EnPro Industries, Inc. (NYSE: NPO) today announced its financial results
for the three-month and six-month periods ended June 30, 2018.
Consolidated and Pro Forma Financial Highlights
(Amounts in millions except per share data and percentages)
June 30
2018 3
% ? 4
June 30
2018 3
% ? 4
Key Developments
“We had a difficult second quarter; however, the high-level numbers
don’t tell the full story. Four of our six divisions did well in the
second quarter, and all of our businesses generated year-over-year sales
growth. In total, our sales were up 13% year-over-year compared to pro
forma sales in the second quarter of last year. Many of our core end
markets continued to experience favorable market conditions in the
quarter, including semiconductor, food & pharma, general industrial,
metals & mining, and European oil & gas,” said Steve Macadam, President
and CEO. “Profitability was challenged by three primary items: first,
continued softness in the industrial gas turbine market, which led to
our decision to exit our facility servicing that market; second,
challenges in our heavy-duty trucking brake products group, including
booking a large warranty reserve; and third, the negative impact of
currency adjustments on the EDF program resulting from the strengthening
dollar and a significant first-half vs. second-half performance profile
in Power Systems. We expect stronger second-half performance in Sealing
Products and Power Systems and remain optimistic about our overall
financial performance in the back half of the year.
Given current macroeconomic forecasts, a robust backlog in Power
Systems, and positive demand patterns in many of our markets, we believe
that our sales momentum will continue through the end of the year,
resulting in full-year sales growth of between 8% and 9% over 2017 pro
forma sales. We expect full-year adjusted EBITDA of between $214 million
and $220 million, down from previous guidance of $224 million to $230
million. This $10 million reduction from our previous guidance is
attributable to the impact of the stronger dollar and second-quarter
profitability challenges in heavy-duty trucking. This new range reflects
a slightly improved outlook for the balance of the year,” said Mr.
Macadam.
Full-year guidance excludes impacts from future acquisitions and
acquisition-related costs, restructuring costs, the impact of foreign
exchange rate changes subsequent to quarter-end, and any litigation or
environmental charges.
Consolidated results for the periods after July 31, 2017 reflect the
reconsolidation of GST, its subsidiaries and OldCo as a result of the
completion of the Asbestos Claims Resolution Process. Given that
consolidated results in the second quarter of 2017 did not reflect all
of EnPro’s entities, investors may find comparisons of consolidated
results for the second quarter of 2018 to pro forma results for the
prior-year period to be most illustrative of the year-over-year
performance of all of EnPro’s businesses. Pro forma results for the
quarter ended June 30, 2017 reflect the performance of all of these
businesses for that period.
Demand in semiconductor, food & pharma, general industrial, metals &
mining, aerospace, and European oil & gas continued to be strong during
the quarter. Nuclear demand was very strong relative to last year, while
automotive markets increased modestly. This positive momentum was
partially offset by continued softness in the industrial gas turbine
market. In total, acquisitions contributed 0.6% sales growth, and
foreign exchange translation contributed 2.0% sales growth on a
consolidated basis versus pro forma sales in the second quarter of 2017.
Segment profit in the second quarter was down year-over-year on a
consolidated basis compared to pro forma segment profit from the same
period of the prior year primarily due to results in Sealing Products
and Power Systems, partially offset by robust results in Engineered
Products. Excluding the impact of acquisitions and divestitures and
related costs, foreign exchange translation, impact of the change in the
loss reserve due to foreign exchange on the EDF contract, and
restructuring charges, total consolidated segment profit was 10.6% lower
compared to the total pro forma segment profit in the second quarter of
last year.
In Sealing Products, consolidated segment profit decreased in the second
quarter versus pro forma segment profit in the second quarter of last
year as higher sales volumes were more than offset by lower volume in
the industrial gas turbine business, commodity cost increases in
heavy-duty trucking that were primarily tariff-related, and unusual
warranty charges and productivity issues in the segment’s heavy-duty
trucking business.
