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NPO > SEC Filings for NPO > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for ENPRO INDUSTRIES, INC

Form 10-Q for ENPRO INDUSTRIES, INC


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following is management's discussion and analysis of certain significant factors that have affected our financial condition, cash flows and operating results during the periods included in the accompanying unaudited consolidated financial statements and the related notes. You should read this in conjunction with those financial statements and the audited consolidated financial statements and related notes included in our annual report on Form 10-K for the fiscal year ended December 31, 2011.

Forward-Looking Information

This quarterly report on Form 10-Q includes statements that reflect projections or expectations of the future financial condition, results of operations and business of EnPro that are subject to risk and uncertainty. We believe those statements to be "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this report, the words "may," "hope," "will," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "potential," "continue," "likely," and other expressions generally identify forward-looking statements.

We cannot guarantee actual results or events will not differ materially from those projected, estimated, assigned or anticipated in any of the forward-looking statements contained in this report. In addition to those factors specifically noted in the forward-looking statements and those identified in the Company's annual report on Form 10-K for the year ended December 31, 2011, other important factors that could result in those differences include:

• the value of pending claims and the number and value of future asbestos claims against our subsidiaries;

• risks inherent and potential adverse developments that may occur in the Chapter 11 reorganization proceeding involving Garlock Sealing Technologies LLC ("GST LLC"), The Anchor Packing Company ("Anchor") and Garrison Litigation Management Group, Ltd. ("Garrison"), including risks presented by efforts of asbestos claimant representatives to assert claims against us based on various theories of derivative corporate responsibility, including veil piercing and alter ego;

• general economic conditions in the markets served by our businesses, some of which are cyclical and experience periodic downturns;

• prices and availability of raw materials; and

• the amount of any payments required to satisfy contingent liabilities related to discontinued operations of our predecessors, including liabilities for certain products, environmental matters, employee benefit obligations and other matters.


We caution our shareholders not to place undue reliance on these statements, which speak only as of the date on which such statements were made.

Whenever you read or hear any subsequent written or oral forward-looking statements attributed to us or any person acting on our behalf, you should keep in mind the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

Overview and Outlook

Overview. We are a leader in the design, development, manufacturing and marketing of proprietary engineered industrial products. We have 59 primary manufacturing facilities located in 11 countries, including the United States.

We manage our business as three segments: a Sealing Products segment, an Engineered Products segment, and an Engine Products and Services segment.

Our Sealing Products segment designs, manufactures and sells sealing products, including: metallic, non-metallic and composite material gaskets; dynamic seals; compression packing; resilient metal seals; elastomeric seals; hydraulic components; expansion joints; heavy-duty truck wheel-end component systems, including brake products; flange sealing and isolation products; pipeline casing spacers/isolators; casing end seals; modular sealing systems for sealing pipeline penetrations; hole forming products; manhole infiltration sealing systems; safety-related signage for pipelines; bellows and bellows assemblies; pedestals for semiconductor manufacturing; PTFE products; conveyor belting; and sheeted rubber products. These products are used in a variety of industries, including chemical and petrochemical processing, petroleum extraction and refining, pulp and paper processing, heavy-duty trucking, power generation, food and pharmaceutical processing, primary metal manufacturing, mining, water and waste treatment, aerospace, medical, filtration and semiconductor fabrication. In many of these industries, performance and durability are vital for safety and environmental protection. Many of our products are used in highly demanding applications, e.g., where extreme temperatures, extreme pressures, corrosive environments, strict tolerances, and/or worn equipment make product performance difficult.

Our Engineered Products segment includes operations that design, manufacture and sell self-lubricating, non-rolling, metal-polymer, solid polymer and filament wound bearing products, aluminum blocks for hydraulic applications, and precision engineered components and lubrication systems for reciprocating compressors. These products are used in a wide range of applications, including the automotive, pharmaceutical, pulp and paper, natural gas, health, power generation, machine tools, air treatment, refining, petrochemical and general industrial markets.

Our Engine Products and Services segment designs, manufactures, sells and services heavy-duty, medium-speed diesel, natural gas and dual fuel reciprocating engines. The United States government and the general markets for marine propulsion, power generation, and pump and compressor applications use these products and services.

