, 2012. EnPro designs and manufactures engineered industrial products through three segments: Sealing Products, Engineered Products, and Engine Products and Services. Results are unaudited and should be considered in conjunction with the 2011 Form 10-K.
Financial Results and Position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $311.5 million | $269.6 million | +16% |
| Gross profit | $107.2 million | $94.0 million | +14% |
| Gross margin | 34.4% | 34.9% | Down 0.5 points |
| Operating income | $32.2 million | $31.4 million | +3% |
| Operating margin | 10.3% | 11.6% | Down 1.3 points |
| Net income | $13.8 million | $15.2 million | Down 9% |
| Diluted EPS | $0.64 | $0.71 | Down 10% |
| Operating cash flow | $3.0 million | $(12.8) million | Improved $15.8 million |
- Segment performance: Sealing Products sales increased 29% to $149.5 million and segment profit increased 15% to $22.5 million. Engineered Products sales increased 7% to $100.6 million, while segment profit declined to $9.0 million from $10.1 million. Engine Products and Services sales increased 3% to $62.0 million and segment profit increased to $11.8 million.
- Segment profitability: Total segment profit rose 6% to $43.3 million, but segment margin declined to 13.9% from 15.2%, primarily because acquired businesses carried lower margins and the company recorded restructuring charges and unfavorable foreign-exchange effects.
- Cash flow and investing: Capital expenditures were $5.5 million. Investing cash use was $6.0 million, compared with $157.5 million in Q1 2011, which included $152.2 million of acquisitions. Cash increased to $39.4 million from $30.7 million at year-end 2011.
- Liquidity: At March 31, 2012, borrowing availability under the $175 million senior secured revolving facility was $125.5 million, after $15.5 million of borrowings and $4.1 million of letters of credit. Following the April acquisition of Motorwheel, availability was approximately $30 million on April 17, 2012.
- Debt: Long-term debt was $163.6 million carrying value at March 31, 2012, including $172.5 million principal amount of convertible debentures due October 2015. Notes payable to GST totaled $248.1 million, including current and long-term amounts. Total liabilities were $762.9 million and shareholders’ equity was $518.0 million.
- Working capital: Accounts receivable increased to $209.3 million and inventories increased to $129.3 million from $195.3 million and $112.6 million, respectively, at December 31, 2011.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected a 12-percentage-point contribution from acquisitions completed since Q1 2011, five percentage points from higher volumes and selected price increases, and a one-percentage-point unfavorable currency impact.
- Cost increases in manufacturing and selling, general and administrative expenses were not fully recovered through pricing. Restructuring charges totaled $1.3 million, and unfavorable foreign-exchange effects reduced segment profit by $0.6 million.
- Corporate expenses increased to $9.1 million from $7.9 million, principally because of higher long-term incentive compensation and directors’ deferred compensation expense.
- Net interest expense increased to $10.6 million from $9.5 million, primarily because of higher GST note balances and revolver borrowings.
- The effective tax rate increased to 36.2% from 30.4%, mainly because certain U.S. tax provisions expired at December 31, 2011.
- Operating cash flow improved from a $12.8 million use to $3.0 million provided, aided by lower cash taxes and improved working capital.
Guidance, Outlook, Risks and Unusual Items
- Management expects strong 2012 sales growth from acquisitions and organic growth. Businesses acquired since Q1 2011 are expected to contribute $55 million to $60 million of sales during the remaining three quarters of 2012.
- Management expects total segment profit margins to improve for 2012, although margins remain affected by lower-margin original-equipment sales and acquisition-integration costs.
- Management expects an effective tax rate of 34% to 37% for the remainder of 2012, subject to discrete tax events and possible renewal of expired tax incentives.
- Motorwheel was acquired in April 2012 for approximately $85 million, funded with additional revolver borrowings. The purchase-price allocation remained subject to valuation and purchase-price adjustments.
- GST LLC, Anchor and Garrison remain in Chapter 11 proceedings related to asbestos claims and have been deconsolidated since June 2010. EnPro’s investment in GST was $236.9 million at March 31, 2012 and is subject to impairment review.
- Available insurance coverage for GST asbestos claims was reported at $157.3 million, of which $37.3 million had been collected since the bankruptcy petition date. Three GST appeals involving adverse decisions totaling $2.4 million were pending at March 31, 2012.
- Environmental liabilities were accrued at $11.9 million for 15 sites. The company also reported a pension liability of $110.4 million and estimated 2012 contributions of $13.4 million to U.S. defined-benefit plans.
- Key risks include asbestos claims and bankruptcy outcomes, reduced revolver availability following Motorwheel, cyclical markets, raw-material costs, foreign-exchange exposure, tax-law changes, pension funding requirements, and contingent liabilities from discontinued operations.
Important Facts for Investors to Verify
- Confirm the final purchase accounting, operating contribution and debt impact of the Motorwheel acquisition.
- Monitor revolver availability, borrowing-base compliance and covenant headroom after the acquisition.
- Track GST’s Chapter 11 plan, asbestos claims, insurance recoveries and potential impairment of the GST investment and related tax receivable.
- Assess whether management’s projected margin improvement is achieved despite lower-margin acquired and original-equipment sales.
- Review pension funding needs, environmental exposures and other discontinued-operation contingencies.
- Verify the effect of expired or renewed tax incentives on the full-year effective tax rate.