In Engineered Products, consolidated segment profit increased in the
second quarter versus pro forma segment profit in the second quarter of
last year due primarily to strong sales growth and positive impacts from
foreign exchange translation. Excluding the impact of restructuring
costs and favorable foreign exchange translation, consolidated segment
profit increased 23.3% compared to pro forma segment profit in the
prior-year period.
In Power Systems, consolidated segment profit decreased in the second
quarter versus pro forma segment profit in the second quarter of last
year driven by the impact of currency adjustments on the
Euro-denominated EDF program partially offset by an increase in profit
on aftermarket parts and services. Excluding a small restructuring
charge and the impact of foreign exchange on the EDF contract, which had
a negative impact of $3.5 million in the second quarter of 2018 and
positive impact of $3.8 million in the second quarter of 2017, segment
profit increased 25.0%.
Total restructuring costs of $6.5 million were incurred during the
second quarter, $6.2 million of which was in Sealing Products related to
exiting the industrial gas turbine facility in Oxford, MA, and
restructuring in heavy-duty trucking that was completed in May. The
restructuring of the industrial gas turbine business included the sale
of the building, which more than offset the cash impact of second
quarter restructuring actions. The before-tax, net cash impact of
restructuring announced in the quarter was a positive $24 million.
The company’s average diluted share count in the second quarter of 2018
was 21.1 million shares, approximately 0.7 million less than in the same
period a year ago. The decrease was primarily due to share repurchases
in connection with the $50 million repurchase program authorized in
October 2017, partially offset by stock compensation award grants.
Repurchases under the October 2017 authorization began in the first
quarter of 2018, and through the second quarter, the company had
purchased 664,859 shares at a total cost of $49.9 million. In early July
2018, the company completed the $50 million share repurchase program.
With the completion of the recent share repurchase authorization, the
permitted share repurchases under the indenture governing the senior
notes have now been substantially exhausted.
Pro Forma Results Including Deconsolidated SubsidiariesTo
aid comparisons of year-over-year data, the company has included
information in this press release showing key operating metrics for
EnPro and its formerly deconsolidated subsidiaries, GST and OldCo, on a
pro forma reconsolidated basis for the three months and six months ended
June 30, 2017. These metrics are derived from tables attached to this
press release that illustrate, on a pro forma basis, financial results
for these periods of 2017 as if GST and OldCo were reconsolidated with
EnPro throughout each period based on consummation of the joint plan of
reorganization, which was consummated on July 31, 2017. In response to
requests from investors, we are providing the pro forma financial
information in this release as supplemental comparative information as
it reflects the performance of all of our subsidiaries during those
periods.
Conference Call and Webcast InformationEnPro will hold a
conference call tomorrow, August 2, at 10:00 a.m. Eastern Time to
discuss second quarter 2018 results. Investors who wish to participate
in the call should dial 1-800-851-4704 approximately 10 minutes before
the call begins and provide conference ID number 53479826. A live audio
webcast of the call and accompanying slide presentation will be
accessible from the company’s website, http://www.enproindustries.com.
To access the presentation, log on to the webcast by clicking the link
on the company’s home page.
Non-GAAP Financial InformationThis press release contains
financial measures that have not been prepared in conformity with GAAP.
They include adjusted net income, adjusted diluted earnings per share,
pro forma adjusted net income, adjusted EBITDA, pro forma adjusted
EBITDA, adjusted EBITDA margin and pro forma adjusted EBITDA margin, as
well as segment adjusted EBITDA, segment adjusted EBITDA margin, pro
forma segment adjusted EBITDA and pro forma segment adjusted EBITDA
margin. Tables showing the effect of these non-GAAP financial measures
for the three months and six months ended June 30, 2017 and 2018 are
attached to the release. Adjusted EBITDA anticipated for full year 2018
is calculated in a manner consistent with the presentation of adjusted
EBITDA in the attached tables. Because of the forward-looking nature of
this estimate of adjusted EBITDA, it is impractical to present a
quantitative reconciliation of such measure to a comparable GAAP
measure, and accordingly no such GAAP measure is being presented.