The historical business operations of certain subsidiaries of the Company's subsidiary, Coltec Industries Inc ("Coltec"), principally GST LLC and Anchor, have resulted in a substantial volume of asbestos litigation in which plaintiffs have alleged personal injury or death as a result of exposure to asbestos fibers. Information about GST LLC's asbestos litigation is contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations in the "Asbestos" subsection of the "Contingencies" section and in Note 14 to our Consolidated Financial Statements.


On June 5, 2010 (the "Petition Date"), GST LLC, Anchor and Garrison filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Western District of North Carolina in Charlotte (the "Bankruptcy Court"). GST LLC, Anchor and Garrison are sometimes referred to jointly as "GST" in this report. The filings were the initial step in a claims resolution process. GST LLC is one of the businesses in our broader Garlock group and, prior to the Petition Date, was included in our Sealing Products segment. GST LLC and its subsidiaries operate five primary manufacturing facilities, including operations in Palmyra, New York and Houston, Texas. The filings did not include EnPro Industries, Inc. or any other EnPro Industries, Inc. operating subsidiary.

GST LLC now operates in the ordinary course under court protection and supervision. All pending litigation against GST is stayed during the process. We address our actions to permanently resolve GST LLC's asbestos litigation, and provide an update on its claims resolution process, in this Management's Discussion and Analysis of Financial Condition and Results of Operation in the "Garlock Sealing Technologies LLC and Garrison Litigation Management Group, Ltd." and "Contingencies - Subsidiary Bankruptcy" sections.

The financial results of GST and subsidiaries were included in our consolidated results through June 4, 2010, the day prior to the Petition Date. However, U.S. generally accepted accounting principles require an entity that files for protection under the U.S. Bankruptcy Code, whether solvent or insolvent, whose financial statements were previously consolidated with those of its parent, as GST's and its subsidiaries' were with ours, generally must be prospectively deconsolidated from the parent and the investment accounted for using the cost method. At deconsolidation, our investment was recorded at its estimated fair value as of June 4, 2010, resulting in a gain for reporting purposes. The cost method requires us to present our ownership interests in the net assets of GST at the Petition Date as an investment and not recognize any income or loss from GST and subsidiaries in our results of operations during the reorganization period. Our investment of $236.9 million as of September 30, 2012, is subject to periodic reviews for impairment. When GST emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting will be determined based upon the applicable facts and circumstances at such time, including the terms of any plan of reorganization. See Note 13 to our Consolidated Financial Statements for condensed financial information for GST and subsidiaries.

In April 2012, the Company acquired Motorwheel Commercial Vehicle Systems, Inc. ("Motorwheel"). Motorwheel is a leading U.S. manufacturer of lightweight brake drums for heavy-duty trucks and other commercial vehicles. Motorwheel also sells wheel-end component assemblies for the heavy-duty market, sells fasteners for wheel-end applications and provides related services to its customers, including product development, testing and certification. The business operates manufacturing facilities in Chattanooga, Tennessee, and Berea, Kentucky. Motorwheel is managed as part of the Stemco operations in the Sealing Products segment.

We paid for the Motorwheel acquisition with approximately $85 million of cash, which was funded by additional borrowings from our revolving credit facility. We preliminarily allocated the purchase price of the business to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the identifiable assets acquired less the liabilities assumed was reflected as goodwill. The purchase price allocation of Motorwheel is subject to the completion of the valuation of certain assets and liabilities as well as purchase price adjustments pursuant to the acquisition agreement.

In August 2011, we acquired certain assets and assumed certain liabilities of PI Bearing Technologies, a privately held manufacturer of bearing blocks and other bearing products used in fluid power applications, and a distributor of high performance plain bearing products used in industrial applications. The business is located in Waukegan, Illinois and is part of our Engineered Products segment.


In July 2011, we acquired Tara Technologies Corporation ("Tara"), a privately-held company that offers highly engineered products and solutions to the semiconductor, aerospace, energy and medical markets. The business, part of our Sealing Products segment, has facilities in Daytona Beach, Florida, San Carlos, California, and Singapore.

