EnPro Industries Reports Results for the Second Quarter of 2018

EnPro Industries, Inc. (NYSE: NPO) today announced its financial results for the three-month and six-month periods ended June 30, 2018.

Key Developments

• All segments experienced strong sales growth in the second quarter, with total company sales growth of 13% compared to pro forma sales in the second quarter of last year.
• Profitability declined due to results in Sealing Products and Power Systems, partially offset by an increase in Engineered Products.
  • Profitability in Sealing Products declined due to continued softness in the industrial gas turbine business and profitability challenges in heavy-duty trucking.
  • Profitability in Engineered Products increased due to strong sales growth and the positive impact of foreign exchange translation.
  • Profitability in Power Systems declined due to the negative impact of currency adjustments applicable to the EDF loss reserve resulting from the strengthening dollar, partially offset by an increase in profit on aftermarket parts and services.
• Received a tax refund of $96 million during the second quarter related to the 2017 loss resulting from asbestos-related expenses and trust payments, and, subject to normal IRS review, the company expects to receive the remaining $32 million of tax refunds in the second half of 2018.
• Collected $11 million of asbestos-related insurance recoveries in the second quarter.
• Second quarter capital allocation highlights:
  • Repurchased 441,285 shares for approximately $32.9 million under the $50.0 million share repurchase program authorized by the Board of Directors in October 2017.
  • Paid a $0.24 per share quarterly dividend with a total value of $5.0 million.
  • Repatriated $30.6 million and $114.0 million of previously taxed earnings from foreign subsidiaries during the second quarter and first six months of the year, respectively.
• Lowered guidance for 2018 Adjusted EBITDA from a range of $224 million to $230 million to a range of $214 million to $220 million, stemming from the impact of the stronger dollar in the second quarter and from second-quarter profitability challenges in heavy-duty trucking.

“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 Subsidiaries
To 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 Information
EnPro 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 Information
This 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 Statements
Statements 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 Industries
EnPro 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.

Sealing Products Segment

Segment Highlights

• Consolidated sales increased in the second quarter versus pro forma sales in the prior-year period due to strength in semiconductor, aerospace, food & pharma, heavy-duty tractor and trailer builds, metals & mining, and nuclear. This positive momentum was partially offset by continued softness in industrial gas turbines. Excluding the impact of acquisitions, divestitures, and foreign exchange translation, consolidated sales increased 9.3% compared to pro forma sales in the prior-year period.
• Consolidated segment profit decreased in the second quarter versus pro forma segment profit in the prior-year period, primarily driven by unusual warranty charges of $4.4 million in the heavy-duty trucking business, commodity cost increases in heavy-duty trucking that were primarily tariff-related, and productivity issues in heavy-duty trucking.

Engineered Products Segment

Segment Highlights

• Consolidated sales increased in the second quarter versus pro forma sales in the prior-year period due to volume gains in the general industrial, oil & gas, and European automotive markets. Excluding the impact of foreign exchange translation, consolidated sales increased 7.2% compared to pro forma sales in the prior-year period.
• Consolidated segment profit increased in the second quarter versus pro forma segment profit in the prior-year period 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.

Power Systems Segment

Segment Highlights

• Consolidated sales increased in the second quarter versus pro forma sales in the prior-year period due to higher engine, aftermarket parts and service revenue. The increase in engine sales was largely driven by increased activity in the marine segment.

• Consolidated segment profit decreased in the second quarter versus pro forma segment profit in the prior-year period primarily due to 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%.

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.