Forward-Looking StatementsStatements in this press release
that express a belief, expectation or intention, as well as those that
are not historical fact, are forward-looking statements under the
Private Securities Litigation Reform Act of 1995. They involve a number
of risks and uncertainties that may cause actual events and results to
differ materially from such forward-looking statements. These risks and
uncertainties include, but are not limited to: 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; fluctuations in relevant foreign currency exchange rates;
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. Our filings with the
Securities and Exchange Commission, including the Form 10-K for the year
ended December 31, 2017, describe these and other risks and
uncertainties in more detail. We do not undertake to update any
forward-looking statements made in this press release to reflect any
change in management’s expectations or any change in the assumptions or
circumstances on which such statements are based.
About EnPro IndustriesEnPro Industries, Inc. is a leader in
sealing products, metal polymer and filament wound bearings, components
and service for reciprocating compressors, diesel and dual-fuel engines
and other engineered products for use in critical applications by
industries worldwide. For more information about EnPro, visit the
company’s website at http://www.enproindustries.com.
APPENDICES
Sealing Products Segment
Results for the Six Months Ended June 30
Segment Highlights
Engineered Products Segment
Results for the Six Months Ended June 30
Segment Highlights
Power Systems Segment
Results for the Six Months Ended June 30
Segment Highlights
2017 (1)
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in assets and liabilities, net of effects of acquisitions
and deconsolidation of businesses:
Average commonshares outstanding,diluted (millions)
Average commonshares outstanding,diluted (millions)
Average commonshares outstanding,diluted (millions)
Average commonshares outstanding,diluted (millions)
Management of the Company believes that it would be helpful to the
readers of the financial statements to understand the impact of
certain selected items on the Company’s reported net income and
earnings per share, including items that may recur from time to
time. The items adjusted for in this schedule are those that are
excluded by management in budgeting or projecting for performance
in future periods, as they typically relate to events specific to
the period in which they occur. This presentation enables readers
to better compare EnPro Industries, Inc. to other diversified
industrial manufacturing companies that do not incur the sporadic
impact of restructuring activities or other selected items.
Management acknowledges that there are many items that impact a
company’s reported results and this list is not intended to
present all items that may have impacted these results.
The adjusted income tax expense presented above is calculated
using a normalized company-wide effective tax rate excluding
discrete items of 29.0% and 32.5%, respectively for 2018 and 2017.
Per share amounts were calculated by dividing by the
weighted-average shares of diluted common stock outstanding during
the periods.
Earnings before interest, income taxes, depreciation,
amortization, and other selected items (adjusted segment EBITDA)
*
Includes fair value adjustments to acquisition date inventory.
Adjustments to arrive at earnings before interest, income taxes,
depreciation and amortization (EBITDA):
Adjustments to arrive at earnings before interest, income taxes,
depreciation, amortization and other selected items (Consolidated
Adjusted EBITDA):
Consolidated adjusted EBITDA as presented also represents the
amount defined as “EBITDA” under the indenture governing the
Company’s 5.875% senior notes due 2022.
Unaudited Pro Forma Information Reflecting the Reconsolidation of
Garlock Sealing Technologies and Other Deconsolidated Subsidiaries
The historical business operations of EnPro’s subsidiaries, Garlock
Sealing Technologies LLC (“GST LLC”) and The Anchor Packing Company
(“Anchor”), resulted in a substantial volume of asbestos litigation in
which plaintiffs alleged personal injury or death as a result of
exposure to asbestos fibers. Those subsidiaries manufactured and/or sold
industrial sealing products, predominately gaskets and packing, that
contained encapsulated asbestos fibers. Anchor was an inactive and
insolvent indirect subsidiary of EnPro. EnPro’s subsidiaries’ exposure
to asbestos litigation and their relationships with insurance carriers
have been managed through another subsidiary, Garrison Litigation
Management Group, Ltd. (“Garrison”). GST LLC, Anchor and Garrison are
collectively referred to as “GST.”
On June 5, 2010 (the “Petition Date”), GST 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”). The filings were the initial step in
an asbestos claims resolution process.
The financial results of GST and its subsidiaries had been included in
EnPro’s 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 EnPro’s, generally must be prospectively
deconsolidated from the parent and the investment accounted for using
the cost method. Accordingly, the financial results of GST and its
subsidiaries are not included in EnPro’s consolidated results after June
4, 2010 until the reconsolidation described below.