In February 2011, we acquired the Mid Western group of companies, a privately-owned business primarily serving the oil and gas drilling, production and processing industries of western Canada. Mid Western services and rebuilds reciprocating compressors, designs and installs lubrication systems, and services and repairs a variety of other equipment used in the oil and gas industry. The business has locations in Calgary, Edmonton and Grand Prairie, Alberta, and is part of our Engineered Products segment.

In February 2011, we acquired the business of Pipeline Seal and Insulator, Inc. and its affiliates ("PSI"), a privately-owned group of companies that manufacture products for the safe flow of fluids through pipeline transmission and distribution systems worldwide. The PSI business primarily serves the global oil and gas industry and water and wastewater infrastructure markets. The business's products include flange sealing and flange isolation products; pipeline casing spacers/isolators; casing end seals; the original Link-Sealฎ modular sealing system for sealing pipeline penetrations into walls, floors, ceilings and bulkheads; hole forming products; manhole infiltration sealing systems; and safety-related signage for pipelines. The business has manufacturing locations in the United States, Germany and the United Kingdom, and is part of our Sealing Products Segment.

In January 2011, we acquired certain assets and assumed certain liabilities of Rome Tool & Die, Inc., a leading supplier of steel brake shoes to the North American heavy-duty truck market. The business is part of Stemco, which is in the Sealing Products segment. The business is located in Rome, Georgia.

We paid for the acquisitions completed during 2011 with $228.2 million in cash, which included $99.2 million for the purchase of PSI. We allocated the purchase prices of the acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase prices over the identifiable assets acquired less the liabilities assumed was reflected as goodwill.

Outlook.

We expect the weakness that characterizes most of our markets to continue to affect our results in the fourth quarter of 2012. Levels of demand are likely to remain low in the quarter, especially in Europe where conditions are weaker than they were a year ago. Our North American markets are somewhat healthier, but current indications are that any increase in activity compared to last year's fourth quarter is likely to be very modest at best. We continue to expect completed acquisitions will increase sales for the full year of 2012 by about 8% over 2011. However, because of declining volumes, we may not report meaningful organic sales growth in 2012. Although the effect of weaker markets will be mitigated somewhat by the benefits of lower material costs, pricing discipline and other initiatives included in our enterprise excellence programs, we believe that lower volumes and increased restructuring costs are likely to reduce the total 2012 segment profit margin in comparison to the margin reported in 2011.

Our effective tax rate is directly impacted by the relative proportions of revenue and income before taxes in the jurisdictions in which we operate. Based on the expected mix of domestic and foreign earnings, we anticipate our effective tax rate for the remainder of 2012 will be between 33% and 36%. The anticipated effective tax rate is higher than prior rates primarily due to the expiration of certain temporary tax incentives that have not been renewed for 2012. These include the research and development credit, certain employment credits, and an exclusion for passive income earned by controlled foreign corporations. These expired provisions result in approximately a three percentage point increase in the projected effective income tax rate. If these tax incentives are renewed during the fourth quarter, it could have a significant positive effect on tax expense in that period.


Our U.S. defined benefit plans continue to be underfunded. Based on currently available data, which is subject to change, we have estimated we will be required to contribute $11.3 million to our U.S. defined benefit pension plans in 2012, of which $8.9 million was contributed during the first nine months of 2012. Additional significant contributions are likely to be required in 2013 and beyond. Future contribution requirements depend on pension asset returns, pension valuation assumptions, plan design, and legislative actions. We estimate annual pension expense for the full year of 2012 will be $13.2 million, which would be $3.6 million more than in 2011. The expected increase in pension expense is primarily due to a decrease in the discount rate used in the actuarial computations.

In connection with our growth strategy, we plan to evaluate additional acquisition opportunities in 2012; however, the effects of such acquisitions, if any, cannot be predicted and therefore are not reflected in this outlook.

We address our outlook regarding our actions to permanently resolve GST LLC's asbestos litigation in this Management's Discussion and Analysis of Financial Condition and Results of Operations in the "Garlock Sealing Technologies LLC and Garrison Litigation Management Group, Ltd." and "Subsidiary Bankruptcy" sections.

