EnPro Industries, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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Annual report pursuant to Section 13 or 15(d) of
the securities exchange act of 1934 |
For the fiscal year ended December 31, 2007
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Transition report pursuant to section 13 or 15(d)
of the securities exchange act of 1934 |
Commission File Number 001-31225
ENPRO INDUSTRIES, INC.
(Exact name of registrant, as specified in its charter)
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North Carolina
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01-0573945 |
(State or other jurisdiction of incorporation)
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(I.R.S. employer identification no.) |
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5605 Carnegie Boulevard, Suite 500,
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28209 |
Charlotte, North Carolina
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(Zip code) |
(Address of principal executive offices) |
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(704) 731-1500
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange |
Title of each class |
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on which registered |
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Common stock, $0.01 par value
Preferred stock purchase rights
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New York Stock Exchange
New York Stock Exchange |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The aggregate market value of voting and nonvoting common stock of the registrant held by
non-affiliates of the registrant as of June 30, 2007 was $909,937,000. As of February 15, 2008,
there were 21,631,176 shares of common stock of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for the 2008 annual meeting of shareholders
are incorporated by reference into Part III.
ENPRO INDUSTRIES, INC.
PART I
ITEM 1. BUSINESS
As used in this report, the terms we, us, our, EnPro and Company mean EnPro
Industries, Inc. and its subsidiaries (unless the context indicates another meaning). The term
common stock means the common stock of EnPro Industries, Inc., par value $0.01 per share. The
terms convertible debentures and debentures mean the 3.9375% Convertible Senior Debentures due
2015 issued by the Company in October 2005.
Background
We were incorporated under the laws of the State of North Carolina on January 11, 2002, as a
wholly owned subsidiary of Goodrich Corporation (Goodrich) in anticipation of Goodrichs
announced distribution of its Engineered Industrial Products segment to existing Goodrich
shareholders, which took place on May 31, 2002 (the Distribution). We are a leader in the
design, development, manufacturing, and marketing of proprietary engineered industrial products.
We have 42 primary manufacturing facilities located in the United States and 10 other countries.
Our sales by geographic region in 2007, 2006 and 2005 were as follows:
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2007 |
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2006 |
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2005 |
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(in millions) |
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United States |
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565.7 |
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543.0 |
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$ |
485.6 |
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Europe |
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277.8 |
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222.8 |
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212.1 |
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Other |
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186.5 |
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162.6 |
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140.9 |
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Total |
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$ |
1,030.0 |
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928.4 |
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$ |
838.6 |
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We maintain an Internet website at www.enproindustries.com. We will make this annual report,
in addition to our other annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to these reports, available free of charge on our website as
soon as reasonably practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission. Our Corporate Governance Guidelines and the charters for
each of our Board Committees (Audit and Risk Management, Compensation and Human Resources,
Executive, and Nominating and Corporate Governance committees) are also available on our website,
and copies of this information are available in print to any shareholder who requests it.
Information included on or linked to our website is not incorporated by reference into this annual
report.
Operations
We manage our business as three segments: a sealing products segment, which includes our
sealing products, heavy-duty wheel end components, polytetrafluoroethylene (PTFE) products, and
rubber products; an engineered products segment, which includes our metal polymer bearings, rotary
and reciprocating air compressors, vacuum pumps, air systems and reciprocating compressor
components; and an engine products and services segment, which manufactures heavy-duty,
medium-speed diesel, natural gas and dual fuel reciprocating engines. For financial information
with respect to our business segments, see Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations Results of Operations, and Note 16 to our
Consolidated Financial Statements. Item 7 and Note 16
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contain information about sales and profits for each segment, and Note 16 contains information
about each segments assets.
Sealing Products Segment
Overview. Our Sealing Products segment designs, manufactures and sells sealing
products, including metallic, non-metallic and composite material gaskets, rotary seals,
compression packing, resilient metal seals, elastomeric seals, hydraulic components and expansion
joints, as well as wheel-end component systems, 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 applications that are highly demanding, e.g., where extreme
temperatures, extreme pressures, corrosive environments and/or worn equipment make sealing
difficult.
Products. Our Sealing Products segment includes the product lines described below,
which are designed, manufactured and sold by our Garlock Sealing Technologies, Stemco, Plastomer
Technologies and Garlock Rubber Technologies operations.
Gasket products are used for sealing flange joints in chemical, petrochemical and pulp and
paper processing facilities where high pressures, high temperatures and corrosive chemicals create
the need for specialized and highly engineered sealing products. We sell these gasket products
under the Garlock®, Gylon®, Blue-Gard®, Stress-Saver®, Edge®, Graphonic® and Flexseal® brand names.
These products have a long-standing reputation within the industries we serve for performance and
reliability.
Rotary seals are used in rotating applications to contain the lubricants that protect the
bearings from excessive friction and heat generation. Because these sealing products are utilized
in dynamic applications, they are subject to wear. Durability, performance, and reliability are,
therefore, critical requirements of our customers. These rotary seals are used in demanding
applications in the steel industry, mining and pulp and paper processing under well-known brand
names including Klozure® and Model 64®.
Compression packing is used to provide sealing in pressurized, static and dynamic applications
such as pumps and valves. Major markets for compression packing products are the pulp and paper,
mining, petrochemical and hydrocarbon processing industries. Branded products for these markets
include EVSP, Synthepak® and Graph-lock®.
Resilient metal seals provide extremely tight sealing performance for highly demanding
applications such as nuclear power generation, semiconductor fabrication facilities, specific
chemical processing applications and race car engines. Branded products for these markets include
Helicoflex® and Ultraflex®.
Critical service flange gaskets, seals and electrical flange isolation kits are used in
high-pressure wellhead equipment, flow lines, water injection lines, sour hydrocarbon process
applications and crude oil and natural gas pipeline/transmission line applications. These products
are sold under the brand names Pikotek®, VCS, Flowlo and PGE.
Stemco manufactures a variety of sealing products used by the heavy-duty trucking industry to
improve the performance of wheel end systems and reduce fleet maintenance. Products for this
market include hub oil seals, axle fasteners, hub caps, wheel bearings and mileage counters. We
sell these
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sealing products under the Stemco®, Grit Guard®, Guardian®, Guardian HP®, Voyager®, Discover®,
Pro-Torq®, Sentinel®, and DataTrac® brand names.
Plastomer Technologies manufactures PTFE specialty tape, formed PTFE products, and PTFE sheets
and shapes. These PTFE products provide highly specialized and engineered solutions to our
customers in the aircraft, fluid handling and semiconductor industries, and are sold under the
Plastolon®, Texolon and Amicon brand names.
Garlock Rubber Technologies manufactures rubber bearing pads, conveyor belts and other rubber
products for industrial applications under the DuraKing®, FlexKing®, Viblon, Techflex and
HeatKing brand names.
Customers. Our Sealing Products segment sells products to industrial agents and
distributors, original equipment manufacturers (OEMs), engineering and construction firms and end
users worldwide. Sealing products are offered to global customers, with approximately 43% of sales
delivered to customers outside the United States in 2007. Representative customers include Saudi
Aramco, Motion Industries, Applied Industrial Technologies, Electricite de France, AREVA, Bayer,
BASF Corporation, General Electric Company, Georgia-Pacific Corporation, Eastman Chemical Company,
Exxon Mobil Corporation, Minarra Resources, Queensland Alumina, AK Steel Corporation, Volvo
Corporation, Utility Trailer, Great Dane, Mack Trucks, International Truck, PACCAR and Applied
Materials. In 2007, no single customer accounted for more than 2% of segment revenues.
Competition. Competition in the sealing markets in which we operate is based on
proven product performance and reliability, as well as price, customer service, application
expertise, delivery terms, breadth of product offering, reputation for quality and the availability
of the product. Our leading brand names, including Garlock® and Stemco®, have been built upon
long-standing reputations for reliability and durability. In addition, the breadth, performance
and quality of our product offerings allow us to achieve premium pricing and have made us a
preferred supplier among our agents and distributors. We believe that our record of product
performance in the major markets in which this segment operates is a significant competitive
advantage for us. Major competitors include A.W. Chesterton Company, Klinger Group, Teadit,
Lamons, SIEM/Flexitallic, SKF USA Inc., Freudenberg-NOK, Federal-Mogul Corporation and
Saint-Gobain.
Raw Materials and Components. Our Sealing Products segment uses PTFE resins, aramid
fibers, specialty elastomers, elastomeric compounds, graphite and carbon, common and exotic metals,
cold-rolled steel, leather, aluminum die castings, nitrile rubber, powdered metal components, and
various fibers and resins. We believe that all of these raw materials and components are readily
available from various suppliers.
Engineered Products Segment
Overview. Our Engineered Products segment includes operations that design,
manufacture and sell self-lubricating, non-rolling, metal polymer bearing products, rotary and
reciprocating air compressors, vacuum pumps, air systems and reciprocating compressor components.
Products. Our Engineered Products segment includes the product lines described below,
which are designed, manufactured and sold by GGB, Quincy Compressor and Compressor Products
International.
GGB produces self-lubricating, non-rolling, metal polymer, solid polymer and filament wound
bearing products. The metal-backed or epoxy-backed bearing surfaces are made of PTFE or a mixture
that includes PTFE to provide maintenance-free performance and reduced friction. These products
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typically perform as sleeve bearings or thrust washers under conditions of no lubrication,
minimal lubrication or pre-lubrication. These products are used in a wide variety of markets such
as the automotive, pump and compressor, construction, power generation and machine tool markets.
We have over 20,000 bearing part numbers of different designs and physical dimensions. GGB is a
well recognized, leading brand name in this product area.
Quincy Compressor® designs and manufactures rotary screw and reciprocating air compressors and
vacuum pumps, ranging from one-third to 500 horsepower, used in a wide range of industrial
applications, including the pharmaceutical, pulp and paper, gas transmission, health, construction,
petrochemical and automotive industries. Quincy® also sells a comprehensive line of dryers,
filters and air treatment products. In addition, Quincy performs comprehensive compressed air
system audits under the Air Science Engineering brand name and manufactures a complete line of
pneumatic and hydraulic cylinders under the Ortman brand name.
Compressor Products International designs, manufactures and services components for
reciprocating compressors and engines. These components (packing and wiper assemblies and rings,
piston and rider rings, compressor valve assemblies and components) are primarily utilized in the
refining, petrochemical, natural gas transmission and general industrial markets. Compressor
Products International also designs and manufactures the Gar-Seal® family of lined butterfly
valves.
Customers. Our Engineered Products segment sells its products to a diverse customer
base using a combination of direct sales and independent distribution networks. GGB has customers
worldwide in all major industrial sectors, and supplies products both directly to customers through
their own local distribution system and indirectly to the market through independent agents and
distributors with their own local network. Quincy Compressor products are sold through a global
network of independent agents and distributors. Quincy Compressor also sells directly to national
accounts, OEMs and climate control houses. Compressor Products International sells its products
globally through a network of company salespersons, independent sales representatives and
distributors. In 2007, no single customer accounted for more than 3% of segment revenues.
Competition. GGB has a number of competitors, including Kolbenschmidt Pierburg AG,
Norton Company and Federal-Mogul Corporation. In the markets in which GGB competes, competition is
based primarily on performance of the product for specific applications, product reliability,
delivery and price. Quincy Compressors major competitors include Gardner Denver, Inc., Sullair
Corporation, Ingersoll-Rand Company, Atlas Copco North America Inc. and Kaeser Compressors, Inc.
In the markets in which Quincy Compressor competes, competition generally is based on reliability,
quality, delivery times, energy efficiency, service and price. Compressor Products International
competes against original equipment manufacturers, such as Dresser Rand, Ingersoll-Rand Company,
Cooper Energy Services, Nuovo Pignone and Ariel Compressor and other component manufacturers, such
as C. Lee Cook and Hoerbiger Corporation. Price, availability, product quality and reliability are
the primary competitive drivers in the markets served by Compressor Products International.
Raw Materials and Components. GGBs major raw material purchases include steel coil,
bronze powder and PTFE. GGB sources components from a number of external suppliers. Quincy
Compressors primary raw materials are iron castings. Components used by Quincy Compressor are
motors, coolers and accessories such as air dryers, filters and electronic controls. Compressor
Products Internationals major raw material purchases include PTFE, PEEK (Polyetheretherketone),
compound additives, cast iron, bronze, steel and stainless steel bar stock. We believe that all of
these raw materials and components are readily available from various suppliers.
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Engine Products and Services Segment
Overview. Our Engine Products and Services segment designs, manufactures, sells and
services heavy-duty, medium-speed diesel, natural gas and dual fuel reciprocating engines. We
market our products and services under the Fairbanks Morse Engine brand name.
Products. In addition to our own designs, our Engine Products and Services segment
manufactures licensed heavy-duty, medium-speed diesel, natural gas and dual fuel reciprocating
engines. The reciprocating engines range in size from 700 to 31,970 horsepower and from five to 20
cylinders. The government and the general industrial market for marine propulsion, power
generation, and pump and compressor applications use these products. We have been building engines
for over 115 years under the Fairbanks Morse Engine brand name and we have a large installed base
of engines for which we supply aftermarket parts and service. Additionally, we have been the U.S.
Navys supplier of choice for medium-speed diesel engines and have supplied engines to the U.S.
Navy for over 70 years.
Customers. Our Engine Products and Services segment sells its products to customers
worldwide, including major shipyards, municipal utilities, institutional and industrial
organizations, sewage treatment plants, nuclear power plants and offshore oil and gas platforms.
We market our products through a direct sales force of engineers in North America and through
independent agents worldwide. Our representative customers include Northrop Grumman, General
Dynamics, Lockheed Martin, the U.S. Navy, the U.S. Coast Guard and Exelon. In 2007, the largest
customer accounted for approximately 29% of segment revenues.
Competition. Major competitors for our Engine Products and Services segment include
MTU, Caterpillar Inc. and Wartsila Corporation. Price, delivery time, and engine efficiency
relating to fuel consumption and emissions drive competition.
Raw Materials and Components. Our Engine Products and Services segment purchases
multiple ferrous and non-ferrous castings, forgings, plate stock and bar stock for fabrication and
machining into engines. In addition, we buy a considerable amount of precision-machined engine
components. We believe that all of these raw materials and components are readily available from
various suppliers.
Research and Development
We refer to our research and development efforts as our EnNovation program. The goal of the
program is to strengthen our product portfolios for traditional markets while simultaneously
creating distinctive and breakthrough products. EnNovation incorporates a process to move
product innovations from concept to commercialization, and to identify, analyze, develop and
implement new product concepts and opportunities aimed at business growth. An EnNovation
steering team comprised of engineering and marketing leaders coordinates and oversees our new
product development efforts.
We employ scientists, engineers and technicians throughout our operations to develop, design
and test new and improved products. We work closely with our customers to identify issues and
develop technical solutions. The majority of our research and development expenditures are
directed toward the development of new sealing products for hostile environments, the development
of truck and trailer fleet information systems, the development of bearing products and materials
with superior friction and wear characteristics, and the extension of our air compressor product
line. Prior to introduction, new products are subject to extensive testing at our various
facilities and at beta test sites in conjunction with our customers.
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Backlog
At December 31, 2007, we had a backlog of orders valued at $268.6 million compared with $192.4
million at December 31, 2006. Approximately 30% of the backlog, mainly at Fairbanks Morse Engine,
is expected to be filled beyond 2008. Backlog represents orders on hand that we believe to be
firm. However, there is no certainty that the backlog orders will in fact result in actual sales
at the times or in the amounts ordered. In addition, for most of our business, backlog is not
particularly predictive of future performance because of our short lead times and some seasonality.
Quality Assurance
We believe that product quality is among the most important factors in developing and
maintaining strong, long-term relationships with our customers. In order to meet the exacting
requirements of our customers, we maintain stringent standards of quality control. We routinely
employ in-process inspection by using testing equipment as a process aid during all stages of
development, design and production to ensure product quality and reliability. These include
state-of-the-art CAD/CAM equipment, statistical process control systems, laser tracking devices,
failure mode and effect analysis and coordinate measuring machines. We are also able to extract
numerical quality control data as a statistical measurement of the quality of the parts being
manufactured from our CNC machinery. In addition, we perform quality control tests on parts that
we outsource. As a result, we are able to significantly reduce the number of defective parts and
therefore improve efficiency, quality and reliability.
As of December 31, 2007, 31 of our manufacturing facilities were ISO 9000, QS 9000 and/or TS
16949 certified with the remaining facilities working towards obtaining ISO and/or TS
certification. Twelve of our facilities are ISO 14001 certified. OEMs are increasingly requiring
these standards in lieu of individual certification procedures and as a condition of awarding
business.
Patents, Trademarks and Other Intellectual Property
We maintain a number of patents and trademarks issued by the U.S. and other countries relating
to the name and design of our products and have granted licenses to some of these trademarks and
patents. We routinely evaluate the need to protect new and existing products through the patent
and trademark systems in the U.S. and other countries. We also have proprietary information,
consisting of know-how and trade secrets relating to the design, manufacture and operation of our
products and their use that is not patented. We do not consider our business as a whole to be
materially dependent upon any particular patent, patent right, trademark, trade secret or license.
In general, we are the owner of the rights to the products that we manufacture and sell.
However, we also license patented and other proprietary technology and processes from various
companies and individuals in order to broaden our product offerings. We are dependent on the
ability of these third parties to diligently protect their intellectual property rights. In
several cases, the intellectual property licenses are integral to the manufacture of our products.
For example, Fairbanks Morse Engine licenses technology from MAN Diesel for the four-stroke
reciprocating engine, and Quincy Compressor licenses from Svenska Rotor Maskiner AB its rotary
screw compressor design and technology. A loss of these licenses or a failure on the part of the
third party to protect its own intellectual property could reduce our revenues. Although these
licenses are all long-term and subject to renewal, it is possible that we may not successfully
renegotiate these licenses or that they could be terminated for a material breach. If this were to
occur, our business, financial condition, results of operations and cash flows could be adversely
affected.
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Employees and Labor Relations
We currently have approximately 4,700 employees worldwide. Approximately 2,700 employees are
located within the U.S. and approximately 2,000 employees are located outside the U.S., primarily
in Europe, Canada and Mexico. Approximately 29% of our U.S. employees are members of trade unions
covered by collective bargaining agreements. Union agreements relate, among other things, to
wages, hours and conditions of employment. The wages and benefits furnished are generally
comparable to industry and area practices.
We have collective bargaining agreements in place at five of our U.S. facilities. The hourly
employees who are unionized are covered by collective bargaining agreements with a number of labor
unions and with varying contract termination dates ranging from August 2008 to June 2012. In
addition, some of our employees located outside the U.S. are subject to national collective
bargaining agreements.
ITEM 1A. RISK FACTORS
In addition to the risks stated elsewhere in this annual report, set forth below are certain
risk factors that we believe are material. If any of these risks occur, our business, financial
condition, results of operations, cash flows and reputation could be harmed. You should also
consider these risk factors when you read forward-looking statements elsewhere in this report.
You can identify forward-looking statements by terms such as may, hope, will, should,
expect, plan, anticipate, intend, believe, estimate, predict, or continue, the
negative of those terms or other comparable terms. Those forward-looking statements are only
predictions and can be adversely affected if any of these risks occur.
Risks Related to Our Business
Certain of our subsidiaries are defendants in asbestos litigation.
The historical business operations of certain subsidiaries of our subsidiary, Coltec
Industries Inc (Coltec), principally Garlock Sealing Technologies LLC and The Anchor Packing
Company, 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. Those subsidiaries
manufactured and/or sold industrial sealing products, predominately gaskets and packing products,
that contained encapsulated asbestos fibers. Anchor is an inactive and insolvent indirect
subsidiary of Coltec. There is no remaining insurance coverage available to Anchor. Our
subsidiaries exposure to asbestos litigation and their relationships with insurance carriers are
actively managed through another Coltec subsidiary, Garrison Litigation Management Group, Ltd.
Several risks and uncertainties may result in potential liabilities to us in the future that could
have a material adverse effect on our business, financial condition, results of operations and cash
flows. Those risks and uncertainties include the following:
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the potential for a large number of future asbestos claims that are not covered by
insurance because insurance coverage is, or will be, depleted; |
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the uncertainty of the per claim value of pending and potential future asbestos
claims; |
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the results of litigation and the success of our litigation and settlement
strategies; |
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the potential for large adverse judgments against us resulting from any required
payments not covered by insurance and any surety/appeal bonds (and related cash
collateral) required in connection with appeals; |
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an increase in litigation costs, fees and expenses that are not covered by
insurance; |
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the financial viability of our subsidiaries insurance carriers and their
reinsurance carriers, and our subsidiaries ability to collect on claims from them; |
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the timing of claims, payments and insurance recoveries, and limitations imposed on
the amount that may be recovered from insurance in any year; |
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the unavailability of any insurance for claims alleging first exposure to asbestos
after July 1, 1984; |
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the potential for asbestos exposure to extend beyond specific Coltec subsidiaries
arising from corporate veil piercing efforts or other claims by asbestos plaintiffs; |
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bankruptcies of other defendants; and |
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the prospect for and impact of any federal legislation providing national asbestos
litigation reform. |
To the extent our subsidiaries insurance is depleted or the payments required in any given
year exceed the annual limitations on insurance recoveries from our subsidiaries carriers, our
subsidiaries would be required to fund these obligations from available cash. This could adversely
affect our ability to use cash for other purposes, including growth of our business, and adversely
affect our financial condition.
In addition, our estimated liability for claims is highly uncertain and is based on subjective
assumptions. The actual liability could vary significantly from the estimate recorded in our
financial statements.
Because of the uncertainty as to the number and timing of potential future asbestos claims, as
well as the amount that will have to be paid to settle or satisfy any such claims in the future
(including significant bonds required by certain states while we appeal adverse verdicts), and the
finite amount of insurance available for future payments, future asbestos claims could have a
material adverse effect on our financial condition, results of operations and cash flows.
For a further discussion of our asbestos exposure, see Managements Discussion and Analysis
of Financial Condition and Results of Operations Contingencies Asbestos.
Our business and some of the markets we serve are cyclical and changes in general market conditions
could have a material adverse effect on our business.
The markets in which we sell our products, particularly chemical companies, petroleum
refineries, heavy-duty trucking, semiconductor manufacturing, capital equipment and the automotive
industry, are, to varying degrees, cyclical and have historically experienced periodic downturns.
Prior downturns have been characterized by diminished product demand, excess manufacturing capacity
and subsequent erosion of average selling prices in these markets resulting in negative effects on
our net sales, gross margins and net income. Economic downturns or other material weakness in
demand in any of these markets could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
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We face intense competition that could have a material adverse effect on our business.