On March 17, 2016, EnPro announced that it had reached a comprehensive
settlement to resolve current and future asbestos claims. The settlement
was reached with the court-appointed committee representing current
asbestos claimants (the “GST Committee”) and the court-appointed legal
representative of future asbestos claimants (the “GST FCR”) in GST’s
Chapter 11 case pending before the Bankruptcy Court. Representatives for
current and future asbestos claimants (the “Coltec Representatives”)
against Coltec Industries Inc (“Coltec”) (another subsidiary of EnPro
and, at that time, GST’s direct parent) also joined in the settlement.
Under the settlement, the GST Committee, the GST FCR and the Coltec
Representatives agreed to join GST and Coltec in proposing a joint plan
of reorganization that incorporates the settlement and to ask asbestos
claimants and the court to approve the plan. The joint plan of
reorganization was filed with the Bankruptcy Court on May 20, 2016 and
amendments to the joint plan of reorganization were filed with the
Bankruptcy Court on June 21, 2016, July 29, 2016, December 2, 2016,
April 3, 2017, May 14, 2017, May 19, 2017, June 8, 2017, and June 9,
2017. The joint plan of reorganization was filed as Exhibit 2.1 to the
Company’s Form 8-K filed on July 31, 2017. As so modified, the joint
plan of reorganization superseded all prior plans of reorganization
filed by GST with the Bankruptcy Court.
As contemplated by the settlement, following the approval of the joint
plan of reorganization by asbestos claimants in December 2016, Coltec
engaged in a series of corporate restructuring transactions in which all
of its significant operating assets and subsidiaries, which included
each of EnPro’s major business units, were distributed to a new direct
EnPro subsidiary (“EnPro Holdings”). OldCo, as the successor by merger
to Coltec in those transactions, retained responsibility for all
asbestos claims and rights to certain insurance assets. The
restructuring was completed on December 31, 2016 and, as contemplated by
the joint plan of reorganization and the settlement, OldCo filed a
pre-packaged Chapter 11 bankruptcy petition with the Bankruptcy Court on
January 30, 2017. Accordingly, the financial results of OldCo and its
subsidiaries are not included in EnPro’s consolidated results after
January 29, 2017 until the reconsolidation described below. On February
3, 2017, the Bankruptcy Court issued an order for the joint
administration of the OldCo Chapter 11 proceedings with the GST Chapter
11 proceedings.
The settlement includes as a condition to EnPro’s obligations to proceed
with the settlement that EnPro, Coltec, GST LLC and Garlock of Canada
Ltd (an indirect subsidiary of GST LLC) enter into a written agreement,
to be consummated concurrently with the effective date of consummation
of the joint plan of reorganization, with the Canadian provincial
workers’ compensation boards (the “Provincial Boards”) resolving
remedies the Provincial Boards may possess against Garlock of Canada
Ltd, GST, Coltec or any of their affiliates, including releases and
covenants not to sue, for any present or future asbestos-related claim,
and that the agreement is either approved by the Bankruptcy Court
following notice to interested parties or the Bankruptcy Court concludes
that its approval is not required. On November 11, 2016, EnPro and such
subsidiaries entered into such an agreement (the “Canadian Settlement”)
with the Provincial Boards to resolve current and future claims against
EnPro, GST, Garrison, Coltec, and Garlock of Canada Ltd. for recovery of
a portion of amounts the Provincial Boards have paid and will pay in the
future under asbestos-injury recovery statutes in Canada for claims
relating to asbestos-containing products. The Canadian Settlement
provided for an aggregate cash settlement payment to the Provincial
Boards of $(U.S.) 20 million, payable on the fourth anniversary of the
effective date of the joint plan of reorganization. Under the Canadian
Settlement, after the effective date of the joint plan of
reorganization, the Provincial Boards had the option of accelerating the
payment, in which case the amount payable would be discounted from the
fourth anniversary of the effective date of the joint plan of
reorganization to the payment date at a discount rate of 4.5% per annum.
