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NPO > SEC Filings for NPO > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for ENPRO INDUSTRIES, INC | Request a Trial to NEW EDGAR Online Pro



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, 2012.

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. Important factors that could result in those differences include those specifically noted in the forward-looking statements and those identified in Item 1A, "Risk Factors" at the Company's annual report on Form 10-K for the year ended December 31, 2012, which 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, manufacture and marketing of proprietary engineered industrial products. We have 61 primary manufacturing facilities located in 12 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, precision engineered components, and lubrication systems and repair services 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, which is ongoing. 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 March 31, 2013 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 14 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 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.


Although we see no indication of sustained improvement, we expect seasonal growth in some markets during the second quarter. These seasonal factors are likely to support an increase in sales compared to the first quarter. Profits and profit margins should improve as volumes increase and as we continue to benefit from previously implemented cost reductions and efficiency programs. Longer term, we remain cautious. In North America, we believe low levels of growth are likely in most of our markets during 2013. In Europe, we anticipate little if any growth as weak economic conditions persist in many of our markets. In these circumstances, we will continue to ensure that our cost structure is in line with activity levels in all markets.

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 2013 will be between 29% and 32%. Tax expense in 2013 is favorably impacted by the January passage of the American Taxpayer Relief Act of 2012, which retroactively extended various tax provisions applicable to the Company. These include the research and development credit, certain employment credits, and an exclusion for passive income earned by controlled foreign corporations. Other discrete tax events may cause our effective rate to fluctuate on a quarterly basis. Certain events, including, for example, acquisitions and other business changes, which are difficult to predict, may also cause our effective tax rate to fluctuate. We are subject

to changing tax laws, regulations, and interpretations in multiple jurisdictions. Corporate tax reform continues to be a priority in the U.S. and other jurisdictions. Changes to the tax system in the U.S. could have significant effects, positive and negative, on our effective tax rate, and on our deferred tax assets and liabilities.

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 approximately $19 million to our U.S. defined benefit pension plans in 2013, of which $7.2 million was contributed during the first three months of 2013. Additional significant contributions are likely to be required in 2014 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 2013 will be $11.1 million, which would be $1.3 million less than in 2012. The expected decrease in pension expense is primarily due to the strong performance of the pension assets, partially offset by 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 2013. 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
                                                     March 31,
                                                 2013         2012
                                                   (in millions)
                 Sealing Products               $ 146.6      $ 149.5
                 Engineered Products               91.8        100.6
                 Engine Products and Services      49.4         62.0

                                                  287.8        312.1

                 Intersegment sales                (0.9 )       (0.6 )

                 Total sales                    $ 286.9      $ 311.5

                 Segment Profit
                 Sealing Products               $  21.3      $  22.5
                 Engineered Products                5.8          9.0
                 Engine Products and Services       4.8         11.8

                 Total segment profit              31.9         43.3

                 Corporate expenses                (9.1 )       (9.1 )
                 Interest expense, net            (11.0 )      (10.6 )
                 Other expense, net                (2.1 )       (2.0 )

                 Income before income taxes     $   9.7      $  21.6

Segment profit is total segment revenue reduced by operating expenses, 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, gains and losses related to the sale of assets, impairments, 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.

First Quarter of 2013 Compared to the First Quarter of 2012

Sales of $286.9 million in the first quarter of 2013 decreased 8% from $311.5
million in the first quarter of 2012. The following table summarizes the impact
of acquisitions, foreign currency, and engine revenues, by segment:

Sales                                                      Percent Change 1st Quarter 2013 vs. 1st Quarter  2012
                                                                  Foreign           Engine
increase/(decrease)                        Acquisitions          Currency           Revenue              Other             Total
EnPro Industries, Inc.                                 4 %               0 %              (5 %)               (7 %)            (8 %)

Sealing Products                                       8 %               0 %             n/a                 (10 %)            (2 %)
Engineered Products                                    0 %               0 %             n/a                  (9 %)            (9 %)
Engine Products & Services                             0 %               0 %             (23 %)                3 %            (20 %)

Following are the drivers regarding changes in sales for the first quarter of 2013 compared to the same period in 2012:

Our acquisition of Motorwheel - acquired in April 2012 and included in the Sealing Products segment.

