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

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

Form 10-Q for ENPRO INDUSTRIES, INC


8-Nov-2013

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 for reciprocating compressors and provides repair services for those 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 September 30, 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.
Outlook
In comparison to the fourth quarter of 2012, activity in certain of our European markets appears to be increasing modestly and demand at our businesses that serve certain original equipment markets in North America also appears to be slightly better than a year ago. In our U.S. government markets, we expect the ongoing effect of sequestration to continue to reduce demand for aftermarket parts and services. In this environment, we expect our total fourth quarter sales to be about the same as in the fourth quarter of 2012, but operating profits are likely to reflect a higher portion of our sales into original equipment markets, where margins tend to be lower.
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 annual effective tax rate for 2013 will be between 29% and 31%. Tax expense in 2013 is favorably impacted by the January passage of the American Taxpayer Relief Act of 2012, which retroactively extended previously expired tax provisions including credits for research and development, certain employment incentives, and other tax provisions applicable to us. 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 $22.5 million to our U.S. defined benefit pension plans in 2013, of which $17.4 million was contributed during the first nine 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 $10.5 million, which would be $1.9 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           Nine Months Ended
                                  September 30,             September 30,
                                2013        2012          2013         2012
                                               (in millions)
Sales
Sealing Products             $  157.9     $ 152.4     $   470.4      $ 467.0
Engineered Products              84.1        87.1         271.0        282.8
Engine Products and Services     34.9        53.1         129.3        157.2
                                276.9       292.6         870.7        907.0
Intersegment sales               (0.9 )      (0.9 )        (2.0 )       (2.1 )
Total sales                  $  276.0     $ 291.7     $   868.7      $ 904.9
Segment Profit
Sealing Products             $   24.2     $  23.6     $    73.2      $  68.9
Engineered Products               2.9         3.5          17.3         19.3
Engine Products and Services      2.3        10.4          13.5         30.0
Total segment profit             29.4        37.5         104.0        118.2
Corporate expenses               (7.6 )      (6.9 )       (25.2 )      (25.1 )
Interest expense, net           (11.1 )     (10.9 )       (33.1 )      (32.3 )
Other expense, net               (3.5 )      (2.3 )       (15.3 )       (6.7 )
Income before income taxes   $    7.2     $  17.4     $    30.4      $  54.1

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. Third Quarter of 2013 Compared to the Third Quarter of 2012 Sales of $276.0 million in the third quarter of 2013 decreased 5% from $291.7 million in the third quarter of 2012. The following table summarizes the impact of acquisitions, foreign currency, and engine revenues, by segment:

Sales                                         Percent Change 2nd Quarter 2013 vs. 2nd Quarter  2012
                                                   Foreign             Engine
increase/(decrease)          Acquisitions          Currency            Revenue              Other             Total
EnPro Industries, Inc.             1 %                  1 %               (3 )%               (4 )%               (5 )%
Sealing Products                   1 %                  1 %              n/a                   2  %                4  %
Engineered Products                - %                  2 %              n/a                  (5 )%               (3 )%
Engine Products & Services         - %                  - %              (16 )%              (18 )%              (34 )%

Following are the key points regarding changes in sales for the third quarter of 2013 compared to the same period in 2012:

               The acquisition of a small product line in January 2013 included
                in the Sealing Products segment


               Favorable foreign currency exchange rate fluctuations in the
                third quarter of 2013 as compared to the same period in 2012


               Lower revenues in the Engine Products & Services segment, which
                is discussed further in the discussion of segment results
                following