We encounter intense competition in almost all areas of our business. Customers for many of
our products are attempting to reduce the number of vendors from which they purchase in order to
reduce inventories. To remain competitive, we need to invest continuously in manufacturing,
marketing, customer service and support and our distribution networks. We also need to develop new
products to continue to meet the needs and desires of our customers. We may not have sufficient
resources to continue to make such investments or maintain our competitive position. Additionally,
some of our competitors are larger than we are and have substantially greater financial resources
than we do. As a result, they may be better able to withstand the effects of periodic economic
downturns. Pricing and other competitive pressures could adversely affect our business, financial
condition, results of operations and cash flows.
If we fail to retain the independent agents and distributors upon whom we rely to market our
products, we may be unable to effectively market our products and our revenue and profitability may
decline.
Our marketing success in the U.S. and abroad depends largely upon our independent agents and
distributors sales and service expertise and relationships with customers in our markets. Many of
these agents have developed strong ties to existing and potential customers because of their
detailed knowledge of our products. A loss of a significant number of these agents or
distributors, or of a particular agent or distributor in a key market or with key customer
relationships, could significantly inhibit our ability to effectively market our products, which
could have a material adverse effect on our business, financial condition, results of operations
and cash flows.
Increased costs for raw materials or the termination of existing supply agreements could have a
material adverse effect on our business.
The prices for raw materials we purchase increased in 2007. While we have been successful in
passing along a portion of these higher costs, there can be no assurance that we will be able to
continue doing so without losing customers. Similarly, the loss of a key supplier or the
unavailability of a key raw material could adversely affect our business, financial condition,
results of operations and cash flows.
We have exposure to some contingent liabilities relating to discontinued operations, which could
have a material adverse effect on our financial condition, results of operations or cash flows in
any fiscal period.
We have some contingent liabilities related to discontinued operations of our predecessors,
including environmental liabilities and liabilities for certain products and other matters. In
some instances, we have indemnified others against those liabilities, and in other instances, we
have received indemnities from third parties against those liabilities.
Claims could arise relating to products or other matters related to our discontinued
operations. Some of these claims could seek substantial monetary damages. Specifically, we may
potentially be subject to the liabilities related to the firearms manufactured prior to 1990 by
Colt Firearms, a former operation of Coltec, and for electrical transformers manufactured prior to
1994 by Central Moloney, another former Coltec operation. Coltec also has ongoing obligations with
regard to workers compensation, retiree medical and other retiree benefit matters associated with
discontinued operations that relate to Coltecs periods of ownership of those operations.
We have insurance, reserves and funds held in trust to address these liabilities. However, if
our insurance coverage is depleted, our reserves are not adequate or the funds held in trust are
insufficient,
9
environmental and other liabilities relating to discontinued operations could have a material
adverse effect on our financial condition, results of operations and cash flows.
We conduct a significant amount of our sales activities outside of the U.S., which subjects us to
additional business risks that may cause our profitability to decline.
Because we sell our products in a number of foreign countries, we are subject to risks
associated with doing business internationally. In 2007, we derived approximately 45% of our
revenues from sales of our products outside of the U.S. Our international operations are, and will
continue to be, subject to a number of risks, including:
|
|
|
unfavorable fluctuations in foreign currency exchange rates; |
|
|
|
|
adverse changes in foreign tax, legal and regulatory requirements; |
|
|
|
|
difficulty in protecting intellectual property; |
|
|
|
|
trade protection measures and import or export licensing requirements; |
|
|
|
|
differing labor regulations; |
|
|
|
|
political and economic instability; and |
|
|
|
|
acts of hostility, terror or war. |
Any of these factors, individually or together, could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
We intend to continue to pursue international growth opportunities, which could increase our
exposure to risks associated with international sales and operations. As we expand our
international operations, we may also encounter new risks that could adversely affect our revenues
and profitability. For example, as we focus on building our international sales and distribution
networks in new geographic regions, we must continue to develop relationships with qualified local
agents, distributors and trading companies. If we are not successful in developing these
relationships, we may not be able to increase sales in these regions.
If we are unable to protect our intellectual property rights and knowledge relating to our
products, our business and prospects may be negatively impacted.
We believe that proprietary products and technology are important to our success. If we are
unable to adequately protect our intellectual property and know-how, our business and prospects
could be negatively impacted. Our efforts to protect our intellectual property through patents,
trademarks, service marks, domain names, trade secrets, copyrights, confidentiality, non-compete
and nondisclosure agreements and other measures may not be adequate to protect our proprietary
rights. Patents issued to third parties, whether before or after the issue date of our patents,
could render our intellectual property less valuable. Questions as to whether our competitors
products infringe our intellectual property rights or whether our products infringe our
competitors intellectual property rights may be disputed. In addition, intellectual property
rights may be unavailable, limited or difficult to enforce in some jurisdictions, which could make
it easier for competitors to capture market share in those jurisdictions.
10
Our competitors may capture market share from us by selling products that claim to mirror the
capabilities of our products or technology. Without sufficient protection nationally and
internationally for our intellectual property, our competitiveness worldwide could be impaired,
which would negatively impact our growth and future revenue. As a result, we may be required to
spend significant resources to monitor and police our intellectual property rights.
Risks Related to Ownership of Our Common Stock
The market price and trading volume of our common stock may be volatile.
A relatively small number of shares traded in any one day could have a significant affect on
the market price of our common stock. The market price of our common stock could fluctuate
significantly for many reasons, including in response to the risks described in this section and
elsewhere in this report or for reasons unrelated to our operations, such as reports by industry
analysts, investor perceptions or negative announcements by our customers, competitors or suppliers
regarding their own performance, as well as industry conditions and general financial, economic and
political instability. In particular, reports concerning asbestos litigation or asbestos reform
could cause a significant increase or decrease in the market price of our common stock.
Because our quarterly revenues and operating results may vary significantly in future periods, our
stock price may fluctuate.
Our revenue and operating results may vary significantly from quarter to quarter. A high
proportion of our costs are fixed, due in part to significant selling and manufacturing costs.
Small declines in revenues could disproportionately affect operating results in a quarter and the
price of our common stock may fall. We may also incur charges to income to cover increases in the
estimate of our subsidiaries future asbestos liability. Other factors that could affect quarterly
operating results include, but are not limited to:
|
|
|
demand for our products; |
|
|
|
|
the timing and execution of customer contracts; |
|
|
|
|
the timing of sales of our products; |
|
|
|
|
payments related to asbestos litigation or annual costs related to asbestos
litigation that are not covered by insurance; |
|
|
|
|
the timing of receipt of insurance proceeds; |
|
|
|
|
increases in manufacturing costs due to equipment or labor issues; |
|
|
|
|
changes in foreign currency exchange rates; |
|
|
|
|
unanticipated delays or problems in introducing new products; |
|
|
|
|
announcements by competitors of new products, services or technological innovations; |
|
|
|
|
changes in our pricing policies or the pricing policies of our competitors; |
|
|
|
|
increased expenses, whether related to sales and marketing, raw materials or
supplies, product development or administration; |
11
|
|
|
major changes in the level of economic activity in North America, Europe, Asia and
other major regions in which we do business; |
|
|
|
|
costs related to possible future acquisitions or divestitures of technologies or
businesses; |
|
|
|
|
an increase in the number or magnitude of product liability claims; |
|
|
|
|
our ability to expand our operations and the amount and timing of expenditures
related to expansion of our operations, particularly outside the United States; and |
|
|
|
|
economic assumptions and market factors used to determine post-retirement benefits
and pension liabilities. |
Various provisions and laws could delay or prevent a change of control.
The anti-takeover provisions of our articles of incorporation and bylaws, our shareholder
rights plan and provisions of North Carolina law could delay or prevent a change of control or may
impede the ability of the holders of our common stock to change our management. In particular, our
articles of incorporation and bylaws, among other things, will:
|
|
|
require a supermajority shareholder vote to approve any business combination
transaction with an owner of 5% or more of our shares unless the transaction is
recommended by disinterested directors; |
|
|
|
|
divide our board of directors into three classes, with members of each class to be
elected for staggered three-year terms, if our board is expanded to nine members; |
|
|
|
|
limit the right of shareholders to remove directors and fill vacancies; |
|
|
|
|
regulate how shareholders may present proposals or nominate directors for election
at shareholders meetings; and |
|
|
|
|
authorize our board of directors to issue preferred stock in one or more series,
without shareholder approval. |
Our shareholder rights plan will also make an acquisition of a controlling interest in EnPro
in a transaction not approved by our board of directors more difficult.
Future sales of our common stock in the public market could lower the market price for our common
stock and adversely impact the trading price of our convertible debentures.
In the future, we may sell additional shares of our common stock to raise capital. In
addition, a substantial number of shares of our common stock are reserved for issuance upon the
exercise of stock options and upon conversion of our convertible debentures. We cannot predict the
size of future issuances or the effect, if any, that they may have on the market price for our
common stock. The issuance and sales of substantial amounts of common stock, or the perception
that such issuances and sales may occur, could adversely affect the trading price of the debentures
and the market price of our common stock.
12
Absence of dividends could reduce our attractiveness to investors.
We have never declared or paid cash dividends on our common stock. Moreover, our current
senior secured credit facility restricts our ability to pay cash dividends on common stock if
availability under the facility falls below $20 million. As a result, our common stock may be less
attractive to certain investors than the stock of companies with a history of paying regular
dividends.
Risks Related to Our Capital Structure
Our debt agreement imposes limitations on our operations, which could impede our ability to respond
to market conditions, address unanticipated capital investments and/or pursue business
opportunities.
We have a $75 million senior secured revolving credit facility that imposes limitations on our
operations, such as limitations on distributions, limitations on incurrence and repayment of
indebtedness, and maintenance of a fixed charge coverage financial ratio. These limitations could
impede our ability to respond to market conditions, address unanticipated capital investment needs
and/or pursue business opportunities.
We may not have sufficient cash to repurchase our convertible debentures at the option of the
holder or upon a change of control or to pay the cash payable upon a conversion.
Upon a change of control, subject to certain conditions, we will be required to make an offer
to repurchase for cash all outstanding convertible debentures at 100% of their principal amount
plus accrued and unpaid interest, including liquidated damages, if any, up to but not including the
date of repurchase. Upon a conversion, we will be required to make a cash payment of up to $1,000
for each $1,000 in principal amount of debentures converted. However, we may not have enough
available cash or be able to obtain financing at the time we are required to make repurchases of
tendered debentures or settlement of converted debentures. Any credit facility in place at the
time of a repurchase or conversion of the debentures may also limit our ability to use borrowings
to pay any cash payable on a repurchase or conversion of the debentures and may prohibit us from
making any cash payments on the repurchase or conversion of the debentures if a default or event of
default has occurred under that facility without the consent of the lenders under that credit
facility. Our current $75 million senior secured credit facility prohibits distributions from our
subsidiaries to us to make payments of interest on the debentures if a default or event of default
exists under the facility. Our senior secured credit facility also prohibits prepayments of the
debentures or distributions from our subsidiaries to us to make principal payments or payments upon
conversion of the debentures if a default or event of default exists under the facility or the
amount of the borrowing base under the facility, less the amount of outstanding borrowings under
the facility and letters of credit and reserves, is less than $20 million. Our failure to
repurchase tendered debentures at a time when the repurchase is required by the indenture or to pay
any cash payable on a conversion of the debentures would constitute a default under the indenture.
A default under the indenture or the change of control itself could lead to a default under the
other existing and future agreements governing our indebtedness. If the repayment of the related
indebtedness were to be accelerated after any applicable notice or grace periods, we may not have
sufficient funds to repay the indebtedness and repurchase the debentures or make cash payments upon
conversion thereof.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
13
ITEM 2. PROPERTIES
We are headquartered in Charlotte, North Carolina and have 42 primary manufacturing facilities
in 10 states within the U.S. and 10 countries outside of the U.S. The following table outlines the
location, business segment and size of our largest facilities, along with whether we own or lease
each facility:
|
|
|
|
|
|
|
|
|
|
|
Owned/ |
|
Size |
Location |
|
Segment |
|
Leased |
|
(Square Feet) |
|
|
|
|
|
|
|
U.S. |
|
|
|
|
|
|
Palmyra, New York |
|
Sealing Products |
|
Owned |
|
638,000 |
Longview, Texas |
|
Sealing Products |
|
Owned |
|
210,000 |
Paragould, Arkansas |
|
Sealing Products |
|
Owned |
|
142,000 |
Quincy, Illinois |
|
Engineered Products |
|
Owned |
|
323,000 |
Bay Minette, Alabama |
|
Engineered Products |
|
Leased |
|
143,000 |
Thorofare, New Jersey |
|
Engineered Products |
|
Owned |
|
120,000 |
Beloit, Wisconsin |
|
Engine Products and Services |
|
Owned |
|
433,000 |
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
Mexico City, Mexico |
|
Sealing Products |
|
Owned |
|
131,000 |
Saint Etienne, France |
|
Sealing Products |
|
Owned |
|
108,000 |
Annecy, France |
|
Engineered Products |
|
Leased |
|
196,000 |
Heilbronn, Germany |
|
Engineered Products |
|
Owned |
|
127,000 |
Sucany, Slovakia |
|
Engineered Products |
|
Owned |
|
109,000 |
Our manufacturing capabilities are flexible and allow us to customize the manufacturing
process to increase performance and value for our customers and meet particular specifications. We
also maintain numerous sales offices and warehouse facilities in strategic locations in the U.S.,
Canada and other countries. We believe that all of our facilities and equipment are in good
condition and are well maintained and able to continue to operate at present levels.
ITEM 3. LEGAL PROCEEDINGS
Descriptions of environmental, asbestos and legal matters are included in Item 7 of this
annual report under the heading Managements Discussion and Analysis of Financial Condition and
Results of Operations Contingencies and in Note 17 to our Consolidated Financial Statements
which descriptions are incorporated by reference herein.
In addition to the matters referenced above, we are from time to time subject to, and are
presently involved in, other litigation and legal proceedings arising in the ordinary course of
business. We believe that the outcome of such other litigation and legal proceedings will not have
a material adverse affect on our financial condition, results of operations or cash flows.
We were not required to pay any penalties for failure to disclose certain reportable
transactions under Section 6707A of the Internal Revenue Code.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal
year covered by this annual report.
14
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our executive officers is set forth below:
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
|
|
|
|
|
|
|
Ernest F. Schaub
|
|
|
64 |
|
|
President, Chief Executive Officer and
Director |
|
|
|
|
|
|
|
William Dries
|
|
|
56 |
|
|
Senior Vice President and Chief Financial
Officer |
|
|
|
|
|
|
|
Richard L. Magee
|
|
|
50 |
|
|
Senior Vice President, General Counsel
and Secretary |
|
|
|
|
|
|
|
J. Milton Childress II
|
|
|
50 |
|
|
Vice President, Strategic Planning and
Business Development |
|
|
|
|
|
|
|
Donald G. Pomeroy II
|
|
|
40 |
|
|
Vice President and Controller |
|
|
|
|
|
|
|
Robert D. Rehley
|
|
|
47 |
|
|
Vice President and Treasurer |
Ernest F. Schaub is currently President and Chief Executive Officer and has held these
positions since May 2002. He is also a director of the Company. From 1999 until joining the
Company, he was Executive Vice President of Goodrich Corporation and President and Chief Operating
Officer of Goodrichs Engineered Industrial Products Segment. From 1990 to 1999, Mr. Schaub was
Group President, Landing Systems of Goodrich. Mr. Schaub joined Goodrich in 1971, and held a
variety of engineering, manufacturing and management positions.
William Dries is currently Senior Vice President and Chief Financial Officer and has held
these positions since May 2002. He served as a consultant to Goodrich Corporation from September
2001 through December 2001 and was employed by Coltec Industries Inc from January 2002 through
April 2002. Prior to that, Mr. Dries was employed by United Dominion Industries, Inc. He was
Senior Vice President and Chief Financial Officer of United Dominion from December 1999 until May
2001, having previously served as Senior Vice President Finance, Vice President and Controller.
Mr. Dries, a certified public accountant, was with Ernst & Young LLP in New York prior to joining
United Dominion in 1985.
Richard L. Magee is currently Senior Vice President, General Counsel and Secretary and has
held these positions since May 2002. He served as a consultant to Goodrich Corporation from
October 2001 through December 2001, and was employed by Coltec Industries Inc from January 2002
through April 2002. Prior to that, Mr. Magee was Senior Vice President, General Counsel and
Secretary of United Dominion Industries, Inc. from April 2000 until July 2001, having previously
served as Vice President, Secretary and General Counsel. Mr. Magee was a partner in the Charlotte,
North Carolina law firm Robinson, Bradshaw & Hinson, P.A. prior to joining United Dominion in 1989.
J. Milton Childress II joined the EnPro corporate staff in December 2005. Mr. Childress was
elected Vice President, Strategic Planning and Business Development in February 2006. He was a
co-founder of and served from October 2001 through December 2005 as Managing Director of
Charlotte-based McGuireWoods Capital Group. Prior to that, Mr. Childress was Senior Vice
President, Planning and Development of United Dominion Industries, Inc. from December 1999 until
May 2001, having previously served as Vice President. Mr. Childress held a number of positions
with Ernst & Youngs corporate finance consulting group prior to joining United Dominion in 1992.
15
Donald G. Pomeroy II is currently Vice President and Controller and has held this position
since September 2007. Mr. Pomeroy served as the Vice President, Finance for Garlock Sealing
Technologies from August 2004 until August 2007, having previously served as the Companys Vice
President and Controller from May 2002 through August 2004. He was Vice President, Finance and
Information Technology at Stemco for Coltec Industries Inc from August 1998 until October 2001, and
an employee of Coltec Industries Inc from November 2001 through May 2002. From May 1995 to
February 1996, Mr. Pomeroy was a financial analyst, and from February 1996 to August 1998, he was
Controller International Operations at Garlock Sealing Technologies. Prior to joining Garlock
Sealing Technologies, Mr. Pomeroy, a certified public accountant, was with Coopers & Lybrand LLP.
Robert D. Rehley is currently Vice President and Treasurer and has held these positions since
May 2002. He was employed by Coltec Industries Inc from January 2002 through April 2002. Mr.
Rehley was Assistant Treasurer of Metaldyne Corporation from October 2001 to January 2002, and was
Executive Director Corporate Tax for Metaldyne from December 2000 until October 2001.
Previously, he was Treasurer of Simpson Industries from April 1998 until December 2000. Mr. Rehley
was Director Finance and Business Development for Cummins Engine Company, Inc. from October 1996
until April 1998.
PART II
ITEM 5. REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is publicly traded on the New York Stock Exchange (NYSE) under the symbol
NPO. As required by Section 3.03A.12(a) of the NYSE listing standards, we filed with the NYSE
the certification of our Chief Executive Officer that he is not aware of any violation by the
Company of NYSE corporate governance listing standards.
As of February 15, 2008, there were 5,440 holders of record of our common stock. The price
range of our common stock from January 1, 2006 through December 31, 2007 is listed below by
quarter:
|
|
|
|
|
|
|
|
|
|
|
Low |
|
High |
|
|
Sale Price |
|
Sale Price |
Fiscal 2007: |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
29.65 |
|
|
$ |
43.32 |
|
Third Quarter |
|
|
31.01 |
|
|
|
46.46 |
|
Second Quarter |
|
|
35.85 |
|
|
|
44.99 |
|
First Quarter |
|
|
30.87 |
|
|
|
40.70 |
|
|
|
|
|
|
|
|
|
|
Fiscal 2006: |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
29.49 |
|
|
$ |
35.75 |
|
Third Quarter |
|
|
29.28 |
|
|
|
35.01 |
|
Second Quarter |
|
|
31.61 |
|
|
|
40.08 |
|
First Quarter |
|
|
26.30 |
|
|
|
34.70 |
|
We did not declare any cash dividends to our shareholders during 2007. For a discussion of
the restrictions on payment of dividends on our common stock, see Managements Discussion and
Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources
Dividends.
16
The following table sets forth all purchases made by us or on our behalf or any affiliated
purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act, of shares of our common stock
during each month in the fourth quarter of 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(or Approximate |
|
|
|
|
|
|
|
|
|
|
(c) Total Number of |
|
Dollar Value) of |
|
|
|
|
|
|
|
|
|
|
Shares (or Units) |
|
Shares (or Units) |
|
|
(a) Total Number |
|
(b) Average Price |
|
Purchased as Part of |
|
that May Yet Be |
|
|
of Shares (or |
|
Paid per Share |
|
Publicly Announced |
|
Purchased Under the |
Period |
|
Units)Purchased |
|
(or Unit) |
|
Plans or Programs |
|
Plans or Programs(1) |
October 1 October 31, 2007 |
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1 November 30, 2007 |
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1 December 31, 2007 |
|
|
1,228 |
(1) |
|
$ |
30.56 |
|
|
|
|
|
|
|
|
|
Total |
|
|
1,228 |
(1) |
|
$ |
30.56 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Shares were transferred to a rabbi trust that we established in connection with our Deferred
Compensation Plan for Non-Employee Directors, pursuant to which non-employee directors may
elect to defer directors fees into common stock units. Coltec, which is a wholly owned
subsidiary of EnPro, furnished these shares in exchange for management and other services
provided by EnPro. These shares were valued at a price of $30.56 per share, the average of
the high and low prices of our common stock on December 31, 2007. We do not consider the
transfer of shares from Coltec in this context to be pursuant to a publicly announced plan or
program. |
CUMULATIVE TOTAL RETURN PERFORMANCE GRAPH
Set forth below is a line graph showing the yearly percentage change in the cumulative total
shareholder return for our common stock as compared to similar returns for the Russell 2000® Stock
Index and a group of our peers consisting of Flowserve Corporation, Robbins & Myers, Inc., Gardner
Denver, Inc., Circor International, Inc., IDEX Corporation and The Gormann-Rupp Company. These
manufacturing companies were chosen because they are all similarly situated to EnPro in terms of
size and markets served. Each of the returns is calculated assuming the investment of $100 in each
of the securities on December 31, 2002 and reinvestment of dividends into additional shares of the
respective equity securities when paid. The graph plots the respective values beginning on
December 31, 2002 and continuing through December 31, 2007. Past performance is not necessarily
indicative of future performance.