Results of Operations



                                                      Quarters Ended              Nine Months Ended
                                                       September 30,                September 30,
                                                    2012          2011           2012           2011
                                                                      (in millions)
Sales
Sealing Products                                   $ 152.4       $ 144.3       $   467.0       $ 395.6
Engineered Products                                   87.1          98.2           282.8         294.6
Engine Products and Services                          53.1          58.8           157.2         145.5

                                                     292.6         301.3           907.0         835.7
Intersegment sales                                    (0.9 )        (0.5 )          (2.1 )        (1.6 )

Total sales                                        $ 291.7       $ 300.8       $   904.9       $ 834.1


Segment Profit
Sealing Products                                   $  23.6       $  22.5       $    68.9       $  66.3
Engineered Products                                    3.5           6.4            19.3          26.1
Engine Products and Services                          10.4           6.5            30.0          23.3

Total segment profit                                  37.5          35.4           118.2         115.7

Corporate expenses                                    (6.9 )        (4.3 )         (25.1 )       (22.2 )
Interest expense                                     (10.9 )        (9.9 )         (32.3 )       (29.0 )
Other income (expenses), net                          (2.3 )         1.4            (6.7 )        (1.7 )


Income from continuing operations before income
taxes                                              $  17.4       $  22.6       $    54.1       $  62.8


Segment profit is total segment revenue reduced by operating expenses and restructuring and other costs identifiable with the segment. Corporate expenses include general corporate administrative costs. Expenses not directly attributable to the segments, corporate expenses, net interest expense, asbestos-related expenses, gains/losses or impairments related to the sale of assets or deconsolidation of operations, and income taxes are not included in the computation of segment profit. The accounting policies of the reportable segments are the same as those for EnPro.

Third Quarter of 2012 Compared to the Third Quarter of 2011

Sales of $291.7 million in the third quarter of 2012 decreased 3% from $300.8
million in the third quarter of 2011. The following table illustrates the
effects of key factors resulting in the change in sales by segment:



Sales                                                  Percent Change  3rd Quarter 2012 vs. 3rd Quarter 2011
                                                                Foreign             Engine
increase/(decrease)                      Acquisitions           Currency           Revenue            Other         Total
EnPro Industries, Inc.                               5 %               (3 %)             (5 %)             0 %          (3 %)

Sealing Products                                    11 %               (3 %)            n/a               (2 %)          6 %
Engineered Products                                  1 %               (6 %)            n/a               (6 %)        (11 %)
Engine Products & Services                           0 %                0 %             (24 %)            14 %         (10 %)

Following are the key points regarding changes in sales for the third quarter of 2012 compared to the same period in 2011:

• Refer to the "Overview" subsection of the "Overview and Outlook" section in this Managements' Discussion and Analysis of Financial Condition and Results of Operations for additional information related to acquisitions including: (1) Motorwheel - acquired in April 2012 and included in the Sealing Products segment; (2) Tara - acquired in July 2011 and included in the Sealing Products segment; and (3) PI Bearing Technologies - acquired in August 2011 and included in the Engineered Products segment.

• Lower engine revenues in the Engine Products & Services segment, which is discussed further in the discussion of segment results following, was another reason for the decrease in total revenues.

• The reported U.S. dollar value of sales was 3% lower than last year due to the unfavorable effect of foreign currency exchange rate fluctuations. This was primarily the result of a weakening euro, as compared to the US dollar. Garlock and Technetics in the Sealing Products segment and GGB and CPI in the Engineered Products segment have significant operations in Europe.

Segment profit, management's primary measure of how our operations perform, increased 6% to $37.5 million in the third quarter of 2012 from $35.4 million in the third quarter of 2011. Earnings from acquisitions completed since the third quarter of 2011 contributed $1.7 million to the improvement partially offset by unfavorable foreign exchange fluctuations of $0.7 million. There were non-recurring unfavorable events in the prior year amounting to $2.1 million, net, in the Engine Products & Services segment that included a warranty expense incurred on an engine component in a series of U.S. Navy ships and an estimated loss on an engine contract, offset by customer reimbursements for a canceled major project, and the favorable resolution of a legal matter. We also experienced lower sales volumes in Europe and Canada due to weak automotive, industrial, refining, and natural gas markets, as can be seen in the results of the Engineered Products segment. Operating margins improved to 12.9% in the third quarter of 2012, as compared to 11.8% in the third quarter of 2011.