See below for additional discussion on segment sales and segment profits. Corporate expenses for the third quarter of 2013 increased $0.7 million as compared to the same period in 2012. The increase was primarily driven by an increase in employee incentive compensation ($0.8 million), purchased services ($0.6 million) and acquisition costs ($0.2 million), partially offset by employee medical costs ($0.9 million).
Net interest expense in the third quarter of 2013 increased $0.2 million as compared to the same period of 2012, primarily due to an increase in the note payable to GST because of capitalized PIK interest partially offset by lower borrowings against the senior secured revolving credit facility. Other expense, net in the third quarter of 2013 increased $1.2 million as compared to the same period of 2012, primarily due to higher ACRP costs of $1.4 million as activity in relation to GST's asbestos liability estimation trial increased.
We recorded income tax expense of $1.6 million on pre-tax income from continuing operations of $7.2 million in the third quarter of 2013, resulting in an effective tax rate for the quarter of 22.2%. During the third quarter of 2012, our effective tax rate was 35.4% as we recorded an income tax expense of $6.1 million on pre-tax income of $17.4 million. Our effective tax rate generally fluctuates based on the portion of our profits earned within and outside the U.S. versus lower rate foreign jurisdictions. The effective tax rate in the current quarter decreased because a larger proportion of our forecasted earnings are taxable in foreign jurisdictions that carry an effective tax rate significantly lower than the U.S.
Net income was $5.6 million, or $0.23 per share, in the third quarter of 2013 compared to net income of $11.3 million, or $0.53 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 $157.9 million in the third quarter of 2013 reflect a 4% increase compared to the $152.4 million reported in the same quarter of 2012. Excluding the benefit of the product line acquisition ($0.8 million) and favorable foreign exchange ($1.7 million), sales were up 2% or $3.0 million. Higher demand in the North American heavy-duty truck markets ($6.0 million) and price increases across the segment ($1.8 million) more than offset lower volumes at the consolidated Garlock operations ($3.9 million) and Technetics ($1.2 million).
Segment profit of $24.2 million in the third quarter of 2013 was an increase of 3% from $23.6 million reported in the third quarter of 2012. Excluding the effects of the product line acquisition and foreign exchange, profit was up $0.8 million or 3%. The increase in segment profit was the result of higher volumes at Stemco and price increases across the segment, partially offset by higher costs at Garlock and Stemco. Including the acquisition and foreign exchange effects, operating margins for the segment declined from 15.5% in 2012 to 15.3% in 2013.
Engineered Products. Sales in the third quarter of 2013 decreased 3% to $84.1 million from the $87.1 million reported in the third quarter of 2012. Excluding the favorable foreign exchange ($1.5 million), sales were down 5% or $4.5 million due to lower demand in the European automotive markets and in CPI's North American markets partially offset by price increases across the segment. Segment profit in the third quarter of 2013 was $2.9 million compared to $3.5 million in the same quarter last year. Lower volumes at both GGB and CPI ($2.9 million) and higher restructuring costs at CPI ($1.0 million) more than offset price increases at both GGB and CPI ($2.0 million), lower restructuring costs at GGB ($0.8 million), and manufacturing efficiencies at CPI ($0.6 million). Operating margins for the segment were 3.4%, which declined from the 4.0% reported in the comparable quarter last year.
Engine Products and Services. Sales of $34.9 million in the third quarter of 2013 decreased 34% from the $53.1 million reported in the third quarter of 2012. The decrease in sales was due to lower parts and service revenue because of sequestration and the timing of scheduled maintenance ($9.6 million), the shipment of two engines in the third quarter of 2012 accounted for under the completed contract method ($6.2 million), and lower POC engine revenue mainly due to downtime incurred during redesign of the manufacturing floor ($1.5 million).
The segment reported a profit of $2.3 million in the third quarter of 2013 compared to $10.4 million in the third quarter of 2012. The quarter-over-quarter decline in segment profit was primarily due to volume decreases and a less attractive product mix as parts and service sales declined. Operating margins for the segment decreased from 19.6% in 2012 to 6.6% in 2013.


Nine Months Ended September 30, 2013 Compared to the Nine Months Ended
September 30, 2012
Sales decreased 4% to $868.7 million in the first nine months of 2013 from
$904.9 million in 2012. The following table summarizes the impact of
acquisitions, foreign currency, and engine revenues, by segment:
Sales                        Percent Change First Nine Months of 2013 vs. First Nine Months of 2012
                                              Foreign           Engine
increase/(decrease)        Acquisitions       Currency         Revenue         Other         Total
EnPro Industries, Inc.          2%               -%              (2)%           (4)%          (4)%
Sealing Products                3%               1%              n/a            (3)%           1%
Engineered Products             -%               1%              n/a            (5)%          (4)%
Engine Products & Services      -%               -%             (14)%           (4)%         (18)%

The factors contributing to sales and segment profit results for the first nine months of 2013 compared to the same period in 2012 were essentially the same as those affecting the comparison of the results between the third quarters of 2013 and 2012. Following are the segment margins for the nine months ended September 30, 2013 and 2012.

                             2013    2012
Company Totals               12.0%   13.1%
Sealing Products             15.6%   14.8%
Engineered Products          6.4%    6.8%

Engine Products and Services 10.4% 19.1%

Corporate expenses for the first nine months of 2013 were $0.1 million higher than the first nine months of 2012.
Net interest expense for the first nine months of 2013 was $0.8 million higher than the first nine months of 2012 for the same factors affecting the comparison of the results between the third quarters of 2013 and 2012.
Other expense, net for the first nine months of 2013 was $8.6 million higher than the first nine months of 2012 due to higher environmental reserves ($5.3 million) and increased ACRP costs as activity in relation to GST's asbestos liability estimation trial increased ($2.2 million).
Income tax expense during the first nine months of 2013 was $8.2 million, resulting in a year-to-date effective tax rate of 27.0%. This is compared to $18.8 million in the comparable period of 2012, that resulted in a year-to-date effective tax rate of 34.8%. In January 2013, the United States Congress passed the American Taxpayer Relief Act of 2012, retroactively extending previously expired tax provisions including credits for research and development, certain employment incentives, and other tax provisions applicable to us. Consequently, results from the nine months ended September 30, 2013 include a tax benefit which significantly reduces our effective tax rate for 2013. 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 $22.2 million, or $0.96 per share, for the first nine months of 2013 compared to $35.3 million, or $1.64 per share, in the same period last year.
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 September 30, 2013, we held $5.9 million of cash or cash equivalents in the United States and $69.2 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 provided cash in the amount of $38.1 million in the first nine months of 2013 compared to $55.9 million in the same period last year. Lower pre-tax earnings of $24 million and higher pension plan contributions of $9 million in 2013 were offset by lower working capital requirements of $14 million in 2013 as compared to 2012. The lower working capital requirements, primarily inventories and accounts payable, resulted from decreased business activity and working capital improvement programs in place at the operations. Income taxes paid in 2013 were $1 million lower than paid in 2012. . . .

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