17
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG ENPRO INDUSTRIES, INC.,
RUSSELL 2000 INDEX AND PEER GROUP INDEX
ASSUMES $100 INVESTED ON DEC. 31, 2002
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2007
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following historical consolidated financial information as of and for each of the years
ended December 31, 2007, 2006, 2005, 2004 and 2003 has been derived from, and should be read
together with, our audited Consolidated Financial Statements and the related notes, for each of
those years. The audited Consolidated Financial Statements and related notes as of December 31,
2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005 are included elsewhere in
this annual report. The information presented below with respect to the last three completed
fiscal years should also be read together with Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
(in millions, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,030.0 |
|
|
$ |
928.4 |
|
|
$ |
838.6 |
|
|
$ |
826.3 |
|
|
$ |
730.1 |
|
Income (loss) from before
extraordinary item |
|
$ |
37.7 |
|
|
$ |
(158.9 |
) |
|
$ |
58.6 |
|
|
$ |
33.8 |
|
|
$ |
33.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (1) |
|
$ |
1,470.3 |
|
|
$ |
1,406.6 |
|
|
$ |
1,276.2 |
|
|
$ |
1,181.0 |
|
|
$ |
1,020.7 |
|
Long-term debt (including
current portion) |
|
$ |
185.7 |
|
|
$ |
185.7 |
|
|
$ |
185.2 |
|
|
$ |
164.8 |
|
|
$ |
170.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share Data Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations |
|
$ |
1.80 |
|
|
$ |
(7.60 |
) |
|
$ |
2.75 |
|
|
$ |
1.60 |
|
|
$ |
1.61 |
|
|
|
|
(1) |
|
For years prior to 2005, the total assets reported in the table above contain immaterial
errors relating to the translation of foreign currency denominated goodwill and other
intangible assets. If the translation adjustments had been properly recorded, total assets
would have been $1,213.2 million and $1,044.2 million for the years 2004 and 2003,
respectively. There would have been no impact upon net income, earnings per share or cash
flows for any of these periods due to the errors. |
18
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is managements discussion and analysis of certain significant factors that have
affected our consolidated financial condition and operating results during the periods included in
the accompanying audited Consolidated Financial Statements and the related notes. You should read
the following discussion in conjunction with our audited Consolidated Financial Statements and the
related notes, included elsewhere in this annual report.
Forward-Looking Statements
This report contains certain statements that are forward-looking statements as that term is
defined under the Private Securities Litigation Reform Act of 1995 (the Act) and releases issued
by the Securities and Exchange Commission. The words may, hope, will, should, expect,
plan, anticipate, intend, believe, estimate, predict, potential, continue, and
other expressions which are predictions of or indicate future events and trends and which do not
relate to historical matters identify forward-looking statements. We believe that it is important
to communicate our future expectations to our shareholders, and we therefore make forward-looking
statements in reliance upon the safe harbor provisions of the Act. However, there may be events in
the future that we are not able to accurately predict or control, and our actual results may differ
materially from the expectations we describe in our forward-looking statements. Forward-looking
statements involve known and unknown risks, uncertainties and other factors, which may cause our
actual results, performance or achievements to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking statements. We advise you
to read further about certain of these and other risk factors set forth in Item 1A of this annual
report, entitled Risk Factors We undertake no obligation to publicly update or revise any
forward-looking statement, either as a result of new information, future events or otherwise.
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.
Overview
Overview. EnPro is a leader in the design, development, manufacturing and marketing
of proprietary engineered industrial products. We have 42 primary manufacturing facilities located
in the United States and 10 countries outside the United States.
We focus on four management initiatives: improving operational efficiencies through our Total
Customer Value, or TCV, lean enterprise program; expanding our product offerings and customer base
through our EnNovation initiative and new operations in new geographic markets; strengthening the
mix of our business by strategic acquisitions and divestitures; and managing the asbestos
settlements of our subsidiaries to minimize the impact on cash flows and enhance our liquidity. We
believe these strategic initiatives will increase our sales growth, increase our gross profit,
provide additional earnings leverage over time through reduced manufacturing, selling and
administrative expenses as a percent of revenue, increase our income from continuing operations,
and provide the cash required to sustain and grow the Company.
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, rotary seals, compression packing, resilient
metal seals, elastomeric seals, hydraulic components and expansion joints, as well as wheel-end
component
19
systems, 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 and
semiconductor fabrication.
Our Engineered Products segment includes operations that design, manufacture and sell
self-lubricating, non-rolling, metal-polymer bearings, filament wound solid polymer bearings,
aluminum blocks for hydraulic applications, rotary and reciprocating air compressors, vacuum pumps,
air systems and reciprocating compressor components. These products are used in a wide range of
applications, including the automotive, pharmaceutical, pulp and paper, gas transmission, health,
construction, petrochemical and general industrial markets.
On July 31, 2007, we acquired Compressor Products International Ltd. and combined its
operations with the operations of France Compressor Products in the Engineered Products segment.
Beginning in May 2006, we completed four smaller acquisitions for France Compressor Products. The
four are Allwest Compressor Services, Southwest Compressor Services, H.A.R. Compressor Products and
Texflo Machining Ltd. This combination of companies created the worlds leading manufacturer of
reciprocating compressor components and one of the worlds largest producers of reciprocating
compressor valves. To accurately reflect the combined companys products, international presence
and objectives for growth, these operations conduct business under the Compressor Products
International brand name. We now refer to these operations as Compressor Products International,
or CPI.
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 general market for marine propulsion, power generation, and pump and compressor applications
use these products and services.
As described elsewhere in this Managements Discussion and Analysis of Financial Condition and
Results of Operations, we actively manage the asbestos claims against our subsidiaries and have a
sizeable amount of insurance remaining for the payment of these claims. We accrue an estimated
liability for both pending and future asbestos claims for the next ten years. For additional
information on this subject, see Contingencies-Asbestos.
Outlook
We continue to make progress in connection with our strategies to improve operating efficiency
through our TCV initiative; to expand our product offerings, our markets, and our customer base; to
strengthen the mix of our businesses; and to manage asbestos settlements by our subsidiaries. Our
strong liquidity, cash flows and relatively low debt ratio provide us with a sound financial base
upon which we can continue to grow the company.
We expect sales to increase in 2008 compared to 2007, mainly because of improved volumes from
market share gained as a result of new products and geographic expansion; market growth; full year
results associated with the acquisitions completed in 2007; and price increases. We expect higher
sales volumes, productivity improvements and restructuring initiatives associated with our TCV lean
manufacturing program, continued focus on low cost manufacturing operations, and price increases to
contribute to operating margins and increased operating profits in 2008.
Improvements in operating margins may be offset, in whole or in part, by the effect of the
acquisition of operations with operating margins less than our existing businesses primarily due to
amortization of the intangible assets of the acquired operations. We expect gross profit will
continue to
20
increase as a result of acquisitions, but operating margins may increase, be flat or decline
depending on the operating margins of the acquired operations and their proportion of our total
results.
We anticipate that cash flows in 2008 will benefit from improved operating income partially
offset by increases in capital expenditures and net asbestos-related payments. Capital spending in
2008 is expected to be higher than 2007 levels as a result of continued investments to expand
geographically, and our strategy to improve operational efficiency. Net asbestos-related payments
are expected to increase in 2008 because we expect to collect significantly less from our insurance
than in 2007.
As part of our operating strategy to strengthen our mix of businesses, we will continue to
evaluate strategic acquisitions and divestitures in 2008; however, the impact of such acquisitions
or divestitures cannot be predicted and therefore is not reflected in this outlook.
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(in millions) |
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
Sealing Products |
|
$ |
457.3 |
|
|
$ |
432.5 |
|
|
$ |
392.9 |
|
Engineered Products |
|
|
445.5 |
|
|
|
391.7 |
|
|
|
346.0 |
|
Engine Products and Services |
|
|
128.1 |
|
|
|
105.2 |
|
|
|
101.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,030.9 |
|
|
|
929.4 |
|
|
|
840.0 |
|
Intersegment sales |
|
|
(0.9 |
) |
|
|
(1.0 |
) |
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
1,030.0 |
|
|
$ |
928.4 |
|
|
$ |
838.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Profit |
|
|
|
|
|
|
|
|
|
|
|
|
Sealing Products |
|
$ |
78.0 |
|
|
$ |
76.5 |
|
|
$ |
66.1 |
|
Engineered Products |
|
|
69.4 |
|
|
|
61.5 |
|
|
|
45.4 |
|
Engine Products and Services |
|
|
15.3 |
|
|
|
4.9 |
|
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
|
Total segment profit |
|
|
162.7 |
|
|
|
142.9 |
|
|
|
117.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses |
|
|
(34.1 |
) |
|
|
(31.6 |
) |
|
|
(25.5 |
) |
Asbestos-related expenses |
|
|
(68.4 |
) |
|
|
(359.4 |
) |
|
|
(11.7 |
) |
Gain (loss) on sale of assets, net |
|
|
|
|
|
|
(0.6 |
) |
|
|
5.8 |
|
Interest income (expense), net |
|
|
0.2 |
|
|
|
(3.2 |
) |
|
|
(6.1 |
) |
Other income (expense), net |
|
|
(2.4 |
) |
|
|
(2.3 |
) |
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
58.0 |
|
|
|
(254.2 |
) |
|
|
92.1 |
|
Income tax benefit (expense) |
|
|
(20.3 |
) |
|
|
95.3 |
|
|
|
(33.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary item |
|
|
37.7 |
|
|
|
(158.9 |
) |
|
|
58.6 |
|
Extraordinary item, net of taxes |
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
40.2 |
|
|
$ |
(158.9 |
) |
|
$ |
58.6 |
|
|
|
|
|
|
|
|
|
|
|
Segment profit is total segment revenue reduced by operating expenses and restructuring and
other costs identifiable with the segment. Corporate expenses include general corporate
administrative costs. Expenses not directly attributable to the segments, corporate expenses, net
interest expense, asbestos-related expenses, gains/losses or impairments related to the sale of
assets 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.
21
2007 Compared to 2006
Sales were $1.03 billion in 2007, a new record and an 11% increase compared to the $928.4
million recorded in 2006. Increases in foreign currency exchange rates relative to the U.S.
dollar, with the euro being the most significant, and acquisitions completed in 2007 added
approximately six percentage points to revenue growth on a year-over-year basis. The five
percentage points of organic growth were the result of stronger demand from Garlock Sealing
Technologies U.S. and European markets, higher shipments from GGBs European operations, continued
strong demand in the energy-related markets of Compressor Products International, increased engine
and parts shipments from Fairbanks Morse Engine, and selected price increases at several
businesses. These favorable variances were partially offset by lower OEM and aftermarket volumes
in Stemcos heavy duty truck market, a drop in demand for Plastomer Technologies products in the
semiconductor and industrial markets, and a small decrease in shipments from Quincy Compressor,
coming off of a strong year in 2006, for key markets such as energy, industrial and contractors.
Segment profit, one of managements primary measures of how our operations perform, increased
14% from $142.9 million in 2006 to $162.7 million in 2007. Segment profit was impacted by selected
price increases and increased sales volume at several businesses, improved margins on Fairbanks
Morse Engine shipments, a contract loss provision for Fairbanks Morse Engine in 2006 that did not
recur this year, a reduction in U.S. defined benefit pension expense, contributions from
acquisitions, and favorable foreign currency exchange rates. The defined benefit pension expense
declined because amendments to our U.S. salaried defined benefit plan implemented in the first
quarter of 2007 lowered service costs and because returns on pension assets improved. Despite the
lower demand experienced by Quincy Compressor and Garlock Rubber Technologies, each contributed to
the year-over-year increase in segment profit as a result of cost savings and price increases.
Volume declines at Stemco and Plastomer Technologies and an increase in restructuring expenses in
2007 partially offset the favorable affects of the previously mentioned items. Restructuring
expenses in 2007 were $6.0 million compared to $2.3 million in 2006. The restructuring costs in
each year were primarily for the modernization project at the Garlock Sealing Technologies
facilities in Palmyra, New York. Segment margins, defined as segment profit divided by sales,
increased from 15.4% in 2006 to 15.8% in 2007.
Asbestos expenses in 2007 were $68.4 million and included net cash outlays of $25.8 million
for legal fees and expenses incurred during the year and $42.6 million in non-cash charges to
maintain a ten-year liability estimate for future claims and to reflect an adjustment to our
internal estimate of the liability. In 2006, asbestos expenses were $359.4 million. The higher
expense in 2006 was primarily the result of an adjustment we made to record the asbestos liability
at a point that we believe to be the best estimate within our outside experts range of equally
likely estimates for the next ten years. For a further discussion of asbestos expenses, see
Contingencies Asbestos.
Net interest income in 2007 was $0.2 million compared to net interest expense of $3.2 million
last year. The net interest income was a result of the increase in invested cash balances while
the yield on those funds was essentially flat.
Our effective tax rate for 2007 was 35.0% compared to 37.5% in 2006. The decrease in the rate
for 2007 was principally due to the effect on our deferred tax balances of the enactment of reduced
income and trade tax rates in Germany. This was partially offset by an unfavorable change in the
mix of foreign and U.S. state and local taxable income.
In 2007, we recorded an extraordinary gain of $2.5 million, net of $1.6 million of taxes,
related to the acquisition of the outstanding shares of a subsidiary held by minority shareholders.
22
Following is a discussion of operating results for each segment during the year:
Sealing Products. Sales of $457.3 million in 2007 were 6% higher than the $432.5
million reported in 2006. The favorable impact of the euro accounted for three percentage points
of the growth. Sales at Garlock Sealing Technologies benefited from increased demand in its
European markets, continued strength in the oil and gas sector, selected price increases and the
stronger euro. Aftermarket and OEM sales decreased at Stemco due to lower demand in the U.S.
heavy-duty truck market. Fewer new trucks and trailers were built as usage of existing trucks
declined. A decline in sales to Plastomer Technologies semiconductor market partially offset the
increase attributable to including the Amicon business, acquired in July 2006, for a full year in
2007.
Segment profit increased by 2% from $76.5 million in 2006 to $78.0 million in 2007. Profits
at Garlock Sealing Technologies benefited from higher volumes and selected price increases. These
benefits were partially offset by increased restructuring costs for the modernization project at
the Garlock Sealing Technologies facilities in Palmyra, NY and additional spending in marketing,
business development and R&D. Stemco reported a decline in profit in connection with its sales
decrease and increased costs, but the decline was partially mitigated by price increases. Garlock
Rubber Technologies increased its profit significantly in 2007 by focusing on cost reductions that
increased operating margins. Lower volumes negatively impacted Plastomer Technologies results, as
did increased restructuring expenses for the reorganization of its facilities. Segment margins
decreased from 17.7% in 2006 to 17.1% in 2007.
Engineered Products. Sales of $445.5 million in 2007 were 14% higher than the $391.7
million reported in 2006. The increase in the value of the euro and the acquisitions completed in
2007 favorably impacted revenue by eleven percentage points when compared to 2006. Sales for
Compressor Products International were higher in 2007 due to the additional volume from the
acquisitions completed in 2006 and 2007 and increased activity in its North American and European
markets. In 2007, GGB benefited from the favorable euro exchange rate and increased volume in
Europe. Quincy Compressors sales were below the record levels of 2006 as demand declined in
energy and construction markets.
Segment profits of $69.4 million in 2007 were 13% higher than the $61.5 million reported in
2006. GGBs profits increased in 2007, when compared to 2006, due to higher volumes, a stronger
euro and selected price increases. Profits at Compressor Products International improved
principally as a result of the acquisitions and selected price increases. However, amortization of
intangible assets associated with the acquisitions resulted in lower operating margins at both CPI
and the segment. Despite the decline in revenue, Quincy Compressor was able to increase its
profitability slightly as a result of price increases and cost reductions. Segment margins were
essentially flat at 15.6% in 2007 and 15.7% in 2006.
Engine Products and Services. Sales increased 22% from the $105.2 million reported in
2006 to $128.1 million in 2007. About half of the increase was attributable to additional engine
and related parts shipments for U.S. Navy shipbuilding programs with the other half from sales of
aftermarket parts and service and selected price increases.
The segment reported a profit of $15.3 million in 2007 compared to $4.9 million in 2006. The
year-over-year improvement was a result of better margins on engine shipments, an increase in parts
shipments, which have better margins than engine sales, net cost savings in manufacturing and
administration expenses, and a $3.1 million contract loss on a U.S. Navy engine program recorded in
2006. Segment margins in 2007 were 11.9% compared to 4.7% in 2006.
23
2006 Compared to 2005
Sales increased 11% from $838.6 million in 2005 to $928.4 million in 2006. Sales in 2006 were
favorably impacted by increased demand in Garlock Sealing Technologies markets and increased
activity in Stemcos heavy-duty truck market. Sales in 2006 also benefited from strong market
demand and new product introductions at Quincy Compressor, increased activities in the industrial
markets of GGB Europe and the automotive markets of GGB Americas, and higher value engine shipments
at Fairbanks Morse Engine. Additionally, the acquisitions completed earlier in the year and
favorable foreign currency rates accounted for two percentage points of the sales increase in 2006.
Segment profit, one of managements primary measures of how our operations performed during
the year, increased 22% from $117.4 million in 2005 to $142.9 million in 2006. Higher volumes,
price increases and cost reduction initiatives associated with our TCV program contributed to
higher profitability in 2006. These favorable variances were partially offset by lower segment
profit at Garlock Rubber Technologies due to productivity issues and lower aftermarket sales at
Fairbanks Morse Engine. Segment margins were 15.4% in 2006 compared to 14.0% in 2005.
Corporate expenses for 2006 were $31.6 million compared to $25.5 million in 2005. This
increase was primarily the result of higher achievement levels associated with performance-based
compensation in 2006.
Asbestos expenses in 2006 were $359.4 million, compared to $11.7 million in 2005. The
increase in 2006 was primarily the result of a revision to our estimated asbestos liability.
Previously, we had recorded the liability at the low end of a broad ten-year range of equally
likely estimates provided by an outside expert. In the fourth quarter of 2006, based on our
experience over the last two years, we identified a best estimate within the experts range and
adjusted the liability accordingly. As a result, the estimated liability recorded at December 31,
2006 was $567.9 million. For additional information on this subject, see Contingencies
Asbestos in this Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Net interest expense for the year ending December 31, 2006 was $3.2 million, compared to $6.1
million in 2005. The decrease in net interest expense in 2006 was a result of lower interest rates
associated with our convertible debt financing completed in the second half of 2005, as well as an
increase in interest income in 2006 associated with higher short-term interest rates.
Other income, net for 2005 was $12.2 million compared to an expense of $2.3 million in 2006.
The results in 2005 benefited from the receipt of $11.0 million associated with excess assets in a
trust that was established for a divested business and a reduction in liabilities due to the
dismissal of product liability and indemnity lawsuits associated with a previously owned
subsidiary.
Our effective tax rate for the year ending December 31, 2006 was 37.5%, compared to 36.3% in
2005. The increase in 2006 was largely due to a change in the mix of our pre-tax earnings between
the U.S. and non-U.S. jurisdictions.
The net loss for 2006 was $(158.9) million, or $(7.60) per share, compared to net income of
$58.6 million, or $2.75 per share, in 2005. The decline was the result of the asbestos charge
recorded in the fourth quarter of 2006. Earnings per share are expressed on a diluted basis.
Following is a discussion of the 2006 operating results for each segment.
24
Sealing Products. Sales increased 10% for the year ending December 31, 2006 to $432.5 million
from $392.9 million in 2005. Sales at Stemco increased as original equipment demand in the
heavy-duty truck market exceeded prior year requirements and aftermarket activity improved compared
to 2005. Sales at Garlock Sealing Technologies increased in 2006 due to higher demand and selected
price increases in its major markets, including the oil and gas and power generation markets.
Plastomer Technologies benefited from increased demand in sheet products, machined components, and
the incremental revenue from the Amicon acquisition completed early in the third quarter of 2006.
Segment profit increased from $66.1 million in 2005 to $76.5 million for the year ending
December 31, 2006. Profits at Garlock Sealing Technologies were favorably impacted by higher
volumes and selected price increases, partially offset by charges for the modernization project at
the Palmyra, New York facility. Plastomer Technologies profit increased as a result of higher
demand and the accretive impact of the Amicon acquisition. Stemcos profit in 2006 was favorably
impacted by increased volumes and selected price increases, partially offset by unfavorable product
mix and higher manufacturing costs; while Garlock Rubber Technologies profit was negatively
impacted by lower productivity. Segment margins increased from 16.8% in 2005 to 17.7% in 2006.
Engineered Products. Sales of $391.7 million for the year ending December 31, 2006 were 13%
higher than the $346.0 million reported in 2005. Sales volumes at Quincy Compressor were
significantly higher in 2006 as a result of strength in its U.S. markets and new product
introductions. Sales increased at GGB in 2006 due to higher volumes in the industrial markets of
Europe and increased automotive demand in the Americas. Sales at France Compressor Products
exceeded 2005 levels due to higher volumes in Europe and the favorable impact associated with the
Allwest acquisition completed in the second quarter of 2006.
Segment profits were $61.5 million for the year ending December 31, 2006, or 35% higher than
the $45.4 million reported in 2005. Profits at Quincy Compressor increased as a result of higher
sales volume, selected price increases and cost reduction initiatives. GGBs profits increased in
2006 due to higher volumes, improved operating efficiencies at its Slovakian manufacturing facility
and cost reduction initiatives associated with our TCV program. Profits at France Compressor
Products exceeded 2005 levels as a result of higher volumes in Europe, selected price increases and
the favorable impact associated with the Allwest acquisition. Segment margins increased from 13.1%
in 2005 to 15.7% in 2006.
Engine Products and Services. Sales in 2006 were $105.2 million, compared to $101.1 million
in 2005. Higher revenue associated with U.S. Navy shipbuilding programs contributed to the
increase in 2006. However, this increase was partially offset by lower parts and service revenue.
The segment reported a profit of $4.9 million in 2006, compared to a profit of $5.9 million in
2005. The results in 2006 were impacted by an unfavorable product mix associated with lower
aftermarket and service revenue. Results in 2006 also include a loss contract charge of $3.1
million while a loss contract charge of $3.5 million was recorded in 2005. Segment margins in 2006
were 4.7%, compared to 5.8% in 2005.
Restructuring and Other Costs
Restructuring expense was $6.0 million, $2.3 million and $1.0 million for 2007, 2006 and 2005,
respectively. The expense in all three years was primarily related to restructuring activities
associated with the modernization project at our Garlock Sealing Technologies manufacturing
facilities in Palmyra, New York. Garlock Sealing Technologies has been on its current site since
the early 1900s, with buildings dating from 1907 to 1956. The project, which is ongoing, will
reduce the number of buildings on the site from 26 to 7 and eliminate approximately 350,000 square
feet of space, or approximately half
25
of the space under roof at the beginning of the project. The modernization will be completed over
five years at an expected cost, including expenses and capital expenditures, of approximately $35
million, excluding the impact of economic development grants, tax abatements and tax credits. See
Note 3 to the Consolidated Financial Statements for additional information regarding restructuring
and other costs in each year.
Critical Accounting Policies and Estimates
The preparation of our Consolidated Financial Statements, in accordance with accounting
principles generally accepted in the United States, requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosures pertaining to contingent assets and liabilities. Note 1, Overview and Significant
Accounting Policies, to the Consolidated Financial Statements describes the significant accounting
policies used to prepare the Consolidated Financial Statements. On an ongoing basis we evaluate
our estimates, including, but not limited to, those related to bad debts, inventories, intangible
assets, income taxes, warranty obligations, restructuring, pensions and other postretirement
benefits, and contingencies and litigation. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances. Actual results
may differ from these estimates.