On February 3, 2017, the Bankruptcy Court issued an order approving the
Canadian Settlement. The Provincial Boards provided notice of their
election to accelerate the payment. After application of the discount
resulting from such acceleration of payment, the settlement payment of
approximately $(U.S.) 16.7 million was made on August 11, 2017.
On May 15, 2017, the Bankruptcy Court announced its decision
recommending that the U.S. District Court for the Western District of
North Carolina (the “District Court”) confirm the joint plan of
reorganization, and on June 12, 2017 the District Court issued an order
confirming the joint plan of reorganization. The joint plan of
reorganization has been consummated, with an effective date of 12:01
a.m. on July 31, 2017 (the “Joint Plan Effective Date”).
The joint plan of reorganization provides for the establishment of a
trust (the “Trust”), which was funded (i) with aggregate cash
contributions by GST LLC and Garrison of $350 million made immediately
prior to the Joint Plan Effective Date, (ii) by the contribution made by
OldCo immediately prior to the Joint Plan Effective Date of $50 million
in cash and an option (the “Option”), exercisable one year after the
Joint Plan Effective Date, permitting the Trust to purchase for $1
shares of EnPro common stock having a value of $20 million (with OldCo
having the right to call the option for payment of $20 million in cash
at any time prior to the first anniversary of the Joint Plan Effective
Date, with the Trust having the right to put the option to OldCo for
payment by OldCo of $20 million on the day prior to the first
anniversary of the Joint Plan Effective Date and with the option
terminating on the second anniversary of the Joint Plan Effective Date
in return for payment to the Trust of $20 million), and (iii) by the
obligations under the Joint Plan of OldCo to make a deferred
contribution of $40 million in cash and of GST LLC and Garrison to make
an aggregate deferred contribution of $20 million in cash no later than
one year after the Joint Plan Effective Date. These deferred
contributions were guaranteed by EnPro and secured by a pledge of 50.1%
of the outstanding voting equity interests of GST LLC and Garrison.
Under the joint plan of reorganization, the Trust has assumed
responsibility for all present and future asbestos claims arising from
the operations or products of GST or Coltec/OldCo. Under the joint plan
of reorganization, EnPro, through its subsidiaries, retained ownership
of OldCo, GST LLC and Garrison. Anchor, which has not conducted business
operations for many years and had nominal assets, has been dissolved. On
November 29, 2017, GST LLC, EnPro Holdings and EnPro entered into an
agreement with the Trust to provide for the early settlement of the
deferred contributions to the Trust under the Joint Plan and for the
call of the Option by EnPro Holdings, as the successor by merger to
OldCo. Under that agreement, in full satisfaction of the $60 million of
aggregate deferred contribution obligations under the Joint Plan and
payment of the $20 million call payment under the Option, on December 1,
2017 GST LLC, EnPro Holdings and EnPro paid $78.8 million (the “Early
Cash Settlement Amount”) to the Trust and agreed to make a further
payment to the Trust to the extent that total interest earned through
July 31, 2018, with respect to a fixed income account in which the Early
Cash Settlement Amount was invested by the Trust is less than $1.2
million.
Pursuant to applicable accounting rules, upon and as of the Joint Plan
Effective Date, the assets and liabilities of both GST and OldCo were
reconsolidated into the EnPro balance sheet and EnPro’s consolidated
financial statements include the sales, income, expenses and cash flows
of both GST and OldCo beginning on the Joint Plan Effective Date.
The accompanying unaudited pro forma condensed consolidated statement of
operations for the three months and six months ended June 30, 2017 has
been prepared to illustrate the effects of the reconsolidation of GST
and OldCo and their respective subsidiaries with EnPro assuming the
confirmation and consummation of the joint plan of reorganization and
the consummation of the Canadian Settlement to give effect to the
reconsolidation as if it had occurred on January 1, 2017.
The unaudited pro forma condensed consolidated statement of operations
for the three months and six months ended June 30, 2017 is based on
estimates and assumptions, which have been made solely for the purposes
of developing such pro forma information. The unaudited pro forma
condensed consolidated statement of operations also include certain
adjustments such as increased depreciation and amortization expense on
tangible and intangible assets, increased interest expense on the debt
incurred to complete the reconsolidation as well as the tax impacts
related to these adjustments. The pro forma adjustments are based upon
available information and certain assumptions that EnPro believes are
reasonable.