Lower engine revenues in the Engine Products & Services segment resulting from the sale of four engines in the prior year period that were accounted for under the completed contract method of accounting, while no engines accounted for under that method were sold in the first quarter of 2013.

Lower volumes across the Sealing Products and Engineered Products segments due to soft markets, which are significantly below the levels of early 2012.

Sales and segment profits in the first quarter of 2013 as compared to the same period in 2012 were not impacted by foreign exchange rate fluctuations.

See below for additional discussion on segment sales and segment profits.

There were no significant changes in amount or composition of Corporate and Other expenses as compared to the first quarter of 2012.

Net interest expense in the first quarter of 2013 increased $0.4 million as compared to the first quarter of 2012, primarily due to higher borrowings against the senior secured revolving credit facility.

We recorded income tax expense of $1.1 million on pre-tax income from continuing operations of $9.7 million in the first quarter of 2013, resulting in an unusually low effective tax rate of 11.4%. In January 2013, the United States Congress passed the American Taxpayer Relief Act of 2012, retroactively extending previously expired tax provisions such as the deduction for domestic production activities, credits for research and development, certain employment credits, and other tax provisions applicable to us. Consequently, results from the first quarter of 2013 include a tax benefit which significantly reduces our effective tax rate for the quarter, and to a lesser extent will reduce the annual effective tax rate for 2013. During the first quarter of 2012, our effective tax rate was 36.2% as we recorded an income tax expense of $7.8 million on pre-tax income of $21.6 million. Our effective tax rate is generally lower than U.S. statutory rates primarily due to the earnings in lower rate foreign jurisdictions where a significant portion of our income is taxed.

Net income was $8.6 million, or $0.39 per share, in the first quarter of 2013 compared to net income of $13.8 million, or $0.64 per share, in the same quarter of 2012. 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 $146.6 million in the first quarter of 2013 were 2% lower than the $149.5 million reported in the same quarter of 2012. Excluding the effect of the Motorwheel acquisition, sales were down 10% or $15.0 million due to lower volumes, primarily in the semiconductor industry ($4.9 million), North American heavy-duty truck markets ($4.4 million), and European water and waste water infrastructure markets ($3.1 million).

Segment profit of $21.3 million in the first quarter of 2013 decreased 5% from $22.5 million reported in the first quarter of 2012. Excluding the effects of the Motorwheel acquisition, profit was down $3.2 million or 14%. The decrease in segment profit was primarily the result of lower sales volumes across the segment and a change in sales mix at Stemco as sales of higher margin after-market products declined. These declines were partially offset by the release of an acquisition earnout provision of $1.5 million. Operating margins for the segment declined from 15.1% in 2012 to 14.5% in 2013.

Engineered Products. Sales of $91.8 million in the first quarter of 2013 were 9% lower than the $100.6 million reported in the first quarter of 2012. The decline in revenue is primarily a result of lower demand in the European ($4.4 million) and North American ($1.1 million) automotive markets, and in the Canadian natural gas market ($1.3 million). These declines were partially offset by higher export sales from European operations.

Segment profit in the first quarter of 2013 was $5.8 million, which compares to $9.0 million in the same quarter last year. Reduced segment profit is primarily due to lower sales volumes, specifically at GGB, which is sensitive to volume declines because of its fixed cost structure. We also experienced higher costs at GGB, which were only partially offset by price increases. CPI's selling, general, and administrative costs were $2.1 million lower than in the first quarter of 2012 as a result of the 2012 restructuring efforts. Operating margins for the segment were 6.3%, which declined from the 8.9% reported in the comparable quarter last year.

Engine Products and Services. Sales of $49.4 million in the first quarter of 2013 were 20% lower than the $62.0 million reported in the first quarter of 2012. The decrease in sales was a result of lower engine revenues driven by a shipment of 4 engines in the first quarter of 2012 valued at $18.4 million, which was accounted for under the completed contract method of accounting. There were no sales of engines accounted for under the completed contract method during the first quarter of 2013. This decline was offset by higher revenue recognized on percentage of completion contracts of $5.3 million. Parts and services sales were up $1.6 million on strong year-over-year sales of new environmental upgrade products.