We believe that the following accounting policies and estimates are the most critical. Some
of them involve significant judgments and uncertainties and could potentially result in materially
different results under different assumptions and conditions.
Revenue Recognition
Revenue is recognized at the time title and risk of ownership is transferred or when services
are rendered. Any shipping costs billed to customers are recognized as revenue and expensed in
cost of goods sold.
Asbestos
In 2005 and the first three quarters of 2006, we recorded a liability related to asbestos
claims at the low end of a broad ten-year range of equally likely estimates provided by the firm of
Bates White, LLC (Bates White), a recognized expert in the field of estimating asbestos-related
liabilities. Due to the uncertain nature of the estimated liability, we and Bates White believed
that no single amount in the range was a better estimate than any other amount in the range. In
accordance with the applicable accounting rules, we recorded a liability for these claims at the
low end of the range of estimated potential liabilities. In the fourth quarter of 2006, based on
our experience during the preceding two years and other factors, we identified a best estimate
within the Bates White range and adjusted the liability accordingly.
The significant assumptions underlying the material components of the estimated liability
include: the number and trend of claims to be asserted; the mix of alleged diseases or impairment;
the trend in the number of claims for non-malignant cases; the probability that some existing and
potential future claims will eventually be dismissed without payment; the estimated amount to be
paid per claim; and the timing and impact of large amounts that will become available for the
payment of claims from the 524(g) trusts of former defendants in bankruptcy. The actual number of
future actions filed per year and the payments made to resolve those claims could exceed those
reflected in our estimate.
With the assistance of Bates White, we periodically review the period over which we can make a
reasonable estimate, the assumptions underlying our estimate, the range of reasonably possible
potential liabilities and managements estimate of the liability, and we adjust the liability if
necessary. Changing circumstances and new data that may become available could cause a change in
the estimated liability in
26
the future by an amount that cannot currently be reasonably estimated, and that increase could
be significant and material. Additional discussion is included in this Managements Discussion and
Analysis of Financial Condition and Results of Operations in Contingencies Asbestos.
Foreign Currency Translation
The financial statements of our operations whose functional currency is a foreign currency are
translated into U.S. dollars using the current rate method. Under this method, all assets and
liabilities are translated in U.S. dollars using current exchange rates, and income statement
activities are translated using weighted average exchange rates. The foreign currency translation
adjustment is reflected in our Consolidated Statements of Changes in Shareholders Equity and is
included in accumulated other comprehensive income in the Consolidated Balance Sheets.
Derivative Instruments and Hedging Activities
We have entered into contracts to hedge forecasted transactions occurring at various dates
through December 2010 that are denominated in foreign currencies. These contracts are accounted
for as cash flow hedges. As cash flow hedges, the effective portion of the gain or loss on the
contracts is reported in other comprehensive income and the ineffective portion is reported in
income. Amounts in accumulated other comprehensive income are reclassified into income in the
period when the hedged transactions occur.
Pensions and Postretirement Benefits
We and certain of our subsidiaries sponsor domestic and foreign defined benefit pension and
other postretirement plans. Major assumptions used in the accounting for these employee benefit
plans include the discount rate, expected return on plan assets, rate of increase in employee
compensation levels and assumed health care cost trend rates. Assumptions are determined based on
data available to us and appropriate market indicators, and are evaluated each year as of the
plans measurement date. A change in any of these assumptions could have a material effect on net
periodic pension and postretirement benefit costs reported in the Consolidated Statements of
Operations, as well as amounts recognized in the Consolidated Balance Sheets. See Note 13 to the
Consolidated Financial Statements for a discussion of pension and postretirement benefits.
Income Taxes
We use the asset and liability method of accounting for income taxes. Temporary differences
arising from the difference between the tax and book basis of an asset or liability are used to
compute future tax assets or liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to the taxable income (losses) in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities from a change in tax rates is recognized in the period that includes the enactment
date. See Note 6 to the Consolidated Financial Statements for a discussion of income taxes.
New Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for a description of new accounting
pronouncements, including the expected dates of adoption and the expected effects on results of
operations, cash flows and financial condition, if any.
27
Liquidity and Capital Resources
Operating Cash Flows
Operating activities provided $104.8 million, $75.6 million and $76.4 million in 2007, 2006
and 2005, respectively. In 2007, operating cash flows increased from the prior year chiefly as a
result of higher net earnings, lower net asbestos payments and a decrease in working capital levels
compared to 2006. These improvements were partially offset by an increase in payments for
environmental remediation activities in 2007, which were included in the change in other noncurrent
assets and liabilities. In 2006, working capital increased primarily due to higher inventories and
customer receivables at several of our operations. Inventory levels were higher in 2006 primarily
due to higher material requirements for engine programs at Fairbanks Morse Engine. Although the
2006 working capital was impacted by an increase in accounts receivable relating to increased sales
activity, the days sales outstanding for receivables remained constant on a year-over-year basis at
51 days. Payments for asbestos-related claims and expenses, net of insurance recoveries, were
$24.9 million in 2007 compared to $38.0 million in 2006.
Investing Cash Flows
We used $142.3 million, $27.5 million and $64.1 million in investing activities in 2007, 2006
and 2005, respectively. Investing activities in 2007 and 2006 included net payments of $77.0
million and $27.3 million, respectively, associated with acquisitions, primarily related to the
newly constituted Compressor Products International. Our investing activities in 2007 also
included capital expenditures of $46.8 million associated with our manufacturing facilities,
compared to $41.3 million in 2006 and $32.2 million in 2005. The increases in capital expenditures
in 2007 and 2006 reflected spending associated with the modernization activities at our
manufacturing facilities in Palmyra, New York and our continued strategy to expand geographically
and to increase investments in our operations as part of an effort to improve customer satisfaction
and reduce costs. The results in 2007 were impacted by the reclassification of $19.5 million of
unrestricted cash balances to other current and noncurrent assets based on changes in expected
maturity dates of the underlying investments. The results in 2005 were impacted by a $41.1 million
reclassification of unrestricted cash balances to restricted cash balances as a result of posting
cash collateral required to secure bonds associated with adverse asbestos verdicts on appeal. The
2006 results benefited from the reclassification of $39.8 million from restricted cash to
unrestricted cash due to the resolution of several verdicts on appeal.
Financing Cash Flows
Financing activities provided $2.7 million and $0.9 million, respectively, in 2007 and 2006,
and used $9.1 million in cash in 2005. Financing cash flows in 2005 included proceeds from the
sale of $172.5 million of our convertible debentures. We used a substantial portion of the net
proceeds from this sale to redeem the $145 million of outstanding Convertible Preferred Securities
Term Income Deferred Equity Securities, or TIDES. We also used a portion of the net proceeds
from the sale of the debentures to enter into hedge and warrant transactions, which will reduce
potential dilution of our common stock from the conversion of the debentures by increasing their
effective conversion price. Debt issuance costs associated with this transaction were $5.2 million
and are being amortized over the term of the debentures. Subsequent to the debenture offering, we
sold our Goodrich call options and received proceeds of $3.0 million (which is included in net cash
used in investing activities described above).
Capital Resources
Our primary U.S. operating subsidiaries have a senior secured revolving credit facility with a
group of banks which matures on April 21, 2011. We have not borrowed against this facility. The
28
facility is collateralized by our receivables, inventories, intellectual property, insurance
receivables and all other personal property assets (other than fixed assets), and by pledges of 65%
of the capital stock of our direct foreign subsidiaries and 100% of the capital stock of our direct
and indirect U.S. subsidiaries. The facility contains covenants and restrictions that are
customary for an asset-based loan, including limitations on dividends, limitations on incurrence
and repayment of indebtedness and maintenance of a fixed charge coverage financial ratio. Certain
of the covenants and restrictions apply only if availability under the facility falls below certain
levels.
The maximum initial amount available for borrowings under the facility is $75 million. Under
certain conditions, the borrowers may request that the facility be increased by up to $25 million,
to $100 million in total. Actual borrowing availability at any date is determined by reference to
a borrowing base of specified percentages of eligible accounts receivable and inventory and is
reduced by usage of the facility (including outstanding letters of credit) and any reserves. The
actual borrowing availability at December 31, 2007, under our senior secured revolving credit
facility was $69.8 million. The borrowing availability was less than the full amount of the
facility because the borrowing base was less than the facility limit at December 31, 2007.
We issued $172.5 million of convertible debentures in 2005. The debentures bear interest at
an annual rate of 3.9375%, and we pay accrued interest on April 15 and October 15 of each year.
The debentures will mature on October 15, 2015. The debentures are direct, unsecured and
unsubordinated obligations and rank equal in priority with our unsecured and unsubordinated
indebtedness and will be senior in right of payment to all subordinated indebtedness. They
effectively rank junior to our secured indebtedness to the extent of the value of the assets
securing such indebtedness. The debentures do not contain any financial covenants. Holders may
convert the debentures into cash and shares of our common stock, if any, at an initial conversion
rate of 29.5972 shares of common stock per $1,000 principal amount of debentures (which is equal to
an initial conversion price of $33.79 per share), subject to adjustment, before the close of
business on October 15, 2015. Upon conversion, we would deliver (i) cash equal to the lesser of
the aggregate principal amount of the debentures to be converted or our total conversion
obligation, and (ii) shares of our common stock in respect of the remainder, if any, of our
conversion obligation. Conversion is permitted only under certain circumstances that had not
occurred at December 31, 2007. Additional discussion regarding the convertible debentures is
included in Note 11 to the Consolidated Financial Statements.
We used a portion of the net proceeds from the sale of the debentures to enter into call
options (hedge and warrant transactions), which entitle us to purchase shares of our stock from a
financial institution at $33.79 per share and entitle the financial institution to purchase shares
of our stock from us at $46.78 per share. This will reduce potential dilution to our common stock
from conversion of the debentures and have the effect to us of increasing the conversion price of
the debentures to $46.78 per share.
Dividends
To date, we have not paid dividends. If availability under our senior secured revolving
credit facility falls below $20 million, we would be limited in our ability to pay dividends. The
indenture that governs the convertible debentures does not restrict us from paying dividends.
Contingencies
General
Various claims, lawsuits and administrative proceedings with respect to commercial, product
liability, asbestos and environmental matters, all arising in the ordinary course of business, are
pending or
29
threatened against us or our subsidiaries and seek monetary damages and/or other remedies. We
believe that any liability that may finally be determined with respect to commercial and
non-asbestos product liability claims should not have a material effect on our consolidated
financial condition or results of operations. From time to time, we and our subsidiaries are also
involved as plaintiffs in legal proceedings involving contract, patent protection, environmental,
insurance and other matters.
Environmental
Our facilities and operations are subject to federal, state and local environmental and
occupational health and safety requirements of the U.S. and foreign countries. We take a proactive
approach in our efforts to comply with all environmental, health and safety laws as they relate to
our manufacturing operations and in proposing and implementing any remedial plans that may be
necessary. We also regularly conduct comprehensive environmental, health and safety audits at our
facilities to maintain compliance and improve operational efficiency.
Although we believe past operations were in substantial compliance with the then applicable
regulations, we or one of our subsidiaries have been named as a potentially responsible party, or
are otherwise involved, at 21 sites where the costs to us are expected to exceed $100,000.
Investigations have been completed for 15 sites and are in progress at the other six sites. The
majority of these sites relate to remediation projects at former operating facilities that were
sold or closed and primarily deal with soil and groundwater contamination.
As of December 31, 2007 and 2006, EnPro had accrued liabilities of $27.7 million and $33.2
million, respectively, for estimated future expenditures relating to environmental contingencies.
See Note 17 to the Consolidated Financial Statements for additional information regarding our
environmental contingencies.
Colt Firearms and Central Moloney
We have contingent liabilities related to divested businesses for which certain of our
subsidiaries retained liability or are obligated under indemnity agreements. These contingent
liabilities include, but are not limited to, potential product liability and associated claims
related to Coltecs former Colt Firearms subsidiary for firearms manufactured prior to its
divestiture in 1990 and Coltecs former Central Moloney subsidiary for electrical transformers
manufactured prior to its divestiture in 1994. No product liability claims are currently pending
against Coltec related to Colt Firearms or Central Moloney. Coltec also has ongoing obligations,
which are included in retained liabilities of previously owned businesses in our Consolidated
Balance Sheets, with regard to workers compensation, retiree medical and other retiree benefit
matters that relate to Coltecs periods of ownership of these operations.
Crucible Materials Corporation
Crucible Materials Corporation (Crucible), which is engaged primarily in the manufacture and
distribution of specialty metal products, was a wholly owned subsidiary of Coltec until 1985 when a
majority of the outstanding shares were sold. Coltec sold its remaining minority interest in 2004.
See Note 17 to the Consolidated Financial Statements for information about certain liabilities
relating to Coltecs ownership of Crucible.
Debt and Capital Lease Guarantees
As of December 31, 2007, we had contingent liabilities for potential payments on guarantees of
certain debt and lease obligations totaling $9.9 million. These guarantees arose from the
divestitures of Crucible, Central Moloney and Haber Tool, and expire at various dates through 2010.
There is no
30
liability for these guarantees reflected in our Consolidated Balance Sheets. In the event
that the other parties do not fulfill their obligations under the debt or lease agreements, we
could be responsible for these obligations.
Asbestos
History. Certain of our subsidiaries, primarily Garlock Sealing Technologies LLC
(Garlock) and The Anchor Packing Company (Anchor), are among a large number of defendants in
actions filed in various states by plaintiffs alleging injury or death as a result of exposure to
asbestos fibers. Among the products at issue in these actions are industrial sealing products,
including gaskets and packing products. Since the first asbestos-related lawsuits were filed
against Garlock in 1975, Garlock and Anchor have processed approximately 900,000 asbestos claims to
conclusion (including judgments, settlements and dismissals) and, together with their insurers,
have paid approximately $1.3 billion in settlements and judgments and over $400 million in fees and
expenses. See Note 17 to the Consolidated Financial Statements for information on the disease mix
in the claims, new claims recently filed, product defenses asserted by our subsidiaries, recent
trial and appeal results, and settlements.
Status of Anchor. Anchor is an inactive and insolvent indirect subsidiary of Coltec.
There is no remaining insurance coverage available to Anchor. Anchor has no remaining assets and
has not committed to settle any actions since 1998. As cases reach the trial stage, Anchor is
typically dismissed without payment.
Insurance Coverage. At December 31, 2007, Garlock had available $381.5 million of
solvent insurance and trust coverage that we believe will be available to cover future asbestos
claims and certain expense payments. In addition, at December 31, 2007, Garlock classified $56
million of otherwise available insurance as insolvent. We believe that Garlock will recover some
of the insolvent insurance over time. In fact, Garlock collected approximately $1 million from
insolvent carriers in 2007, bringing total collections from insolvent carriers from 2002 through
2007 to approximately $39.3 million. There can be no assurance that Garlock will collect any of
the remaining insolvent insurance. See Note 17 to the Consolidated Financial Statements for
additional information about the quality of Garlocks insurance, arrangements for payments with
certain insurers, the resolution of past insurance disputes, and coverage exclusions for exposure
after July 1, 1984.
Our Liability Estimate. Prior to mid-2004, we maintained that our subsidiaries
liability for unasserted claims was not reasonably estimable. We estimated and recorded
liabilities only for pending claims in advanced stages of processing, for which we believed we had
a basis for making a reasonable estimate. We disclosed the significance of the total potential
liability for unasserted claims in considerable detail. By 2004, however, most asbestos defendants
who disclose their liabilities were recording estimates of their liabilities for pending and
unasserted claims. In view of the change in practice by other defendants, during 2004 we
authorized counsel to retain a recognized expert to assist in estimating our subsidiaries
liability for pending and future asbestos claims. After interviewing and qualifying several
recognized experts with us, counsel selected Bates White.
Bates Whites first report, dated February 17, 2005, provided an estimate of the liability as
of December 31, 2004 for the following ten years, which represented a time horizon within which
Bates White believed such liability was both probable and estimable within a range of values.
Bates White opined that each value within the range of $227 million to $382 million was an equally
likely estimate of the liability. We adopted the Bates White estimate and, accordingly, recorded
an additional liability for pending and unasserted claims as of December 31, 2004 to increase our
liability to an amount equal to the low end of the estimated range ($227 million). The recording
of such increased asbestos liability resulted in our also recording an increase to our insurance
receivable.
31
Bates White has updated its estimate every quarter since the end of 2004. The estimated range
of potential liabilities provided by Bates White at December 31, 2007 was $431 million to $626
million. According to Bates White, increases have been attributable primarily to (1) an increase
in settlement values of mesothelioma claims, (2) an increase in claims filings and values in some
jurisdictions, most notably California, and (3) the delay in, and uncertain impact of, the funding
and implementation of trusts formed under Section 524(g) of the United States Bankruptcy Code to
pay asbestos claims against numerous defendants in Chapter 11 reorganization cases. Because the
524(g) trusts are estimated to have more than $30 billion that will be available for the payment of
asbestos claims, they could have a significant impact on our future settlement payments and could
therefore significantly affect our liability.
Each quarter until the fourth quarter of 2006, we adopted the Bates White estimate and
adjusted the liability to equal the low end of the then-current range. Until the second quarter of
2006, the additional liability was recorded with a corresponding increase in our insurance
receivable, and thus did not affect net income. During the second quarter of 2006, however, our
insurance was fully allocated to past, present and future claims, and therefore subsequent changes
to the Bates White estimate were recorded as charges to income.
We have independently developed internal estimates for asbestos-related liabilities. We have
used those estimates for a variety of purposes, including guidance for settlement negotiations and
trial strategy, in our strategic planning, budgeting and cash flow planning processes, and in
setting targets for annual and long-term incentive compensation. Until the end of 2006, we did not
have sufficient history comparing claims payments to our internal estimates to allow us to identify
a most likely point within the Bates White range. Therefore, prior to the fourth quarter of 2006,
we had adopted the low-end of the range provided by Bates White. However, our internal estimate
has been within the Bates White range of equally likely estimates and has proven to be a more
precise predictor of the actual amounts spent on settlements and verdicts than the low end of the
range. As a result, while the low end of the Bates White range still provides a reasonable lower
boundary of possible outcomes, Bates White and management believe that our internal estimate for
the next ten years represents the most likely point within the range. Accordingly, we adjusted the
recorded liability from the low end of the Bates White estimate to our point estimate in the fourth
quarter of 2006 and have adjusted the liability in each subsequent quarter consistent with our
internal estimate. During the fourth quarter of 2006, we recorded a pre-tax charge of $305.1
million to reflect our estimate.
We focus on future cash flows to prepare our estimate. We make assumptions about declining
future asbestos spending based on (1) past trends, (2) publicly available epidemiological data, (3)
current agreements with plaintiff firms and our judgment about the current and future litigation
environment, (4) the availability to claimants of other payment sources, both co-defendants and the
524(g) trusts, and (5) the input and insight provided to us by Bates White. We adjust our estimate
when current cash flow results and long-term trends suggest that our targets cannot be met. As a
result, we have a process that we believe produces the best estimate of the future liability for
the ten-year time period within the Bates White range.
We currently estimate that the liability of our subsidiaries for the indemnity cost of
resolving asbestos claims for the next ten years will be $519.0 million. The estimated liability
of $519.0 million is before any tax benefit and is not discounted to present value, and it does not
include fees and expenses, which are recorded as incurred. The recorded liability will continue to
be impacted by our actual claims and settlement experience and any change in the legal environment
that could cause a significant increase or decrease in the long-term expectations of management and
Bates White. We expect the recorded liability to fluctuate, perhaps significantly. Any
significant change in the estimated liability could have a material effect on our consolidated
financial position and results of operations.
32
Although we believe that our estimate is the best estimate within the Bates White range of
reasonable and probable estimates of Garlocks future obligation, we note that Bates White also
indicated a broader range of potential estimates from $199 million to $733 million. We caution
that points within that broader range remain possible outcomes. Also, while we agree with our
expert that beyond two to four years for Garlocks economically-driven non-malignant claims and
beyond ten years for Garlocks cancer claims and medically-driven non-malignant claims, there are
reasonable scenarios in which the [asbestos] expenditure is de minimus, we caution that the
process of estimating future liabilities is highly uncertain. Adjusting our liability to the best
estimate within the range does not change that fact. In the words of the Bates White report, the
reliability of estimates of future probable expenditures of Garlock for asbestos-related personal
injury claims declines significantly for each year further into the future. Scenarios continue to
exist that could result in a total future asbestos liability for Garlock in excess of $1 billion.
As previously mentioned, the liability estimate does not include legal fees and expenses,
which add considerably to the costs each year. Over the last two years, these expenses have
averaged approximately $7 million per quarter. In addition to these legal fees and expenses, we
expect to continue to record charges to income in future quarters for:
|
|
|
Increases, if any, in our estimate of Garlocks potential liability, plus |
|
|
|
|
Increases, if any, that result from additional quarters added to maintain the
ten-year estimation period (increases of this type have averaged approximately $7 8
million per quarter for the last two years), plus |
|
|
|
|
Amounts, if any, of solvent insurance lost or commuted, offset by insolvent
recoveries and earnings from insurance settlement trusts. |
In 2007, we recorded a pre-tax charge to income of $68.4 million to reflect net cash outlays
of $25.8 million for legal fees and expenses incurred during the year, and a $42.6 million non-cash
charge. The non-cash charge included $23.2 million related to the addition of periods to maintain
a ten-year liability estimate and $19.4 million to adjust the liability based on revisions to
managements estimate. A portion of the non-cash charge ($19.4 million) resulted from adjustments
made to managements estimation model in the fourth quarter of 2007. We made this adjustment based
on our review of negotiations and payment trends and our belief that it is more likely that, in the
future, a higher percentage of settlement commitments made in any year will also be paid in that
same year.
Quantitative Claims and Insurance Information. Our liability as of December 31, 2007
was $524.4 million (our estimate of the liability described above of $519.0 million plus $5.4
million of accrued legal and other fees already incurred but not yet paid). The total liability as
of December 31, 2007, included $86.9 million classified as a current liability and $437.5 million
classified as a noncurrent liability. The recorded amounts do not include legal fees and expenses
to be incurred in the future. See Note 17 to the Consolidated Financial Statements for additional
information about pending cases, insurance, cash flows and our liability.
Strategy. Garlocks strategy is to focus on trial-listed cases and other cases in
advanced stages, to reduce new settlement commitments each year, to carefully manage and maximize
insurance collections, and to proactively support legislative and other efforts aimed at meaningful
asbestos reform. We believe that this strategy should result in the continued reduction of the
negative annual cash flow impact from asbestos claims. However, the risk of large verdicts
sometimes impacts the implementation of the strategy, and therefore it is likely that, from time to
time, Garlock will enter into settlements that involve large numbers of cases, including
early-stage cases, when it believes that the risk outweighs the benefits of the strategy. We
believe that, as predicted in various epidemiological studies that are publicly
33
available, the
incidence of asbestos-related disease is in decline and should continue to decline steadily
over the next decade and thereafter, so that claims activity against Garlock will eventually
decline to a level that can be paid from the cash flow expected from Garlocks operations, even
after Garlock exhausts its insurance coverage. However, there can be no assurance that
epidemiological predictions about incidence of asbestos-related disease will prove to be accurate,
or that, even if they are, there will be a commensurate decline in the number of asbestos-related
claims filings.