EnPro is providing the accompanying unaudited pro forma condensed
consolidated statement of operations in light of specific requests for
such pro forma information by investors. The unaudited pro forma
condensed consolidated statement of operations is provided for
illustrative purposes only and does not purport to represent what the
actual consolidated results of operations or the consolidated financial
position of EnPro would have been had the reconsolidation of GST and
OldCo occurred on the date assumed.
GST and
OldCo
Reflects the increase in depreciation expense of $0.3 million due
to adjusting property, plant and equipment to fair value. The
total fair value adjustment to property, plant and equipment was
$23.3 million of which $16.0 million related to depreciable
buildings and improvements and machinery and equipment that have a
net remaining economic life of 14.5 years.
Reflects the increase in amortization expense as a result of the
estimated fair value adjustment due to the creation of the
finite-lived intangible assets. The estimated useful life of the
finite-lived intangible assets is 15 years.
Eliminate intercompany interest and add interest expense on
incremental borrowings made in order to make payment upon
confirmation and consummation of the joint plan of reorganization.
We used an estimated interest rate of 3% for all periods.
For purposes of the consolidated pro forma financial information,
an estimated statutory tax rate of 37.5% has been used for all
periods presented.
OldCo
Reflects the increase in depreciation expense of $0.6 million due
to adjusting property, plant and equipment to fair value. The
total fair value adjustment to property, plant and equipment was
$23.3 million of which $16.0 million related to depreciable
buildings and improvements and machinery and equipment that have a
net estimated remaining economic life of 14.5 years.
Reflects the increase in amortization expense as a result of the
estimated fair value adjustment due to the creation of the
finite-lived intangible assets. The estimated useful life of the
finite-lived intangible assets is 15 years.
Eliminate intercompany interest and add interest expense on
incremental borrowings made in order to make payment upon
confirmation and consummation of the proposed joint plan of
reorganization. We used an estimated interest rate of 3% for all
periods.
For purposes of the consolidated pro forma financial information,
an estimated 2017 statutory tax rate of 37.5% has been used for
all periods presented.
Adjustments to arrive at pro forma earnings before interest,
taxes, depreciation, and amortization (pro forma EBITDA)
Adjustments to arrive at pro forma earnings before interest,
income taxes, depreciation, amortization, and other selected items
(pro forma adjusted EBITDA):
The foregoing table provides a reconciliation of pro forma net
income set forth in the accompanying unaudited pro forma condensed
consolidated statements of operations reflecting reconsolidation
of GST to pro forma earnings before interest, income taxes,
depreciation, amortization and other selected items (pro forma
adjusted EBITDA). The methodology for reconciliation is the same
as presented on the table titled “Reconciliation of Consolidated
Net Income to Consolidated Adjusted EBITDA (Unaudited).”
Pro forma segment earnings before interest, income taxes,
depreciation amortization, and other selected items (pro forma
adjusted segment EBITDA)
See notes (2) and (3) to the accompanying Pro Forma Condensed
Consolidated Statements of Operations (Unaudited) for further
information about these adjustments.
Averagecommon sharesoutstanding,diluted
(millions)
$
Averagecommon sharesoutstanding,diluted
(millions)
$
Averagecommon sharesoutstanding,diluted
(millions)
$
Averagecommon sharesoutstanding,diluted
(millions)
The foregoing tables provide a reconciliation of pro forma net
income set forth in the accompanying unaudited pro forma condensed
consolidated statements of operations reflecting reconsolidation
of GST to pro forma net income before selected items (pro forma
adjusted net income). The methodology for reconciliation is the
same as presented on the table titled “Reconciliation of
Consolidated Net Income to Consolidated Adjusted Net Income and
Consolidated Adjusted Diluted Earnings Per Share (Unaudited).”
Note that for the quarter and six months ended June 30, 2018, pro
forma financial results equal consolidated financial results as
the reconsolidation of GST and OldCo took place prior to the
beginning of the quarter.
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