The segment reported a profit of $4.8 million in the first quarter of 2013 compared to $11.8 million in the first quarter of 2012. The quarter-over-quarter decline in segment profit was primarily due to lower sales, a less profitable product mix as sales of environmental upgrade packages increased and a low margin engine refurbishment project was completed, and a change in accounting treatment for foreign exchange hedges of $0.8 million. Operating margins for the segment decreased from 19.0% in 2012 to 9.7% in 2013.

Liquidity and Capital Resources

Cash requirements for, but not limited to, working capital, capital expenditures, acquisitions, pension contributions, and debt repayments have been funded from cash balances on hand, revolver borrowings and cash generated from operations. We are proactively pursuing acquisition opportunities. It is possible our cash requirements for one or more acquisition opportunities could exceed our cash balance at the time of closing. Should we need additional capital, we have resources available, which are discussed in this section under the heading "Capital Resources."

As of March 31, 2013, we held $1 million cash or cash equivalents in the United States and $47 million of cash and cash equivalents outside of the United States. If the funds held outside the United States were needed for our operations in the U.S., we could be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate cash to fund our U.S. operations.

Cash Flows

Operating activities consumed cash in the amount of $17.8 million in the first quarter of 2013 compared to cash generated of $3.4 million in the same period last year. The change as compared to the first quarter of 2012 is primarily driven by lower segment results of approximately $11 million, higher pension payments of $7.2 million and higher taxes paid of $5.4 million.

Investing activities used $15.4 million of cash during the first quarter of 2013, primarily to fund the acquisition of a building previously under lease and enterprise resource and planning system implementations. Investing activities used $6.4 million of cash in the first quarter of 2012.

Financing activities provided $30.2 million in cash in the first quarter of 2013, including net borrowings on the senior secured revolving credit facility of approximately $22 million and net proceeds from short term borrowings of $7.4 million. Financing activities in the first quarter of 2012 provided cash of $11.1 million, including net borrowings on the senior secured revolving credit facility of $11.4 million.

Capital Resources

Senior Secured Revolving Credit Facility. Our primary U.S. operating subsidiaries, other than GST LLC, are parties to a senior secured revolving credit facility with a maximum availability of $175 million, $30 million of which may be used for letters of credit. Actual borrowing availability under the credit facility is determined by reference to a borrowing base of specified percentages of eligible accounts receivable, inventory, equipment and certain real property, and is reduced by usage of the facility, including outstanding letters of credit, and any reserves. Under certain conditions, we may request an increase to the facility maximum availability by up to $50 million to $225 million in total. Any increase is dependent on obtaining future lender commitments for those amounts, and no current lender has any obligation to provide such commitment. The credit facility matures on July 17, 2015, unless, prior to that date, our convertible debentures are paid in full, refinanced on certain terms, or defeased, in which case the facility will mature on March 30, 2016.

Borrowings under the credit facility are secured by specified assets of ours and our U.S. operating subsidiaries, other than GST LLC, and primarily include accounts receivable, inventory, equipment, certain real property, deposit accounts, intercompany loans, intellectual property and related contract rights, general intangibles related to any of the foregoing and proceeds related to the foregoing. Subsidiary capital stock is not included as collateral.

Outstanding borrowings under the credit facility currently bear interest at a rate equal to, at our option, either: (1) a base/prime rate plus 0.75%, or
(2) the adjusted one, two, three or six-month LIBOR

rate plus 1.75%. Future pricing under the credit facility at any particular time will be determined by reference to a pricing grid based on average daily availability under the facility for the immediately prior fiscal quarter. Under the pricing grid, the applicable margins will range from 0.75% to 1.25% for base/prime rate loans and from 1.75% to 2.25% for LIBOR loans. The undrawn portion of the credit facility is subject to an unused line fee calculated at an annual rate of 0.375%. Outstanding letters of credit are subject to an annual . . .
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