Considering the foregoing, as well as the experience of our subsidiaries and other defendants
in asbestos litigation, the likely sharing of judgments among multiple responsible defendants,
bankruptcies of other defendants, and legislative efforts, and given the amount of insurance
coverage available to our subsidiaries from solvent insurance carriers, we believe that pending
asbestos actions against our subsidiaries are not likely to have a material adverse effect on our
financial condition, but could be material to our results of operations or cash flows in given
future periods. We anticipate that asbestos claims will continue to be filed against our
subsidiaries. Because of (1) the uncertainty as to the number and timing of potential future
claims and the amount that will have to be paid to litigate, settle or satisfy claims, and (2) the
finite amount of insurance available for future payments, future claims could have a material
adverse effect on our financial condition, results of operations and cash flows.
Reform Legislation. While reform measures have been adopted in several states and are
likely to be considered from time-to-time on a state-by-state basis in a number of other
jurisdictions, the outlook for federal legislation to provide national asbestos litigation reform
continues to be uncertain. While reform legislation ultimately may be adopted by the U.S.
Congress, it appears unlikely that any federal asbestos legislation will be enacted in the near
future.
Off Balance Sheet Arrangements
Lease Agreements
We have several operating leases primarily for real estate, equipment and vehicles. Operating
lease arrangements are generally utilized to secure the use of assets from time to time if the
terms and conditions of the lease or the nature of the asset makes the lease arrangement more
favorable than a purchase. As of December 31, 2007, approximately $43.9 million of future minimum
lease payments were outstanding under these agreements. See Note 17, Commitments and
Contingencies Other Commitments, to the Consolidated Financial Statements for additional
disclosure.
Debt and Capital Lease Guarantees
At December 31, 2007, we have outstanding contingent liabilities for guaranteed debt and lease
payments of $9.9 million related to previously divested businesses.
Contractual Obligations
A summary of our contractual obligations and commitments at December 31, 2007 is as follows:
34
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|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period (in millions) |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
185.7 |
|
|
$ |
3.6 |
|
|
$ |
9.6 |
|
|
$ |
|
|
|
$ |
172.5 |
|
Interest on long-term debt |
|
|
54.3 |
|
|
|
7.5 |
|
|
|
13.7 |
|
|
|
13.6 |
|
|
|
19.5 |
|
Operating leases |
|
|
43.9 |
|
|
|
9.8 |
|
|
|
16.0 |
|
|
|
10.4 |
|
|
|
7.7 |
|
Other long-term
liabilities |
|
|
60.1 |
|
|
|
8.7 |
|
|
|
6.4 |
|
|
|
5.7 |
|
|
|
39.3 |
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
344.0 |
|
|
$ |
29.6 |
|
|
$ |
45.7 |
|
|
$ |
29.7 |
|
|
$ |
239.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for long-term debt may be accelerated under certain circumstances because the
convertible debentures due in 2015 may be converted earlier, requiring payment of the principal
amount thereof in cash. Additional discussion regarding the convertible debentures is included in
this Managements Discussion and Analysis of Financial Condition and Results of Operations in
Liquidity and Capital Resources Capital Resources, and in Note 11 to the Consolidated
Financial Statements.
Payments for other long-term liabilities are estimates of amounts that will be paid for
environmental and retained liabilities of previously owned businesses included in the Consolidated
Balance Sheets at December 31, 2007. These estimated payments are based on information currently
known to us. However, it is possible that these estimates will vary from actual results if new
information becomes available in the future or if there are changes in the facts and circumstances
related to these liabilities. Additional discussion regarding these liabilities is included
earlier in this Managements Discussion and Analysis of Financial Condition and Results of
Operations in Contingencies Environmental, Other Contingent Liability Matters, and in Note
17 to the Consolidated Financial Statements.
At December 31, 2007, we had a $17.2 million reserve for unrecognized tax benefits which is
not reflected in the table above. Substantially all of this tax reserve is classified in other
long-term liabilities and deferred income taxes in our Consolidated Balance Sheet. The table also
does not include obligations under our pension and postretirement benefit plans, which are included
in Note 13 to the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks as part of our ongoing business operations, including
risks from changes in interest rates and foreign currency exchange rates that could impact our
financial condition, results of operations and cash flows. We plan to manage our exposure to these
and other market risks through regular operating and financing activities, and on a limited basis,
through the use of derivative financial instruments. We intend to use such derivative financial
instruments as risk management tools and not for speculative investment purposes.
Interest Rate Risk
We are exposed to interest rate risk as a result of our outstanding debt obligations. The
table below provides information about our debt obligations as of December 31, 2007. The table
represents principal cash flows (in millions) and related weighted average interest rates by
expected (contractual) maturity dates.
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
Thereafter |
|
Total |
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt |
|
$ |
3.6 |
|
|
$ |
9.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
172.5 |
|
|
$ |
185.7 |
|
|
$ |
215.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest
rate |
|
|
7.2 |
% |
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.9 |
% |
|
|
4.1 |
% |
|
|
|
|
Foreign Currency Risk
We are exposed to foreign currency risks that arise from normal business operations. These
risks include the translation of local currency balances on our foreign subsidiaries balance
sheets, intercompany loans with foreign subsidiaries and transactions denominated in foreign
currencies. Our objective is to control our exposure to these risks through our normal operating
activities and, where appropriate, through foreign currency forward or option contracts. The
following table provides information about our outstanding foreign currency forward and option
contracts as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
|
|
|
|
|
|
|
|
Outstanding in |
|
|
|
|
|
|
|
|
|
Millions of U.S. |
|
|
|
|
|
|
|
Transaction Type |
|
Dollars (USD) |
|
|
Maturity Dates |
|
|
Exchange Rate Ranges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
Sell Slovakian koruna/buy euro |
|
$ |
26.9 |
|
|
Jan 2008 |
|
|
33.660 to 33.671 koruna/euro |
|
Sell British pound/buy euro |
|
|
19.7 |
|
|
Jan 2008 |
|
|
0.723 to 0.724 euro/pound |
|
Buy euro/sell US dollar |
|
|
17.6 |
|
|
Jan 2008 Jan 2010 |
|
|
1.275 to 1.450 USD/euro |
|
Buy US dollar/sell euro |
|
|
14.1 |
|
|
Jan 2008 Dec 2008 |
|
|
1.377 to 1.382 USD/euro |
|
Sell euro/buy Australian dollar |
|
|
9.4 |
|
|
Jan 2008 |
|
|
1.660 to 1.664 Australian dollar/euro |
|
Buy US dollar/sell Canadian
dollar |
|
|
8.0 |
|
|
Jan 2008 Dec 2008 |
|
|
1.041 to 1.042 Canadian dollar/USD |
|
Buy Slovakian koruna/sell euro |
|
|
7.3 |
|
|
Jan 2008 Dec 2008 |
|
|
32.829 to 33.021 koruna/euro |
|
Buy US dollar/sell Australian
dollar |
|
|
4.2 |
|
|
Jan 2008 Dec 2008 |
|
|
0.859 to 0.876 Australian dollar/USD |
|
Buy euro/sell peso |
|
|
3.9 |
|
|
Jan 2008 |
|
|
15.53 to 15.57 peso/euro |
|
Sell US dollar/buy peso |
|
|
2.7 |
|
|
Jan 2008 Dec 2008 |
|
|
10.996 to 11.268 peso/USD |
|
Sell Singapore dollar/buy euro |
|
|
0.2 |
|
|
Jan 2008 |
|
|
2.092 to 2.094 euro/Singapore dollar |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
Buy euro/sell US dollar |
|
|
27.5 |
|
|
May 2008 Dec 2010 |
|
1.336 USD/euro |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
141.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
ENPRO INDUSTRIES, INC.
Index to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our chief executive officer and chief financial officer,
of the effectiveness of the design and operation of our disclosure controls and procedures. The
purpose of our disclosure controls and procedures is to provide reasonable assurance that
information required to be disclosed in our reports filed under the Exchange Act, including this
report, is recorded, processed, summarized and reported within the time periods specified, and that
such information is accumulated and communicated to our management to allow timely decisions
regarding disclosure.
Management does not expect that our disclosure controls and procedures or internal controls
will prevent all errors and all fraud. A control system, no matter how well conceived or operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is based in part on
certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions. Over
time, controls may become inadequate because of changes in conditions or deterioration in the
degree of compliance with polices or procedures. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Based on the controls evaluation, our chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures are effective to reasonably ensure that
information
37
required to be disclosed in our reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified, and that management will be timely
alerted to material information required to be included in our periodic reports filed with the
Securities and Exchange Commission.
In addition, no change in our internal control over financial reporting has occurred during
the quarter ended December 31, 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Our
internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. Because of its
inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with policies and procedures may deteriorate. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
We carried out an evaluation, under the supervision and with the participation of our chief
executive officer and our chief financial officer, of the effectiveness of our internal control
over financial reporting as of the end of the period covered by this report. However, the
assessment did not include the following operations that we acquired within the past year, none of
which, individually or in the aggregate, would be considered significant under Rule 1-02(w) of
Regulation SX of the SEC: Compressor Products International Ltd., Texflo Machining Ltd and
Böhringer GmbH. In making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on our assessment, we have concluded that, as of December 31, 2007, our internal
control over financial reporting was effective based on those criteria.
The effectiveness of our internal control over financial reporting as of December 31, 2007,
has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm,
as stated in their report which appears in this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
Not applicable.
38
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning our directors and officers appearing under the captions Election of
Directors, Legal Proceedings, Corporate Governance Policies and Practices, and information
under the caption Security Ownership of Certain Beneficial Owners and Management Section 16(a)
Beneficial Ownership Reporting Compliance in our definitive proxy statement for the 2008 annual
meeting of shareholders is incorporated herein by reference.
We adopted a written Code of Business Conduct that applies to all of our directors, officers
and employees, including our principal executive officer, principal financial officer and principal
accounting officer. The Code is available on our Internet site at www.enproindustries.com. We
intend to disclose on our Internet site any substantive changes to the Code and any waivers granted
under the Code to the specified officers.
ITEM 11. EXECUTIVE COMPENSATION
A description of the compensation of our executive officers is set forth under the caption
Executive Compensation in our definitive proxy statement for the 2008 annual meeting of
shareholders and is incorporated herein by reference.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED
SHAREHOLDER MATTERS
Security ownership data appearing under the caption Security Ownership of Certain Beneficial
Owners and Management in our definitive proxy statement for the 2008 annual meeting of
shareholders is incorporated herein by reference.
The table below contains information as of February 15, 2008, about our Amended and Restated
2002 Equity Compensation Plan, the only compensation plan or arrangement (other than our
tax-qualified plans) under which we have equity securities authorized for issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
|
|
|
|
|
|
|
|
Remaining Available for |
|
|
Number of Securities |
|
|
|
|
|
Future Issuance Under |
|
|
to be Issued Upon |
|
Weighted-Average |
|
Equity Compensation |
|
|
Exercise of Outstanding |
|
Exercise Price of |
|
Plans (Excluding |
|
|
Options, Warrants |
|
Outstanding Options, |
|
Securities Reflected in |
Plan Category |
|
and Rights |
|
Warrants and Rights |
|
Column (a)) |
|
|
(a) |
|
(b) |
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans
approved by security holders |
|
|
1,606,784 |
|
|
$ |
4.97 |
|
|
|
954,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not
approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,606,784 |
|
|
$ |
4.97 |
|
|
|
954,175 |
|
39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning the independence of our directors is set forth under the caption
Corporate Governance Policies and Practices Director Independence in our definitive proxy
statement for the 2008 annual meeting of shareholders and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information appearing under the caption Independent Registered Public Accounting Firm in our
definitive proxy statement for the 2008 annual meeting of shareholders is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) |
|
The following documents are filed as part of this report: |
The financial statements filed as part of this report are listed in Part II, Item 8 of this
report on the Index to Consolidated Financial Statements.
|
2. |
|
Financial Statement Schedule |
Schedule II Valuation and Qualifying Accounts for the years ended December 31, 2007, 2006
and 2005 appears on page 89.
Other schedules are omitted because of the absence of conditions under which they are required
or because the required information is provided in the Consolidated Financial Statements or notes
thereto.
The exhibits to this report on Form 10-K are listed in the Exhibit Index appearing on pages 43
to 46.
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Charlotte, North Carolina on this 25th day of February, 2008.
|
|
|
|
|
|
ENPRO INDUSTRIES, INC.
|
|
Date: February 25, 2008 |
By: |
/s/ Richard L. Magee
|
|
|
|
Richard L. Magee |
|
|
|
Senior Vice President, General Counsel and
Secretary |
|
|
|
|
|
|
By: |
/s/ Donald G. Pomeroy II
|
|
|
|
Donald G. Pomeroy II |
|
|
|
Vice President and Controller
(Principal Accounting Officer) |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons, or in their behalf by their duly appointed attorney-in-fact,
on behalf of the registrant in the capacities and on the date indicated.
|
|
|
|
|
Signatures |
|
Title |
|
Date |
|
|
|
|
|
/s/ Ernest F. Schaub
Ernest F. Schaub
|
|
President and
Chief Executive Officer
(Principal Executive Officer) and Director
|
|
February 25, 2008 |
|
|
|
|
|
/s/ William Dries
William Dries
|
|
Senior Vice President and Chief Financial
Officer
|
|
February 25, 2008 |
|
|
|
|
|
/s/ William R. Holland
|
|
Chairman of the Board and Director
|
|
February 25, 2008 |
|
|
|
|
|
|
|
|
|
|
/s/ J. P. Bolduc
|
|
Director
|
|
February 25, 2008 |
|
|
|
|
|
|
|
|
|
|
/s/ Peter C. Browning
Peter C. Browning*
|
|
Director
|
|
February 25, 2008 |
|
|
|
|
|
/s/ Joe T. Ford
Joe T. Ford*
|
|
Director
|
|
February 25, 2008 |
|
|
|
|
|
/s/ Gordon D. Harnett
Gordon D. Harnett*
|
|
Director
|
|
February 25, 2008 |
|
|
|
|
|
/s/ David L. Hauser
David L. Hauser*
|
|
Director
|
|
February 25, 2008 |
|
|
|
|
|
/s/ Wilbur J. Prezzano,
Jr.
Wilbur J. Prezzano, Jr.*
|
|
Director
|
|
February 25, 2008 |
41
|
|
|
|
|
|
|
|
* By: |
/s/ Richard L. Magee
|
|
|
|
Richard L. Magee, Attorney-in-Fact |
|
|
|
|
|
|
|
42
EXHIBIT INDEX
3.1 |
|
Restated Articles of Incorporation of EnPro Industries, Inc., as amended (incorporated by
reference to Exhibits 4.3 and 4.4 to the Registration Statement on Form S-8 filed by EnPro
Industries, Inc., the EnPro Industries, Inc. Retirement Savings Plan for Hourly Workers and
the EnPro Industries, Inc. Retirement Savings Plan for Salaried Workers (File No. 333-89576)) |
|
3.2 |
|
Amended Bylaws of EnPro Industries, Inc. (incorporated by reference to Exhibit 99.1 to the
Form 8-K dated December 12, 2007 filed by EnPro Industries, Inc. (File No. 001-31225)) |
|
4.1 |
|
Form of certificate representing shares of common stock, par value $0.01 per share, of EnPro
Industries, Inc. (incorporated by reference to Amendment No. 4 of the Registration Statement
on Form 10 of EnPro Industries, Inc. (File No. 001-31225)) |
|
4.2 |
|
Rights Agreement between EnPro Industries, Inc. and The Bank of New York, as rights agent
(incorporated by reference to Exhibit 4.7 to the Registration Statement on Form S-8 filed by
EnPro Industries, Inc., the EnPro Industries, Inc. Retirement Savings Plan for Hourly Workers
and the EnPro Industries, Inc. Retirement Savings Plan for Salaried Workers (File No.
333-89576)) |
|
4.3 |
|
Indenture dated as of April 16, 1998, between Coltec Industries Inc and Bankers Trust Company
as Trustee, relating to the Coltec Industries Inc 71/2% Senior Notes due 2008 (incorporated by
reference to Exhibit 4.1 to Coltec Industries Incs Registration Statement on Form S-4 (File
No. 333-53005)) |
|
4.4 |
|
Form of 71/2% Senior Note due 2008 (included in Exhibit 4.3 above) |
|
4.5 |
|
Indenture dated as of October 26, 2005 between EnPro Industries, Inc. and Wachovia Bank,
National Association, as trustee (incorporated by reference to Exhibit 10.1 to the Form 8-K
dated October 26, 2005 filed by EnPro Industries, Inc. (File No. 001-31225)) |
|
10.1 |
|
Form of Indemnification Agreement for directors and officers (incorporated by reference to
Exhibit 10.5 to Amendment No. 3 of the Registration Statement on Form 10 of EnPro Industries,
Inc. (File No. 001-31225)) |
|
10.2+ |
|
EnPro Industries, Inc. 2002 Equity Compensation Plan (2005 Amendment and Restatement)
(incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A dated March
29, 2005 filed by EnPro Industries, Inc. (File No. 001-31225)) |
|
10.3+ |
|
EnPro Industries, Inc. Senior Executive Annual Performance Plan (incorporated by reference
to Appendix A to the Proxy Statement on Schedule 14A dated March 22, 2007 filed by EnPro
Industries, Inc. (File No. 001-31225)) |
|
10.4+ |
|
EnPro Industries, Inc. Long-Term Incentive Plan (incorporated by reference to Appendix B to
the Proxy Statement on Schedule 14A dated March 22, 2007 filed by EnPro Industries, Inc. (File
No. 001-31225)) |
|
10.5+* |
|
Form of EnPro Industries, Inc. Long-Term Incentive Plan Award Grant |
|
10.6+* |
|
Form of EnPro Industries, Inc. Phantom Share Award Grant for Outside Directors (2005
Amendment and Restatement) |
43
10.7+ |
|
Form of EnPro Industries, Inc. Restricted Share Award Agreement (incorporated by reference
to Exhibit 10.1 to the Form 8-K dated February 14, 2008 filed by EnPro Industries, Inc. (File
No. 001-31225)) |
|
10.8+* |
|
EnPro Industries, Inc. Defined Benefit Restoration Plan (amended and restated effective as
of January 1, 2007) (incorporated by reference to Exhibit 10.25 to the Form 10-K for the year
ended December 31, 2006 filed by EnPro Industries, Inc. (File No. 001-31225)) |
|
10.9+* |
|
EnPro Industries, Inc. Deferred Compensation Plan (as amended and restated effective January
1, 2007) |
|
10.10+* |
|
EnPro Industries, Inc. Deferred Compensation Plan for Non-Employee Directors (as amended and
restated effective January 1, 2007) |
|
10.11+ |
|
EnPro Industries, Inc. Outside Directors Phantom Share Plan (incorporated by reference to
Exhibit 10.14 to the Form 10-K for the year ended December 31, 2002 filed by EnPro Industries,
Inc. (File No. 001-31225)) |
|
10.12 |
|
Amended and Restated Loan and Security Agreement, dated April 26, 2006 by and among Coltec
Industries Inc, Coltec Industrial Products LLC, Garlock Sealing Technologies LLC, GGB LLC,
Corrosion Control Corporation and Stemco LP, as Borrowers; EnPro Industries, Inc., as Parent;
QFM Sales and Services, Inc., Coltec International Services Co, Garrison Litigation Management
Group, Ltd., GGB, Inc., Garlock International Inc, Stemco Delaware LP, Stemco Holdings, Inc.,
Stemco Holdings Delaware, Inc. and Garlock Overseas Corporation, as Subsidiary Guarantors; the
various financial institutions listed on the signature pages thereof, as Lenders; Bank of
America, N.A., as Agent and Issuing Bank; and Banc of America Securities LLC, as Sole Lead
Arranger and Sole Book Manager (incorporated by reference to Exhibit 10.1 to the Form 8-K
dated April 26, 2006 filed by EnPro Industries, Inc. (File No. 001-31225)) |
|
10.13+ |
|
Management Continuity Agreement dated as of August 1, 2002 between EnPro Industries, Inc.
and Ernest F. Schaub (incorporated by reference to Exhibit 10.21 to the Form 10-K for the year
ended December 31, 2002 filed by EnPro Industries, Inc. (File No. 001-31225)) |
|
10.14+ |
|
Management Continuity Agreement dated as of August 1, 2002 between EnPro Industries, Inc.
and William Dries (incorporated by reference to Exhibit 10.23 to the Form 10-K for the year
ended December 31, 2002 filed by EnPro Industries, Inc. (File No. 001-31225)) |
|
10.15+ |
|
Management Continuity Agreement dated as of August 1, 2002 between EnPro Industries, Inc.
and Richard L. Magee (incorporated by reference to Exhibit 10.25 to the Form 10-K for the year
ended December 31, 2002 filed by EnPro Industries, Inc. (File No. 001-31225)) |
|
10.16+ |
|
Management Continuity Agreement dated as of August 1, 2002 between EnPro Industries, Inc.
and Robert D. Rehley (incorporated by reference to Exhibit 10.28 to the Form 10-K for the year
ended December 31, 2002 filed by EnPro Industries, Inc. (File No. 001-31225)) |
|
10.17+ |
|
Management Continuity Agreement dated as of January 30, 2006 between EnPro Industries, Inc.
and J. Milton Childress II (incorporated by reference to Exhibit 10.28 to the Form 10-K for
the year ended December 31, 2005 filed by EnPro Industries, Inc. (File No. 001-31225)) |
|
10.18+ |
|
Management Continuity Agreement dated as of September 1, 2007 between EnPro Industries, Inc.
and Donald G. Pomeroy II (incorporated by reference to Exhibit 10.1 to the Form 8-K dated
August 17, 2007 filed by EnPro Industries, Inc. (File No. 001-31225)) |
44
10.19+ |
|
Death Benefits Agreement dated as of December 12, 2002 between EnPro Industries, Inc. and
Ernest F. Schaub (incorporated by reference to Exhibit 10.29 to the Form 10-K for the year
ended December 31, 2002 filed by EnPro Industries, Inc. (File No. 001-31225)) |
|
10.20+ |
|
Death Benefits Agreement dated as of December 12, 2002 between EnPro Industries, Inc. and
William Dries (incorporated by reference to Exhibit 10.31 to the Form 10-K for the year ended
December 31, 2002 filed by EnPro Industries, Inc. (File No. 001-31225)) |
|
10.21+ |
|
Death Benefits Agreement dated as of December 12, 2002 between EnPro Industries, Inc. and
Richard L. Magee (incorporated by reference to Exhibit 10.33 to the Form 10-K for the year
ended December 31, 2002 filed by EnPro Industries, Inc. (File No. 001-31225)) |
|
10.22+ |
|
Supplemental Retirement and Death Benefits Agreement dated as of November 8, 2005 between
EnPro Industries, Inc. and Ernest F. Schaub (incorporated by reference to Exhibit 10.1 to the
Form 10-Q for the quarter ended September 30, 2005 filed by EnPro Industries, Inc. (File No.