Corporate expenses for the third quarter of 2012 were $2.6 million higher than reported in the third quarter of 2011, primarily due to higher healthcare benefit expenses and variable compensation expenses for directors as our stock price increased, which were partially offset by lower management incentive compensation expense.

Net interest expense in the third quarter of 2012 was $10.9 million compared to $9.9 million during the same quarter in 2011. The increase was primarily due to increased borrowings on the senior secured revolving credit facility and an increase in the principal balance of the notes payable to GST LLC.

Other income (expenses), net in the third quarter of 2011 included a $2.9 million gain recorded upon the contribution of a guaranteed investment contract ("GIC") to our U.S. defined benefit pension plan in the third quarter of 2011.

We recorded income tax expense of $6.1 million on pre-tax income of $17.4 million in the third quarter of 2012, resulting in an effective tax rate for the quarter of 35.4%. During the third quarter of 2011, our effective tax rate was 36.8% when we recorded an income tax expense of $8.4 million on pre-tax income of $22.6 million. During the third quarter of 2012, we recorded three adjustments with a net unfavorable impact to income tax expense of $0.7 million. The IRS completed the field examination for our 2008, 2009, and 2010 U.S. federal income tax returns during the third quarter of 2012, which resulted in incremental taxes payable of $1.5 million and tax expense of $1.4 million. As a result of the IRS's conclusion of its field examination, we reduced our liability for uncertain tax positions by $2.4 million to reflect amounts determined to be effectively settled, which lowered income tax expense by $1.9 million. Finally, we recorded $1.2 million of additional income tax expense related to the 2011 tax return filed in the third quarter of 2012. Although the IRS fieldwork was completed with respect to the 2008, 2009, and 2010 tax returns, we disagreed with and protested certain adjustments included in the audit results. While these audit years remain open, the only items under appeal that are not considered to be effectively settled relate to our deconsolidated GST operations. No further recognition of income tax expense or benefit to the consolidated results is expected.

Net income was $11.3 million, or $0.53 per share, in the third quarter of 2012 compared to net income of $14.2 million, or $0.66 per share in the same quarter of 2011. Earnings per share are expressed on a diluted basis.

Following is a discussion of operating results for each segment during the quarter:

Sealing Products. Sales of $152.4 million in the third quarter of 2012 were 6% higher than the $144.3 million reported in the same quarter of 2011. The increase in sales includes 11 percentage points from sales contributed by the Tara and Motorwheel acquisitions, offset by a three percentage point decline in sales due to unfavorable foreign currency exchange rates quarter-over-quarter. Excluding the effects of acquisitions and foreign exchange, Sealing Products experienced a two percentage point decline in sales, due to weakness primarily in European markets and in the North American heavy-duty truck business. European markets are experiencing a contraction in industrial production. In North America, we have seen declines in OEM trailer production coupled with heavy-duty truck dealers decreasing their inventory levels.

Segment profit increased to $23.6 million in the third quarter of 2012 from $22.5 million in the third quarter of 2011. Acquisitions contributed $1.7 million toward the increase in segment profit, partially offset by unfavorable foreign currency exchange rate movement of $0.6 million. Operating margins for the segment remained relatively flat at 15.5% in the third quarter of 2012, as compared to 15.6% in the third quarter of 2011.


Engineered Products. Sales of $87.1 million in the third quarter of 2012 were 11% lower than the $98.2 million reported in the third quarter of 2011. The acquisition of PI Bearings in August 2011 added one percentage point to revenue, while the effect of foreign currency exchange rates was unfavorable by six percentage points. A decline of nine percentage points in sales volumes was primarily driven by lower demand in the European automotive and industrial markets, reduced preventive maintenance activities in the European refining industry, and lower sales volumes in Canada, due in part to low natural gas prices and high natural gas storage levels. The decline in volume was partially offset by price increases of three percentage points.

Segment profit decreased to $3.5 million in the third quarter of 2012 from $6.4 million in the same quarter last year. Segment profits declined $4.4 million due to lower sales volumes and $2.7 million due to cost increases. These were partially offset by price increases of $2.2 million and reductions in SG&A of . . .

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