001-31225)) |
|
10.23+ |
|
Supplemental Retirement and Death Benefits Agreement dated as of November 8, 2005 between
EnPro Industries, Inc. and William Dries (incorporated by reference to Exhibit 10.2 to the
Form 10-Q for the quarter ended September 30, 2005 filed by EnPro Industries, Inc. (File No.
001-31225)) |
|
10.24+ |
|
Supplemental Retirement and Death Benefits Agreement dated as of November 8, 2005 between
EnPro Industries, Inc. and Richard L. Magee (incorporated by reference to Exhibit 10.3 to the
Form 10-Q for the quarter ended September 30, 2005 filed by EnPro Industries, Inc. (File No.
001-31225)) |
|
10.25+* |
|
EnPro Industries, Inc. Senior Officer Severance Plan (effective as of January 1, 2008) |
|
10.26+* |
|
Summary of Executive and Director Compensation Arrangements |
|
14 |
|
EnPro Industries, Inc. Code of Business Conduct (incorporated by reference to Exhibit 14 to
the Form 10-K for the year ended December 31, 2002 filed by EnPro Industries, Inc. (File No.
001-31225)) |
|
21* |
|
List of Subsidiaries |
|
23.1* |
|
Consent of PricewaterhouseCoopers LLP |
|
23.2* |
|
Consent of Bates White, LLC |
|
24.1* |
|
Power of Attorney from J. P. Bolduc |
|
24.2* |
|
Power of Attorney from Peter C. Browning |
|
24.3* |
|
Power of Attorney from Joe T. Ford |
|
24.4* |
|
Power of Attorney from Gordon D. Harnett |
|
24.5* |
|
Power of Attorney from David L. Hauser |
|
24.6* |
|
Power of Attorney from William R. Holland |
45
24.7* |
|
Power of Attorney from Wilbur J. Prezzano, Jr. |
|
31.1* |
|
Certification of Chief Executive Officer pursuant to Rule 13a 14(a)/15d 14(a) |
|
31.2* |
|
Certification of Chief Financial Officer pursuant to Rule 13a 14(a)/15d 14(a) |
|
32* |
|
Certification pursuant to Section 1350 |
|
|
|
* |
|
Items marked with an asterisk are filed herewith. |
|
+ |
|
Management contract or compensatory plan required to be filed under Item 15(c) of this report
and Item 601 of Regulation S-K of the Securities and Exchange Commission. |
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of EnPro Industries, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of EnPro Industries, Inc. and its
subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2007 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible
for these financial statements and financial statement schedule, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in Managements Report on Internal Control over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Companys internal control over
financial reporting based on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
47
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
February 25, 2008
48
PART I. FINANCIAL INFORMATION
ENPRO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2007, 2006 and 2005
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,030.0 |
|
|
$ |
928.4 |
|
|
$ |
838.6 |
|
Cost of sales |
|
|
670.0 |
|
|
|
621.1 |
|
|
|
565.7 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
360.0 |
|
|
|
307.3 |
|
|
|
272.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
228.4 |
|
|
|
196.3 |
|
|
|
183.8 |
|
Asbestos-related expenses |
|
|
68.4 |
|
|
|
359.4 |
|
|
|
11.7 |
|
Restructuring and other costs |
|
|
6.0 |
|
|
|
2.3 |
|
|
|
1.0 |
|
Loss (gain) on sale of assets, net |
|
|
|
|
|
|
0.6 |
|
|
|
(5.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
302.8 |
|
|
|
558.6 |
|
|
|
190.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
57.2 |
|
|
|
(251.3 |
) |
|
|
82.2 |
|
Interest expense |
|
|
(8.1 |
) |
|
|
(8.1 |
) |
|
|
(9.7 |
) |
Interest income |
|
|
8.3 |
|
|
|
4.9 |
|
|
|
3.6 |
|
Other income, net |
|
|
0.6 |
|
|
|
0.3 |
|
|
|
16.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
58.0 |
|
|
|
(254.2 |
) |
|
|
92.1 |
|
Income tax benefit (expense) |
|
|
(20.3 |
) |
|
|
95.3 |
|
|
|
(33.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary item |
|
|
37.7 |
|
|
|
(158.9 |
) |
|
|
58.6 |
|
Extraordinary item, net of taxes |
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
40.2 |
|
|
$ |
(158.9 |
) |
|
$ |
58.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary item |
|
$ |
1.77 |
|
|
$ |
(7.60 |
) |
|
$ |
2.83 |
|
Extraordinary item |
|
|
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1.89 |
|
|
$ |
(7.60 |
) |
|
$ |
2.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary item |
|
$ |
1.69 |
|
|
$ |
(7.60 |
) |
|
$ |
2.75 |
|
Extraordinary item |
|
|
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1.80 |
|
|
$ |
(7.60 |
) |
|
$ |
2.75 |
|
|
|
|
|
|
|
|
|
|
|
See notes to Consolidated Financial Statements.
49
ENPRO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2007, 2006 and 2005
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
40.2 |
|
|
$ |
(158.9 |
) |
|
$ |
58.6 |
|
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
29.1 |
|
|
|
26.4 |
|
|
|
24.0 |
|
Amortization |
|
|
11.1 |
|
|
|
8.8 |
|
|
|
7.3 |
|
Deferred income taxes |
|
|
(8.4 |
) |
|
|
(104.5 |
) |
|
|
14.6 |
|
Stock-based compensation |
|
|
3.6 |
|
|
|
5.5 |
|
|
|
2.9 |
|
Excess tax benefits from stock-based compensation |
|
|
(3.8 |
) |
|
|
(1.3 |
) |
|
|
(1.3 |
) |
Extraordinary gain, net of taxes |
|
|
(2.5 |
) |
|
|
|
|
|
|
|
|
Loss (gain) on sale of assets, net |
|
|
|
|
|
|
0.6 |
|
|
|
(5.8 |
) |
Change in assets and liabilities, net of effects of
acquisitions of businesses: |
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos liabilities, net of receivables |
|
|
43.0 |
|
|
|
321.4 |
|
|
|
(10.1 |
) |
Receivables |
|
|
(11.0 |
) |
|
|
(7.9 |
) |
|
|
(3.7 |
) |
Inventories |
|
|
18.2 |
|
|
|
(9.7 |
) |
|
|
(8.6 |
) |
Accounts payable |
|
|
11.9 |
|
|
|
3.7 |
|
|
|
2.6 |
|
Other current assets and liabilities |
|
|
(6.4 |
) |
|
|
(2.9 |
) |
|
|
5.7 |
|
Other noncurrent assets and liabilities |
|
|
(20.2 |
) |
|
|
(5.6 |
) |
|
|
(9.8 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
104.8 |
|
|
|
75.6 |
|
|
|
76.4 |
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(46.8 |
) |
|
|
(41.3 |
) |
|
|
(32.2 |
) |
Proceeds from sales of assets |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
7.9 |
|
Reclassification of investments from cash equivalents |
|
|
(19.5 |
) |
|
|
|
|
|
|
|
|
Receipts from (deposits into) restricted cash accounts |
|
|
0.2 |
|
|
|
39.8 |
|
|
|
(41.1 |
) |
Acquisitions, net of cash acquired |
|
|
(77.0 |
) |
|
|
(27.3 |
) |
|
|
(1.7 |
) |
Other |
|
|
0.5 |
|
|
|
1.1 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(142.3 |
) |
|
|
(27.5 |
) |
|
|
(64.1 |
) |
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
|
|
|
|
|
|
|
|
172.5 |
|
Repayments of debt |
|
|
(2.1 |
) |
|
|
(0.5 |
) |
|
|
(152.1 |
) |
Purchase of call options related to convertible debentures |
|
|
|
|
|
|
|
|
|
|
(26.7 |
) |
Debt issue costs |
|
|
|
|
|
|
(0.6 |
) |
|
|
(5.2 |
) |
Proceeds from issuance of common stock |
|
|
1.0 |
|
|
|
0.7 |
|
|
|
1.1 |
|
Excess tax benefits from stock-based compensation |
|
|
3.8 |
|
|
|
1.3 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
2.7 |
|
|
|
0.9 |
|
|
|
(9.1 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents |
|
|
3.0 |
|
|
|
2.5 |
|
|
|
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(31.8 |
) |
|
|
51.5 |
|
|
|
1.5 |
|
Cash and cash equivalents at beginning of year |
|
|
161.0 |
|
|
|
109.5 |
|
|
|
108.0 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
129.2 |
|
|
$ |
161.0 |
|
|
$ |
109.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
8.1 |
|
|
$ |
7.9 |
|
|
$ |
10.1 |
|
Income taxes |
|
$ |
21.7 |
|
|
$ |
13.0 |
|
|
$ |
13.1 |
|
Payments for asbestos-related claims and
expenses, net of insurance recoveries |
|
$ |
24.9 |
|
|
$ |
38.0 |
|
|
$ |
21.8 |
|
See notes to Consolidated Financial Statements.
50
ENPRO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2007 and 2006
(in millions, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
129.2 |
|
|
$ |
161.0 |
|
Accounts and notes receivable, less allowance for doubtful accounts
of $3.6 in 2007 and $2.8 in 2006 |
|
|
167.6 |
|
|
|
138.3 |
|
Asbestos insurance receivable |
|
|
70.0 |
|
|
|
71.3 |
|
Inventories |
|
|
70.3 |
|
|
|
79.3 |
|
Other current assets |
|
|
55.3 |
|
|
|
22.4 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
492.4 |
|
|
|
472.3 |
|
Property, plant and equipment |
|
|
193.5 |
|
|
|
166.3 |
|
Goodwill |
|
|
213.8 |
|
|
|
161.6 |
|
Other intangible assets |
|
|
103.5 |
|
|
|
70.1 |
|
Asbestos insurance receivable |
|
|
311.5 |
|
|
|
396.7 |
|
Deferred income taxes |
|
|
90.3 |
|
|
|
80.2 |
|
Other assets |
|
|
65.3 |
|
|
|
59.4 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,470.3 |
|
|
$ |
1,406.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
3.6 |
|
|
$ |
|
|
Accounts payable |
|
|
80.1 |
|
|
|
62.2 |
|
Asbestos liability |
|
|
86.9 |
|
|
|
88.8 |
|
Other accrued expenses |
|
|
89.8 |
|
|
|
74.1 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
260.4 |
|
|
|
225.1 |
|
Long-term debt |
|
|
182.1 |
|
|
|
185.7 |
|
Retained liabilities of previously owned businesses |
|
|
31.0 |
|
|
|
30.3 |
|
Environmental liabilities |
|
|
20.4 |
|
|
|
25.1 |
|
Asbestos liability |
|
|
437.5 |
|
|
|
479.1 |
|
Other liabilities |
|
|
63.8 |
|
|
|
57.4 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
995.2 |
|
|
|
1,002.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
Common stock $.01 par value; 100,000,000 shares authorized;
issued 21,631,176 shares at December 31, 2007 and 21,211,044
shares at December 31, 2006 |
|
|
0.2 |
|
|
|
0.2 |
|
Additional paid-in capital |
|
|
427.2 |
|
|
|
418.9 |
|
Accumulated deficit |
|
|
(0.7 |
) |
|
|
(41.0 |
) |
Accumulated other comprehensive income |
|
|
49.9 |
|
|
|
27.3 |
|
Common stock held in treasury, at cost 223,081 shares at
December 31, 2007 and 228,126 shares at December 31, 2006 |
|
|
(1.5 |
) |
|
|
(1.5 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
475.1 |
|
|
|
403.9 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,470.3 |
|
|
$ |
1,406.6 |
|
|
|
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|
See notes to Consolidated Financial Statements.
51
ENPRO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years Ended December 31, 2007, 2006 and 2005
(dollars and shares in millions)
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Retained |
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Accumulated |
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Additional |
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Earnings |
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Other |
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Total |
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Common Stock |
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Paid-in |
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(Accumulated |
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Comprehensive |
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Treasury |
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Shareholders |
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Shares |
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Amount |
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Capital |
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Deficit) |
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Income |
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Stock |
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Equity |
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Balance, December 31, 2004 |
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20.6 |
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$ |
0.2 |
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$ |
411.6 |
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$ |
59.3 |
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$ |
7.0 |
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$ |
(1.6 |
) |
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$ |
476.5 |
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Net income |
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58.6 |
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|
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58.6 |
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Other comprehensive income: |
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Cumulative translation
adjustment |
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10.0 |
(1) |
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10.0 |
(1) |
Minimum pension liability
adjustment |
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(4.7 |
) |
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(4.7 |
) |
Loss on cash flow hedges |
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(0.3 |
) |
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(0.3 |
) |
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Total comprehensive income |
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63.6 |
|
Purchase of call options related to
convertible debentures, net
of tax benefit of $21.3 million |
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(5.4 |
) |
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(5.4 |
) |
Exercise of stock options and
other incentive plan activity |
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0.2 |
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5.2 |
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5.2 |
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Balance, December 31, 2005 |
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20.8 |
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|
0.2 |
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|
|
411.4 |
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|
|
117.9 |
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|
|
12.0 |
|
|
|
(1.6 |
) |
|
|
539.9 |
|
Net loss |
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|
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|
|
|
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(158.9 |
) |
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(158.9 |
) |
Other comprehensive loss: |
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|
Cumulative translation
adjustment |
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17.3 |
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17.3 |
|
Minimum pension liability
adjustment |
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|
11.9 |
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11.9 |
|
Gain on cash flow hedges |
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0.7 |
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0.7 |
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Total comprehensive loss |
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|
|
|
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|
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|
(129.0 |
) |
Adjustment to initially apply
SFAS No. 158, net of tax
benefit of $8.7 million |
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|
|
|
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|
|
|
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|
(14.6 |
) |
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|
|
|
|
|
(14.6 |
) |
Exercise of stock options and
other incentive plan activity |
|
|
0.2 |
|
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7.5 |
|
|
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|
|
|
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0.1 |
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7.6 |
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|
Balance, December 31, 2006 |
|
|
21.0 |
|
|
|
0.2 |
|
|
|
418.9 |
|
|
|
(41.0 |
) |
|
|
27.3 |
|
|
|
(1.5 |
) |
|
|
403.9 |
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|
|
|
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|
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|
|
|
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|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40.2 |
|
|
|
|
|
|
|
|
|
|
|
40.2 |
|
Other comprehensive income: |
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|
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|
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|
Cumulative translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.3 |
|
|
|
|
|
|
|
25.3 |
|
Pension and other postretirement
benefit plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.7 |
) |
|
|
|
|
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62.8 |
|
Adjustment to initially apply
FIN 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Exercise of stock options and
other incentive plan activity |
|
|
0.4 |
|
|
|
|
|
|
|
8.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.3 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
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|
|
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|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
21.4 |
|
|
$ |
0.2 |
|
|
$ |
427.2 |
|
|
$ |
(0.7 |
) |
|
$ |
49.9 |
|
|
$ |
(1.5 |
) |
|
$ |
475.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For further information, see Foreign Currency Translation section of Note 1. |
See notes to Consolidated Financial Statements.
52
ENPRO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Overview and Significant Accounting Policies
Overview
EnPro Industries, Inc. (EnPro or the Company) is a leader in the design, development,
manufacturing and marketing of well recognized, proprietary engineered industrial products that
include sealing products, metal and metal polymer bearings and filament wound products, air
compressors, and heavy-duty, medium-speed diesel, natural gas and dual fuel reciprocating engines.
Summary of Significant Accounting Policies
Principles of Consolidation The Consolidated Financial Statements reflect the accounts of
the Company and its majority-owned and controlled subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Use of Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Reclassifications Certain prior year amounts in the accompanying prior year annual
financial statements have been reclassified to conform with the current year presentation.
Revenue Recognition Revenue is recognized at the time title and risk of product ownership
is transferred or when services are rendered. Any shipping costs billed to customers are
recognized as revenue and expensed in cost of goods sold.
Foreign Currency Translation The financial statements of those operations whose functional
currency is a foreign currency are translated into U.S. dollars using the current rate method.
Under this method, all assets and liabilities are translated into U.S. dollars using current
exchange rates, and income statement activities are translated using weighted average exchange
rates. The foreign currency translation adjustment is reflected in the Consolidated Statements of
Changes in Shareholders Equity and is included in accumulated other comprehensive income in the
Consolidated Balance Sheets. Gains and losses on foreign currency transactions are included in
operating income. Foreign currency transaction gains (losses) totaled $0.1 million, $(0.5) million
and $(2.3) million for 2007, 2006 and 2005, respectively.
In the Consolidated Statement of Changes in Shareholders Equity for 2005, the cumulative
translation adjustment of $10.0 million includes a $32.2 million addition representing cumulative
corrections of immaterial errors in the translation of foreign currency denominated goodwill and
other intangible assets during years prior to 2005. Such errors had no effect upon net income,
earnings per share, or cash flows for any period.
Research and Development Expense Costs related to research and development activities are
expensed as incurred. The Company performs research and development under Company-funded programs
for commercial products. Total research and development expenditures in 2007, 2006 and 2005 were
$14.1 million, $12.8 million and $14.4 million, respectively.
53
Income Taxes The Company uses the asset and liability method of accounting for income
taxes. Temporary differences arising from the difference between the tax basis of an asset or
liability and its carrying amount on the Consolidated Balance Sheet are used to calculate future
income tax assets or liabilities. This method also requires the recognition of deferred tax
benefits, such as net operating loss carryforwards, to the extent that realization of such benefits
is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income (losses) in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date.
Cash and Cash Equivalents Cash and cash equivalents include cash on hand, demand deposits
and highly liquid investments with a maturity of three months or less at the time of purchase. The
Consolidated Statement of Cash Flows for the year ended December 31, 2007, reflects the
reclassification of $19.5 million of unrestricted cash balances to other current and noncurrent
assets based on changes in expected maturity dates of the underlying investments.
Receivables Accounts receivable are stated at the historical carrying amount net of
write-offs and allowance for doubtful accounts. The Company establishes an allowance for doubtful
accounts receivable based on historical experience and any specific customer collection issues that
the Company has identified. Doubtful accounts receivable are written off when a settlement is
reached for an amount that is less than the outstanding historical balance or when the Company has
determined the balance will not be collected.
The balances billed but not paid by customers pursuant to retainage provisions in long-term
contracts and programs will be due upon completion of the contracts and acceptance by the owner.
At December 31, 2007, the Company had $3.9 million of retentions expected to be collected in 2008
recorded in accounts and notes receivable and $2.4 million of retentions expected to be collected
beyond 2008 recorded in other noncurrent assets in the Consolidated Balance Sheets. At December
31, 2006, the Company had $5.0 million of current retentions and $1.4 million of non-current
retentions recorded in the Consolidated Balance Sheets.
Inventories Certain domestic inventories are valued by the last-in, first-out (LIFO) cost
method. Inventories not valued by the LIFO method, other than inventoried costs relating to
long-term contracts and programs, are valued using the first-in, first-out (FIFO) cost method,
and are recorded at the lower of cost or market. Approximately 45% and 50% of inventories were
valued by the LIFO method in 2007 and 2006, respectively.
Inventoried costs relating to long-term contracts and programs are stated at the actual
production cost, including factory overhead, incurred to date. Progress payments related to
long-term contracts and programs are shown as a reduction of inventories. Initial program start-up
costs and other nonrecurring costs are expensed as incurred. Inventoried costs relating to
long-term contracts and programs are reduced by charging any amounts in excess of estimated
realizable value to cost of sales.
Property, Plant and Equipment Property, plant and equipment are recorded at cost. Major
renewals and betterments are capitalized; whereas, maintenance and repairs are expensed as
incurred. Depreciation of plant and equipment is determined on the straight-line method over the
following estimated useful lives of the assets: buildings and improvements, 3 to 40 years;
machinery and equipment, 3 to 20 years.
Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price
over the fair value of the net assets of acquired businesses. Goodwill is not amortized, but
instead is subject to
54
annual impairment testing conducted each year as of October 1. The goodwill asset impairment
test involves comparing the fair value of a reporting unit to its carrying amount. If the carrying
amount of a reporting unit exceeds its fair value, a second step of comparing the implied fair
value of the reporting units goodwill to the carrying amount of that goodwill is required to
measure the potential goodwill impairment loss. Interim tests may be required if an event occurs
or circumstances change that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. The Company completed its required annual impairment tests of goodwill
as of October 1, 2007, 2006 and 2005. The results of these assessments did not indicate any
impairment of the goodwill.
Other intangible assets are recorded at cost, or when acquired as a part of a business
combination, at estimated fair value. These assets include customer relationships, patents and
other technology agreements, trademarks, licenses and non-compete agreements. Intangible assets
that have definite lives are amortized using a method that reflects the pattern in which the
economic benefits of the assets are consumed or the straight-line method over estimated useful
lives of 2 to 25 years. Intangible assets with indefinite lives are subject to at least annual
impairment testing, which compares the fair value of the intangible asset with its carrying amount.
The results of these assessments did not indicate any impairment to these intangible assets for
the years presented.
Asbestos In 2005 and the first three quarters of 2006, the Company recorded a liability
related to asbestos claims at the low end of a broad ten-year range of equally likely estimates
provided by the firm of Bates White, LLC (Bates White), a recognized expert in the field of
estimating asbestos-related liabilities. Due to the uncertain nature of the estimated liability,
the Company and Bates White believed that no single amount in the range was a better estimate than
any other amount within the range. In accordance with the applicable accounting rules, the Company
recorded a liability for these claims at the lower end of the range of estimated potential
liabilities. In the fourth quarter of 2006, based on the Companys experience over the prior two
years and other factors, management identified a best estimate within the Bates White range and
adjusted the liability accordingly.
The significant assumptions underlying the material components of the estimated liability
include: the number and trend of claims to be asserted; the mix of alleged diseases or impairment;
the trend in the number of claims for non-malignant cases; the probability that some existing and
potential future claims will eventually be dismissed without payment; the estimated amount to be
paid per claim, and the timing and impact of large amounts that will become available for the
payment of claims from the 524(g) trusts of former defendants in bankruptcy. The actual number of
future actions filed per year and the payments made to resolve those claims could exceed those
reflected in managements estimate of the liability.
With the assistance of Bates White, the Company will periodically review the period over which
it can make a reasonable estimate, the assumptions underlying the Companys estimate, the range of
reasonably possible potential liabilities and managements estimate of the liability. The Company
will adjust the liability if necessary. Changing circumstances and new data that may become
available could cause a change in the estimated liability in the future by an amount that cannot
currently be reasonably estimated, and that increase could be significant and material. Additional
discussion is included in Note 17 to the Consolidated Financial Statements, Commitments and
Contingencies Asbestos.
Derivative Instruments The Company uses derivative financial instruments to manage its
exposure to various risks. The use of these financial instruments modifies the exposure with the
intent of reducing the risk to the Company. The Company does not use financial instruments for
trading purposes, nor does it use leveraged financial instruments. The counterparties to these
contractual arrangements are major financial institutions. The Company uses several different
financial institutions for derivative contracts to minimize the concentration of credit risk.
Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended, requires that all
55
derivative instruments be reported in the Consolidated Balance Sheets at fair value and that
changes in a derivatives fair value be recognized currently in earnings unless specific hedge
criteria are met.
The Company is exposed to foreign currency risks that arise from normal business operations.
These risks include the translation of local currency balances on its foreign subsidiaries balance
sheets, intercompany loans with foreign subsidiaries and transactions denominated in foreign
currencies. The Company strives to control its exposure to these risks through its normal
operating activities and, where appropriate, through derivative instruments. The Company has
entered into contracts to hedge forecasted transactions occurring at various dates through December
2010 that are denominated in foreign currencies. The notional amount of foreign exchange contracts
hedging foreign currency transactions was $141.5 million and $84.4 million at December 31, 2007 and
2006, respectively. These contracts are accounted for as cash flow hedges. As cash flow hedges,
the effective portion of the gain or loss on the contracts is reported in accumulated other
comprehensive income and the ineffective portion is reported in income. Amounts in accumulated
other comprehensive income are reclassified into income in the period that the hedged transactions
affect earnings. It is anticipated that $0.2 million of the amounts within accumulated other
comprehensive income at December 31, 2007, will be reclassified into income within the next twelve
months.
Fair Value of Financial Instruments Because of their short maturity, the carrying value of
cash and cash equivalents, accounts and notes receivable, accounts payable and short-term bank debt
approximates fair value. Fair value of long-term investments is based on quoted market prices.
New Accounting Pronouncements In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements.
The standard provides guidance for using fair value to measure assets and liabilities. Under the
standard, fair value refers to the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants in the market in which
the reporting entity transacts. The standard clarifies the principle that fair value should be
based on the assumptions market participants would use when pricing the asset or liability. In
support of this principle, the standard establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. The Statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years. The Company does not believe there will be a significant impact on the Consolidated
Financial Statements in connection with the adoption of this pronouncement.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R),
Business Combinations (SFAS 141(R)) and Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51
(SFAS 160). These new standards will significantly change the financial accounting and reporting
of business combination transactions and noncontrolling (or minority) interests in consolidated
financial statements. The Company will be required to adopt SFAS 141(R) and 160 for periods
beginning on or after December 15, 2008. These new standards will not change the financial
accounting and reporting for business combinations completed prior to the effective date of the new
standards.
2. Acquisitions
In June 2007, the Company acquired Texflo Machining Ltd., a privately-held company that
services and repairs reciprocating compressors, primarily for the natural gas market in western
Canada. In July 2007, the Company acquired Compressor Products International Limited, a
privately-held manufacturer of critical sealing components for reciprocating compressors, gas
engines and related equipment. These acquisitions are included in the Companys Engineered
Products segment. The Company also purchased the remaining ownership interest in one of its
subsidiaries and two small product lines during 2007.
56
The acquisitions completed during 2007 were paid for with $77.0 million in cash. They
resulted in increases in property, plant and equipment of $4.5 million, goodwill of $42.3 million,
other intangible assets of $40.3 million and debt of $2.2 million, decreases in long-term deferred
tax assets of $7.6 million, other noncurrent liabilities of $4.1 million and working capital of
$0.3 million, as well as an extraordinary gain of $4.1 million related to the purchase of the
remaining ownership interest in one of the Companys subsidiaries. The gain was recorded net of
$1.6 million of income taxes.
In May 2006, the Company acquired Allwest Compressor Services (Allwest), a privately-held
manufacturer of compressor components primarily for the natural gas and oil production industries
in Western Canada. Allwest, along with Southwest Compressor Services and H.A.R. Compressor
Products, which were also acquired during the year, are included in the Companys Engineered
Products segment. In July 2006, the Company acquired Amicon Plastics, a privately-held company
that manufactures and sells customized fluoropolymer and engineered plastic components to
semiconductor, pump and valve, oilfield and other industries. This acquisition is included in the
Companys Sealing Products segment.
The acquisitions completed during 2006 were paid for with $27.3 million in cash, and a $1.0
million note payable to one of the sellers. The acquisitions resulted in increases in working
capital of $4.6 million, property, plant and equipment of $2.9 million, goodwill of $7.2 million,
other intangible assets of $13.3 million, and other assets of $0.3 million.
During 2005, the Company spent a total of $1.7 million to purchase the remaining ownership
interest in one of its subsidiaries in the Sealing Products segment and a small product line.
These acquisitions resulted in an increase in goodwill of $0.9 million, an increase in other
intangible assets of $0.1 million and a decrease in other non-current liabilities of $0.7 million.
3. Restructuring and Other Costs
In 2005, the Company approved a plan to modernize the Palmyra, New York facilities of Garlock
Sealing Technologies, included within the Sealing Products segment. Garlock Sealing Technologies
has been on its current site since the early 1900s, with the buildings dating from 1907 to 1956.
The project will reduce the number of buildings on the site from 26 to 7 and eliminate 350,000
square feet of space, or approximately half of the space currently under roof. Work on the project
began in the second half of 2005. The modernization will be completed over five years at an
expected cost, including expenses and capital expenditures, of approximately $35 million, excluding
the impact of grants, tax abatements and tax credits. The Company anticipates that slightly less
than half of the costs, primarily demolition of existing structures, site preparation and equipment
relocation, will be expensed as incurred and the balance, primarily construction of new buildings,
will be capitalized.
During 2007, the Company announced the planned consolidation of facilities for a unit within
the Sealing Products segment. Approximately $0.6 million of costs were incurred during 2007 of the
total anticipated $2.4 million for the entire initiative. Workforce reductions announced totaled
33, primarily hourly manufacturing positions, none of which took place during 2007. The project is
currently anticipated to be completed early in 2008.
Restructuring reserves at December 31, 2007, as well as activity during the year, consisted
of:
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
Credits to |
|
|
Balance |
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
Environmental |
|
|
December 31, |
|
|
|
2006 |
|
|
Provision |
|
|
Payments |
|
|
Liabilities |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
Personnel-related costs |
|
$ |
0.1 |
|
|
$ |
0.7 |
|
|
$ |
(0.4 |
) |
|
$ |
|
|
|
$ |
0.4 |
|
Facility demolition and
relocation costs |
|
|
|
|
|
|
5.3 |
|
|
|
(3.0 |
) |
|
|
(2.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.1 |
|
|
$ |
6.0 |
|
|
$ |
(3.4 |
) |
|
$ |
(2.3 |
) |
|
$ |
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring reserves at December 31, 2006, as well as activity during the year, consisted
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
Credits to |
|
|
Balance |
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
Environmental |
|
|
December 31, |
|
|
|
2005 |
|
|
Provision |
|
|
Payments |
|
|
Liabilities |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
Personnel-related costs |
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.1 |
|
Facility demolition and
relocation costs |
|
|
|
|
|
|
2.3 |
|
|
|
(0.9 |
) |
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.1 |
|
|
$ |
2.3 |
|
|
$ |
(0.9 |
) |
|
$ |
(1.4 |
) |
|
$ |
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Several smaller restructuring initiatives were begun and completed during 2005. These
included the conversion of a manufacturing facility to a service center, the closing of a warehouse
and the consolidation and relocation of several product lines. Workforce reductions announced and
completed during 2005 relating to these programs totaled 13 positions.
Restructuring reserves at December 31, 2005, as well as activity during the year, consisted
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2004 |
|
|
Provision |
|
|
Payments |
|
|
2005 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Personnel-related costs |
|
$ |
1.0 |
|
|
$ |
0.1 |
|
|
$ |
(1.0 |
) |
|
$ |
0.1 |
|
Facility demolition and
relocation costs |
|
|
|
|
|
|
0.9 |
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.0 |
|
|
$ |
1.0 |
|
|
$ |
(1.9 |
) |
|
$ |
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The restructuring and other costs of $6.0 million, $2.3 million and $1.0 million for the years
ending December 31, 2007, 2006 and 2005, respectively, all related to the Sealing Products segment.
4. Loss (Gain) on Sale of Assets, Net
In 2005, the Company sold a facility occupied by a former subsidiary. The Company had leased
the facility to the former subsidiary since its divestiture in 1990. Net proceeds from the sale
were approximately $6 million resulting in a $5.2 million pre-tax gain.
58
5. Other Income
In conjunction with the closure of a plant in the early 1980s, the Company was required to
fund two trusts for retiree medical benefits for union employees at the plant. The first trust
(the Benefits Trust) pays for these retiree medical benefits on an ongoing basis. The Company
has no ownership interest in the Benefits Trust, and thus the assets and liabilities of this trust
are not included in the Companys Consolidated Balance Sheets.
Because of the possibility that the Company would be required to make additional contributions
to the Benefits Trust to cover potential shortfalls, the Company was required to establish a second
trust (the Back-Up Trust). Under the terms of the Benefits Trust agreement, the trustees are
required to retain an actuary to assess the adequacy of the assets in the Benefits Trust in 1995,
2005 and 2015. Based on the valuation completed in early 2005, the actuary determined that there
were adequate assets in the Benefits Trust to fund the estimated payments by the trust until the
next valuation date. As a result, $11 million of excess assets held in the Back-Up Trust was
released to the Company during 2005. This amount was based on a distribution formula described in
the Benefits Trust agreement and was recorded in income upon receipt. This topic is discussed
further in Note 17, Commitments and Contingencies.
During 2005, the Company recorded income of $4.6 million resulting from a favorable legal
decision in a product liability matter which was partially offset by increases to environmental
reserves based on new facts at five specific sites. All of these matters related to previously
owned businesses.
6. Income Taxes
Income (loss) before income taxes and extraordinary items as shown in the Consolidated
Statements of Operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
12.4 |
|
|
$ |
(285.7 |
) |
|
$ |
62.5 |
|
Foreign |
|
|
45.6 |
|
|
|
31.5 |
|
|
|
29.6 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
58.0 |
|
|
$ |
(254.2 |
) |
|
$ |
92.1 |
|
|
|
|
|
|
|
|
|
|
|
A summary of income tax benefit (expense) in the Consolidated Statements of Operations before
extraordinary items is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(in millions) |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(10.6 |
) |
|
$ |
2.0 |
|
|
$ |
(6.8 |
) |
Foreign |
|
|
(17.3 |
) |
|
|
(10.6 |
) |
|
|
(11.7 |
) |
State |
|
|
(0.8 |
) |
|
|
(0.6 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(28.7 |
) |
|
|
(9.2 |
) |
|
|
(18.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
6.5 |
|
|
|
99.2 |
|
|
|
(12.5 |
) |
Foreign |
|
|
1.5 |
|
|
|
(2.4 |
) |
|
|
(0.8 |
) |
State |
|
|
0.4 |
|
|
|
7.7 |
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
8.4 |
|
|
|
104.5 |
|
|
|
(14.6 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(20.3 |
) |
|
$ |
95.3 |
|
|
$ |
(33.5 |
) |
|
|
|
|
|
|
|
|
|
|
59
Significant components of deferred income tax assets and liabilities at December 31, 2007 and
2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
Accrual for post-retirement benefits other than pensions |
|
$ |
3.0 |
|
|
$ |
3.4 |
|
Environmental reserves |
|
|
10.4 |
|
|
|
16.5 |
|
Retained liabilities of previously owned businesses |
|
|
12.1 |
|
|
|
9.9 |
|
Call options |
|
|
18.7 |
|
|
|
20.2 |
|
Inventories |
|
|
1.9 |
|
|
|
3.2 |
|
Accruals and reserves |
|
|
18.0 |
|
|
|
14.2 |
|
Minimum pension liability |
|
|
10.1 |
|
|
|
8.5 |
|
Asbestos accrual |
|
|
143.4 |
|
|
|
127.1 |
|
|
|
|
|
|
|
|
Total deferred income tax assets |
|
|
217.6 |
|
|
|
203.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
Pensions |
|
|
(4.8 |
) |
|
|
(4.1 |
) |
Tax depreciation and amortization in excess of book |
|
|
(37.1 |
) |
|
|
(22.9 |
) |
Payments in excess of insurance recoveries |
|
|
(62.5 |
) |
|
|
(83.5 |
) |
Other |
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities |
|
|
(105.2 |
) |
|
|
(110.5 |
) |
|
|
|
|
|
|
|
Net deferred income taxes |
|
$ |
112.4 |
|
|
$ |
92.5 |
|
|
|
|
|
|
|
|
The Company concluded that a valuation allowance on its deferred tax assets at December 31,
2007 and December 31, 2006, was not required. The Companys methodology for determining the
realizability of deferred tax assets involves estimates of future taxable income from its
operations. These estimates are projected through the life of the related deferred tax assets
based on assumptions that the Company believes to be reasonable and consistent with current
operating results. Changes in future operating results not currently forecasted may have a
significant impact on the realization of deferred tax assets.
The effective income tax rate from operations varied from the statutory federal income tax
rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Pretax Income |
|
|
Years Ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate |
|
|
35.0 |
% |
|
|
(35.0 |
)% |
|
|
35.0 |
% |
Credits |
|
|
(1.6 |
) |
|
|
|
|
|
|
(0.7 |
) |
State and local taxes |
|
|
0.7 |
|
|
|
(2.8 |
) |
|
|
1.8 |
|
Extraterritorial income exclusion benefit |
|
|
|
|
|
|
(0.3 |
) |
|
|
(0.9 |
) |
Foreign rate variations |
|
|
1.8 |
|
|
|
0.2 |
|
|
|
1.7 |
|
German tax rate change |
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
Uncertain tax positions |
|
|
2.0 |
|
|
|
|
|
|
|
|
|
Other items |
|
|
1.5 |
|
|
|
0.4 |
|
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
35.0 |
% |
|
|
(37.5 |
)% |
|
|
36.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, the Company had undistributed earnings of approximately $61.4 million
from subsidiaries in Australia, Canada, Mexico and Brazil that are not considered to be permanently
reinvested. Based on current income tax rates, the Company believes the tax effect on any
distribution
60
will be immaterial due to the Companys foreign tax credit position. Accordingly, no
deferred taxes have been provided for these undistributed foreign earnings.
The Company has not provided for the federal and foreign withholding taxes on $115.8 million
of the remaining foreign subsidiaries undistributed earnings as of December 31, 2007, because such
earnings are intended to be reinvested indefinitely. On repatriation, certain foreign countries
impose withholding taxes. The amount of withholding tax that would be payable on remittance of the
entire amount would approximate $9.8 million. Based on current income tax rates, the Company
believes the tax effect of any distribution will be immaterial due to the Companys foreign tax
credit position.
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48) on January 1, 2007. Accordingly, the Company recorded a $0.1 million decrease in
liabilities for unrecognized tax benefits with a corresponding reduction in the accumulated
deficit. At January 1, 2007, the Company had recorded a liability of approximately $21.8 million
for unrecognized tax benefits of which $4.9 million, if recognized, would affect the effective tax
rate. The Company records interest and penalties related to unrecognized tax benefits in income
tax expense. At January 1, 2007, the Company had accrued $1.1 million for the potential payment of
interest. At December 31, 2007, the Company had a $19.1 million liability recorded for
unrecognized tax benefits, which includes interest of $1.9 million. Included in the balance at
December 31, 2007, are $13.2 million of tax positions for which the ultimate deductibility is
highly certain but for which there is uncertainty about the timing of such deductibility. The
total amount of unrecognized benefits that, if recognized, would have affected the effective tax
rate was $5.9 million. A reconciliation of the beginning and ending amount of the unrecognized tax
benefits is as follows:
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Balance at January 1, 2007 |
|
$ |
21.8 |
|
Additions based on tax positions related to the current year |
|
|
0.7 |
|
Additions for tax positions of prior years |
|
|
0.1 |
|
Reductions for tax positions of prior years |
|
|
(4.5 |
) |
Reductions as a result of audit settlements |
|
|
(0.9 |
) |
|
|
|
|
Balance at December 31, 2007 |
|
$ |
17.2 |
|
|
|
|
|
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax
in multiple state and foreign jurisdictions. Substantially all federal, state and local, and
foreign income tax returns for the years 2003 through 2006 are open to examination. The U.S.
federal income tax returns for 2003 to 2005 and various foreign and state tax returns are currently
under examination and may conclude within the next twelve months. The final outcomes of these
audits are not yet determinable; however, management believes that any assessments that may arise
will not be material to the Companys financial condition or results of operations.
7. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing the applicable net income (loss) by
the weighted-average number of common shares outstanding for the period. Diluted earnings (loss)
per share is calculated using the weighted-average number of shares of common stock as adjusted for
any potentially dilutive shares as of the balance sheet date. The computation of basic and
diluted earnings (loss) per share is as follows:
61
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share amounts) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Numerator (basic and diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
40.2 |
|
|
$ |
(158.9 |
) |
|
$ |
58.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares basic |
|
|
21.3 |
|
|
|
20.9 |
|
|
|
20.7 |
|
Share-based awards |
|
|
0.5 |
|
|
|
|
|
|
|
0.6 |
|
Convertible debentures |
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares diluted |
|
|
22.3 |
|
|
|
20.9 |
|
|
|
21.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.89 |
|
|
$ |
(7.60 |
) |
|
$ |
2.83 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.80 |
|
|
$ |
(7.60 |
) |
|
$ |
2.75 |
|
|
|
|
|
|
|
|
|
|
|
As discussed further in Note 11, the Company has issued convertible debentures. Under the
terms of the debentures, the Company would settle the par amount of its obligations in cash and the
remaining obligations, if any, in common shares. In accordance with the current applicable
accounting guidelines, the Company includes the conversion option effect in diluted earnings per
share during such periods when the Companys stock price exceeds the initial conversion price of
$33.79 per share.
In 2006, there was a loss attributable to common shares. Potentially dilutive share-based
awards of 0.6 million shares and convertible debentures of 0.1 million shares were excluded from
the calculation of diluted earnings per share as they were antidilutive.
8. Inventories
Inventories consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
Finished products |
|
$ |
45.7 |
|
|
$ |
40.0 |
|
Costs relating to long-term contracts and programs |
|
|
19.4 |
|
|
|
32.1 |
|
Work in process |
|
|
23.0 |
|
|
|
20.8 |
|
Raw materials and supplies |
|
|
30.8 |
|
|
|
24.6 |
|
|
|
|
|
|
|
|
|
|
|
118.9 |
|
|
|
117.5 |
|
Reserve to reduce certain inventories to LIFO basis |
|
|
(16.2 |
) |
|
|
(16.6 |
) |
Progress payments |
|
|
(32.4 |
) |
|
|
(21.6 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
70.3 |
|
|
$ |
79.3 |
|
|
|
|
|
|
|
|
9. Property, Plant and Equipment
Property, plant and equipment consists of the following:
62
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
4.0 |
|
|
$ |
3.6 |
|
Buildings and improvements |
|
|
107.7 |
|
|
|
102.3 |
|
Machinery and equipment |
|
|
344.1 |
|
|
|
319.8 |
|
Construction in progress |
|
|
33.1 |
|
|
|
19.3 |
|
|
|
|
|
|
|
|
|
|
|
488.9 |
|
|
|
445.0 |
|
Less accumulated depreciation |
|
|
(295.4 |
) |
|
|
(278.7 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
193.5 |
|
|
$ |
166.3 |
|
|
|
|
|
|
|
|
Construction in progress has been reduced by $1.6 million as of December 31, 2007, for grants
and credits receivable from governmental agencies to reimburse the Company for expenditures made on
the Palmyra, New York modernization project. Since this was a noncash investing activity, it has
not been included in the accompanying Consolidated Statements of Cash Flows.
10. Goodwill and Other Intangible Assets
The changes in the net carrying value of goodwill by reportable segment for the years ended
December 31, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engine |
|
|
|
|
|
|
Sealing |
|
|
Engineered |
|
|
Products and |
|
|
|
|
|
|
Products |
|
|
Products |
|
|
Services |
|
|
Total |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net as of December 31, 2005 |
|
$ |
43.1 |
|
|
$ |
94.5 |
|
|
$ |
7.1 |
|
|
$ |
144.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
1.1 |
|
|
|
8.6 |
|
|
|
|
|
|
|
9.7 |
|
Acquisitions |
|
|
4.4 |
|
|
|
2.8 |
|
|
|
|
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net as of December 31, 2006 |
|
|
48.6 |
|
|
|
105.9 |
|
|
|
7.1 |
|
|
|
161.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
1.2 |
|
|
|
8.7 |
|
|
|
|
|
|
|
9.9 |
|
Acquisitions |
|
|
|
|
|
|
42.3 |
|
|
|
|
|
|
|
42.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net as of December 31, 2007 |
|
$ |
49.8 |
|
|
$ |
156.9 |
|
|
$ |
7.1 |
|
|
$ |
213.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross carrying amount and accumulated amortization of identifiable intangible assets is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 |
|
|
As of December 31, 2006 |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
68.4 |
|
|
$ |
20.9 |
|
|
$ |
42.9 |
|
|
$ |
16.1 |
|
Existing technology |
|
|
21.0 |
|
|
|
3.8 |
|
|
|
16.5 |
|
|
|
2.9 |
|
Trademarks |
|
|
38.4 |
|
|
|
5.8 |
|
|
|
28.5 |
|
|
|
4.2 |
|
Other |
|
|
13.3 |
|
|
|
7.1 |
|
|
|
11.4 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
141.1 |
|
|
$ |
37.6 |
|
|
$ |
99.3 |
|
|
$ |
29.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
The goodwill and identifiable intangible assets as of December 31, 2007, are subject to change
once the final asset and liability valuations are completed for the 2007 acquisitions.
Amortization expense for the years ended December 31, 2007, 2006 and 2005 was $7.8 million,
$6.1 million and $5.5 million, respectively. Amortization expense for these intangible assets for
the years 2008 through 2012 is estimated to be $9.6 million, $9.3 million, $9.0 million, $8.6
million and $7.6 million, respectively. Of the $38.4 million in trademarks as of December
31, 2007, approximately $23 million was for trademarks with indefinite lives.
11. Long-Term Debt
The Companys long-term debt at December 31, 2007 and 2006 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
Convertible Debentures |
|
$ |
172.5 |
|
|
$ |
172.5 |
|
Coltec Senior Notes |
|
|
3.1 |
|
|
|
3.1 |
|
Industrial revenue bonds |
|
|
9.6 |
|
|
|
9.6 |
|
Other note payable |
|
|
0.5 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
185.7 |
|
|
|
185.7 |
|
Less current maturities of long-term debt |
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
182.1 |
|
|
$ |
185.7 |
|
|
|
|
|
|
|
|
The Companys primary U.S. operating subsidiaries have a senior secured revolving credit
facility with a group of banks. The credit agreement for this facility was originally executed on
May 16, 2002. On April 26, 2006, the Company and its primary U.S. operating subsidiaries amended
and extended the facility. As amended, the maximum initial amount available for borrowings under
the facility is $75 million. Under certain conditions, the borrowers may request that the facility
be increased by up to $25 million, to $100 million total. The facility matures on April 21, 2011.
Borrowings are available at LIBOR plus a margin of 1.00% to 1.75%. The Company pays an annual
unused line fee of 0.25%. The Company also pays an annual administrative agency fee of $40,000.
There have been no borrowings under this credit facility since its inception. Borrowings
under the credit facility would be collateralized by receivables, inventories, intellectual
property, insurance receivables and all other personal property assets (other than fixed assets) of
the Company and its U.S. subsidiaries, and by pledges of 65% of the capital stock of their foreign
subsidiaries and 100% of the capital stock of their domestic subsidiaries. The credit facility
contains customary restrictions, covenants and events of default for financings of this type,
including but not limited to limitations on the ability to pay dividends, limitations on the
incurrence and repayment of additional debt and maintenance of a fixed charge coverage financial
ratio. Certain of the covenants and restrictions apply only if availability under the facility
falls below certain levels.
In 2005, the Company issued $172.5 million in aggregate principal amount of Convertible Senior
Debentures (the Debentures). The Debentures bear interest at the annual rate of 3.9375%, with
interest due on April 15 and October 15 of each year. The Debentures will mature on October 15,
2015 unless they are converted prior to that date. The Debentures are the Companys direct,
unsecured and unsubordinated obligations and rank equal in priority with all unsecured and
unsubordinated indebtedness and senior in right of payment to all subordinated indebtedness. They
effectively rank junior to all secured indebtedness to the extent of the value of the assets
securing such indebtedness. The Debentures do not contain any financial covenants.
64
Holders may convert the Debentures into cash and shares of the Companys common stock, under
certain circumstances. The initial conversion rate, which is subject to adjustment, is 29.5972
shares of common stock per $1,000 principal amount of Debentures. This is equal to an initial
conversion price of $33.79 per share. The debentures may be converted under the following
circumstances:
|
|
|
during any fiscal quarter commencing after December 31, 2005 (and only during such
fiscal quarter), if the closing price of the Companys common stock for at least 20
trading days in the 30 consecutive trading-day period ending on the last trading day of
the preceding fiscal quarter was 130% or more of the then current conversion price per
share of common stock on that 30th trading day; |
|
|
|
|
during the five business day period after any five consecutive trading-day period
(which is referred to as the measurement period) in which the trading price per
debenture for each day of the measurement period was less than 98% of the product of
the closing price of the Companys common stock and the applicable conversion rate for
the debentures; |
|
|
|
|
on or after September 15, 2015; |
|
|
|
|
upon the occurrence of specified corporate transactions; or |
|
|
|
|
in connection with a transaction or event constituting a change of control. |
The conditions that permit conversion were not satisfied at December 31, 2007.
Upon conversion of any Debentures, the principal amount would be settled in cash.
Specifically, in connection with any conversion, the Company will satisfy its obligations under the
Debentures by delivering to holders, in respect of each $1,000 aggregate principal amount of
Debentures being converted:
|
|
|
cash equal to the lesser of $1,000 or the Conversion Value, and |
|
|
|
|
to the extent the Conversion Value exceeds $1,000, a number of shares equal to the
sum of, for each day of the Cash Settlement Period (defined below), (1) 5% of the
difference between (A) the product of the conversion rate (plus any additional shares
as an adjustment upon a change of control) and the closing price of the Companys
common stock for such date and (B) $1,000, divided by (2) the closing price of the
Companys common stock for such day. |
Conversion Value means the product of (1) the conversion rate in effect (plus any additional
shares as an adjustment upon a change of control) and (2) the average of the closing prices of the
Companys common stock for the 20 consecutive trading days beginning on the second trading day
after the conversion date for those Debentures.
The Company used a portion of the net proceeds from the sale of the Debentures to enter into
call options (hedge and warrant transactions), which entitle the Company to purchase shares of its
stock from a financial institution at $33.79 per share and entitle the financial institution to
purchase shares from the Company at $46.78 per share. This will reduce potential dilution to the
Companys common stock from conversion of the Debentures by increasing the effective conversion
price to $46.78 per share. The entry into these transactions had the effect of decreasing the
Companys total shareholders equity by approximately $5.4 million, which represents the net cash outlay of the call options of $26.7
million, offset by an anticipated tax benefit of $21.3 million. Future tax benefits are subject to
various risks and
65
uncertainties, including changes in the applicable provisions of federal and
state income tax codes and regulations.
The 71/2% Coltec Senior Notes are payable in full in 2008. The industrial revenue bonds are
payable in full in 2009 and bear interest at rates ranging from 6.4% to 6.55%. The other note
payable is payable in full in 2008 and bears interest at a rate of 5.0%.
Future principal payments on long-term debt are as follows:
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
3.6 |
|
2009 |
|
|
9.6 |
|
2010 |
|
|
|
|
2011 |
|
|
|
|
2012 |
|
|
|
|
Thereafter |
|
|
172.5 |
|
|
|
|
|
|
|
$ |
185.7 |
|
|
|
|
|
12. Fair Values of Financial Instruments
The Companys accounting policies with respect to financial instruments are described in Note
1. The carrying values of the Companys significant financial instruments reflected in the
Consolidated Balance Sheets approximate their respective fair values at December 31, 2007 and 2006,
except for the following instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Value |
|
Value |
|
Value |
|
Value |
|
|
(in millions) |
Long-term debt |
|
$ |
185.7 |
|
|
$ |
215.9 |
|
|
$ |
185.7 |
|
|
$ |
230.2 |
|
The fair values for long-term debt are based on quoted market prices or on rates available to
the Company for debt with similar terms and maturities.
13. Pensions and Postretirement Benefits
The Company and its subsidiaries have several non-contributory defined benefit pension plans
covering eligible employees in the United States, Canada, Mexico and several European countries.
Salaried employees benefit payments are generally determined using a formula that is based on an
employees compensation and length of service. The Company closed its defined benefit pension plan
for new salaried employees in the United States who joined the Company after January 1, 2006, and
effective January 1, 2007, benefits were frozen for all salaried employees who are not age 40 as of
December 31, 2006, and other employees who chose to freeze their benefits. Hourly employees
benefit payments are generally determined using stated amounts for each year of service. The
Companys employees also participate in voluntary contributory retirement savings plans for
salaried and hourly employees maintained by the Company and its subsidiaries. Under these plans,
eligible employees can receive matching contributions up to the first 6% of their eligible
earnings. Effective January 1, 2007, those employees whose defined benefit pension plan benefits
were frozen will receive an additional 2% Company contribution each year. The Company recorded $6.2 million, $5.2 million and $4.6
million in expenses in 2007, 2006 and 2005, respectively, for matching contributions under these
plans.
66
The Companys general funding policy for qualified defined benefit pension plans is to
contribute amounts that are at least sufficient to satisfy regulatory funding standards. In each
of 2007, 2006 and 2005, the Company contributed discretionary amounts of $10.0 million to the U.S.
pension plans. The Company anticipates that there will be no required funding in 2008, and has not
determined whether it will make a discretionary contribution in 2008 to the U.S. pension plans.
The Company expects to make total contributions of approximately $1.4 million in 2008 to the
foreign pension plans. The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the defined benefit pension plans with accumulated benefit obligations in
excess of plan assets were $186.7 million, $172.5 million and $167.5 million at December 31, 2007,
and $139.5 million, $127.8 million and $118.9 million at December 31, 2006, respectively.
The Company amortizes prior service cost and unrecognized gains and losses using the
straight-line basis over the average future service life of active participants.
The Company provides, through non-qualified plans, supplemental pension benefits to a limited
number of employees. Certain of the Companys subsidiaries also sponsor unfunded defined benefit
postretirement plans that provide certain health-care and life insurance benefits to eligible
employees. The health-care plans are contributory, with retiree contributions adjusted
periodically, and contain other cost-sharing features, such as deductibles and coinsurance. The
life insurance plans are generally noncontributory. The amounts included in Other Benefits in
the following tables include the non-qualified plans and the defined benefit postretirement plans
that provide certain health-care and life insurance benefits to eligible employees.
Domestic Plans
The following table sets forth the changes in projected benefit obligations and plan assets of
the Companys U.S. defined benefit pension and other non-qualified and postretirement plans as of
and for the years ended December 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Projected Benefit Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations at
beginning of year |
|
$ |
155.8 |
|
|
$ |
157.5 |
|
|
$ |
11.9 |
|
|
$ |
11.4 |
|
Service cost |
|
|
5.8 |
|
|
|
7.4 |
|
|
|
1.5 |
|
|
|
0.9 |
|
Interest cost |
|
|
9.7 |
|
|
|
8.9 |
|
|
|
0.7 |
|
|
|
0.7 |
|
Actuarial loss (gain) |
|
|
3.0 |
|
|
|
(11.0 |
) |
|
|
|
|
|
|
0.1 |
|
Amendments |
|
|
0.4 |
|
|
|
(1.5 |
) |
|
|
0.5 |
|
|
|
|
|
Administrative expenses |
|
|
(1.3 |
) |
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
Benefits paid |
|
|
(4.8 |
) |
|
|
(4.1 |
) |
|
|
(1.7 |
) |
|
|
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations at end of year |
|
|
168.6 |
|
|
|
155.8 |
|
|
|
12.9 |
|
|
|
11.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets
at beginning of year |
|
|
143.2 |
|
|
|
122.2 |
|
|
|
|
|
|
|
|
|
Actual return on plan assets |
|
|
10.0 |
|
|
|
16.5 |
|
|
|
|
|
|
|
|
|
Administrative expenses |
|
|
(1.3 |
) |
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
Company contributions |
|
|
10.0 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
Benefits paid |
|
|
(4.8 |
) |
|
|
(4.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
157.1 |
|
|
|
143.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status at End of Year |
|
$ |
(11.5 |
) |
|
$ |
(12.6 |
) |
|
$ |
(12.9 |
) |
|
$ |
(11.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in the
Consolidated Balance Sheets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets |
|
$ |
|
|
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
(0.8 |
) |
|
|
(1.2 |
) |
Noncurrent liabilities |
|
|
(11.5 |
) |
|
|
(12.7 |
) |
|
|
(12.1 |
) |
|
|
(10.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(11.5 |
) |
|
$ |
(12.6 |
) |
|
$ |
(12.9 |
) |
|
$ |
(11.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax charges recognized in accumulated other comprehensive income as of December 31, 2007
and 2006 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
$ |
20.3 |
|
|
$ |
14.8 |
|
|
$ |
2.5 |
|
|
$ |
2.7 |
|
Prior service cost |
|
|
4.5 |
|
|
|
5.4 |
|
|
|
1.6 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24.8 |
|
|
$ |
20.2 |
|
|
$ |
4.1 |
|
|
$ |
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all domestic defined benefit pension plans was $156.7
million and $145.7 million at December 31, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(in millions) |
|
Net Periodic Benefit Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
5.8 |
|
|
$ |
7.4 |
|
|
$ |
7.1 |
|
|
$ |
1.5 |
|
|
$ |
0.9 |
|
|
$ |
0.9 |
|
Interest cost |
|
|
9.7 |
|
|
|
8.9 |
|
|
|
8.2 |
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.6 |
|
Expected return on plan assets |
|
|
(12.5 |
) |
|
|
(10.5 |
) |
|
|
(9.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
1.2 |
|
|
|
2.5 |
|
|
|
2.5 |
|
|
|
0.2 |
|
|
|
(0.1 |
) |
|
|
(0.2 |
) |
Recognized net actuarial loss |
|
|
0.1 |
|
|
|
1.8 |
|
|
|
1.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.1 |
|
Curtailment loss |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
|
4.3 |
|
|
$ |
10.3 |
|
|
$ |
9.7 |
|
|
|
2.6 |
|
|
$ |
1.7 |
|
|
$ |
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Changes in Plan Assets and
Benefit Obligations Recognized in
Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
Amortization of net loss |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other
comprehensive income |
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recognized in Net Periodic Benefit
Cost and Other Comprehensive
Income |
|
$ |
8.9 |
|
|
|
|
|
|
|
|
|
|
$ |
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
The estimated net loss and prior service cost for the defined benefit pension plans that will
be amortized from accumulated other comprehensive income into net periodic benefit cost over the
next fiscal year are $0.4 million and $1.2 million, respectively. The estimated net loss and prior
service cost for the other defined benefit postretirement plans that will be amortized from
accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is
$0.1 million and $0.1 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Benefits |
|
|
2007 |
|
2006 |
|
2005 |
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Assumptions Used to
Determine Benefit Obligations at
December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.25 |
% |
|
|
6.25 |
% |
|
|
5.75 |
% |
|
|
6.25 |
% |
|
|
6.25 |
% |
|
|
5.75 |
% |
Rate of compensation increase |
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Assumptions Used to
Determine Net Periodic Benefit Cost for
Years Ended December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.25 |
% |
|
|
5.75 |
% |
|
|
6.0 |
% |
|
|
6.25 |
% |
|
|
5.75 |
% |
|
|
6.0 |
% |
Expected long-term return on plan assets |
|
|
8.5 |
% |
|
|
8.5 |
% |
|
|
8.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase |
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
4.0 |
% |
The discount rate reflects the current rate at which the pension liabilities could be
effectively settled at the end of the year. The discount rate was determined by matching the
Companys expected benefit payments, taking into account the plans demographics, to payments from
a stream of AA- or higher bonds available in the marketplace. This produced a discount rate of
6.25% at December 31, 2007. As of the date of these financial statements, there are no known or
anticipated changes in our discount rate assumption that will impact our pension expense in 2008.
A 25 basis point decrease (increase) in our discount rate, holding constant our expected long-term
return on plan assets and other assumptions, would increase (decrease) pension expense by
approximately $0.7 million per year.
The overall expected long-term rate of return on assets was determined based upon
weighted-average historical returns over an extended period of time for the asset classes in which
the plans invest according to the Companys current investment policy.
The Company uses the RP-2000 mortality table to value its domestic pension liabilities.
|
|
|
|
|
|
|
|
|
Assumed Health Care Cost Trend Rates at December 31 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
Health care cost trend rate assumed for next year |
|
|
9.0 |
% |
|
|
9.0 |
% |
Rate to which the cost trend rate is assumed to
decline (the ultimate rate) |
|
|
5.0 |
% |
|
|
5.0 |
% |
Year that the rate reaches the ultimate trend rate |
|
|
2013 |
|
|
|
2012 |
|
A one percentage point change in the assumed health-care cost trend rate would have an impact
of not more than $0.1 million on net periodic benefit cost and $0.4 million on benefit obligations.
Plan Assets
The asset allocation for pension plans at the end of 2007 and 2006, and the target allocation
for 2008, by asset category are as follows:
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target |
|
|
|
|
Allocation |
|
Plan Assets at December 31, |
|
|
2008 |
|
2007 |
|
2006 |
Asset Category |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
65 |
% |
|
|
65 |
% |
|
|
66 |
% |
Fixed income |
|
|
35 |
% |
|
|
35 |
% |
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys investment goal is to maximize the return on assets, over the long term, by
investing in equities and fixed income investments while diversifying investments within each asset
class to reduce the impact of losses in individual securities. Equity investments include a mix of
U.S. large capitalization equities, U.S. small capitalization equities and non-U.S. equities.
Fixed income investments include a mix of corporate bonds, treasury obligations and mortgage backed
securities. The asset allocation policy is reviewed periodically and any variation from the target
asset allocation mix greater than 2% is rebalanced on a monthly basis. The plans have no direct
investments in the Companys common stock.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are
expected to be paid:
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
Other |
|
|
|
Benefits |
|
|
Benefits |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
5.6 |
|
|
$ |
1.3 |
|
2009 |
|
|
6.1 |
|
|
|
4.0 |
|
2010 |
|
|
6.8 |
|
|
|
1.4 |
|
2011 |
|
|
7.4 |
|
|
|
1.1 |
|
2012 |
|
|
8.3 |
|
|
|
1.1 |
|
Years 2013 2017 |
|
|
56.2 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
$ |
90.4 |
|
|
$ |
14.5 |
|
|
|
|
|
|
|
|
Foreign Plans
The following table sets forth the changes in projected benefit obligations and plan assets of
the Companys foreign defined benefit pension and other postretirement plans as of and for the
years ended December 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Projected Benefit Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations at
beginning of year |
|
$ |
18.2 |
|
|
$ |
18.1 |
|
|
$ |
1.5 |
|
|
$ |
1.6 |
|
Service cost |
|
|
0.7 |
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Interest cost |
|
|
0.9 |
|
|
|
0.8 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Curtailments and settlements |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
Actuarial gain |
|
|
(1.1 |
) |
|
|
|
|
|
|
(0.3 |
) |
|
|
(0.4 |
) |
Benefits paid |
|
|
(1.8 |
) |
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
Other, primarily exchange
rate adjustment |
|
|
2.4 |
|
|
|
0.9 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations at end of year |
|
|
19.3 |
|
|
|
18.2 |
|
|
|
1.4 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets
at beginning of year |
|
|
10.6 |
|
|
|
9.7 |
|
|
|
|
|
|
|
|
|
Actual return on plan assets |
|
|
0.1 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
Company contributions |
|
|
1.9 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
Benefits paid |
|
|
(1.8 |
) |
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
Other, primarily exchange rate adjustment |
|
|
1.6 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
12.4 |
|
|
|
10.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status |
|
$ |
(6.9 |
) |
|
$ |
(7.6 |
) |
|
$ |
(1.4 |
) |
|
$ |
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in the
Consolidated Balance Sheets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets |
|
$ |
0.8 |
|
|
$ |
0.7 |
|
|
$ |
|
|
|
$ |
|
|
Current liabilities |
|
|
(0.3 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
Noncurrent liabilities |
|
|
(7.4 |
) |
|
|
(8.0 |
) |
|
|
(1.4 |
) |
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(6.9 |
) |
|
$ |
(7.6 |
) |
|
$ |
(1.4 |
) |
|
$ |
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax charges (credits) recognized in accumulated other comprehensive income as of December
31, 2007 and 2006 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain) |
|
$ |
2.4 |
|
|
$ |
2.5 |
|
|
$ |
(0.6 |
) |
|
$ |
(0.2 |
) |
Prior service cost |
|
|
(0.3 |
) |
|
|
(0.3 |
) |
|
|
0.9 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.1 |
|
|
$ |
2.2 |
|
|
$ |
0.3 |
|
|
$ |
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligations for all foreign defined benefit pension plans was $16.9
million and $15.7 million at December 31, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
0.7 |
|
|
$ |
0.6 |
|
|
$ |
0.5 |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
Interest cost |
|
|
0.9 |
|
|
|
0.8 |
|
|
|
0.9 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Expected return on plan assets |
|
|
(0.8 |
) |
|
|
(0.7 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment and settlement loss |
|
|
|
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
|
0.9 |
|
|
$ |
1.1 |
|
|
$ |
1.1 |
|
|
|
0.2 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
Other Changes in Plan Assets and
Benefit Obligations Recognized in
Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
Amortization of net loss |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, primarily exchange rate
adjustment |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other
comprehensive income |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recognized in Net Periodic Benefit
Cost and Other Comprehensive
Income |
|
$ |
0.8 |
|
|
|
|
|
|
|
|
|
|
$ |
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated net loss for the defined benefit pension plans that will be amortized from
accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is
$0.1 million. The estimated prior service cost for the other defined benefit postretirement plans
that will be amortized from accumulated other comprehensive income into net periodic benefit cost
over the next fiscal year is $0.1 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Assumptions Used to
Determine Benefit Obligations at
December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.6 |
% |
|
|
5.0 |
% |
|
|
4.7 |
% |
|
|
5.5 |
% |
|
|
4.5 |
% |
|
|
4.0 |
% |
Rate of compensation increase |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Assumptions Used to
Determine Net Periodic Benefit Cost for
Years Ended December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.0 |
% |
|
|
4.7 |
% |
|
|
5.3 |
% |
|
|
4.5 |
% |
|
|
4.0 |
% |
|
|
4.5 |
% |
Expected long-term return on plan assets |
|
|
7.0 |
% |
|
|
7.4 |
% |
|
|
7.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.1 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
Assumed Health Care Cost Trend Rates
The assumed health care cost trend rate at December 31, 2007 and 2006 was 4%.
A one percentage point change in the assumed health-care cost trend rate would have an impact
of not more than $0.1 million on net periodic benefit cost and $0.3 million on benefit obligations.
Plan Assets
The asset allocation for the Canadian pension plan at the end of 2007 and 2006 and the target
allocation for 2008 is 60% equity securities, 35% fixed income, and 5% other. The asset allocation
for the Mexican pension plan at the end of 2007 and 2006 and the target allocation for 2008 is 100%
fixed income. The European plans are generally unfunded.
72
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are
expected to be made:
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
Other |
|
|
|
Benefits |
|
|
Benefits |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
1.1 |
|
|
$ |
|
|
2009 |
|
|
1.0 |
|
|
|
|
|
2010 |
|
|
1.0 |
|
|
|
|
|
2011 |
|
|
1.5 |
|
|
|
|
|
2012 |
|
|
1.3 |
|
|
|
|
|
Years 2013 2017 |
|
|
8.5 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
$ |
14.4 |
|
|
$ |
0.3 |
|
|
|
|
|
|
|
|
14. Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
Unrealized translation adjustments |
|
$ |
68.7 |
|
|
$ |
43.4 |
|
Pension and other postretirement plans |
|
|
(19.5 |
) |
|
|
(16.8 |
) |
Accumulated net gain on cash flow hedges |
|
|
0.7 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
49.9 |
|
|
$ |
27.3 |
|
|
|
|
|
|
|
|
The pension and other postretirement plans are net of deferred taxes of $11.8 million and
$10.1 million, in 2007 and 2006, respectively. The accumulated net gain on cash flow hedges is net
of deferred taxes of $0.5 million and $0.4 million in 2007 and 2006, respectively.
15. Equity Compensation Plan
The Company has an equity compensation plan (the Plan) that provides for the delivery of up
to 3.6 million shares pursuant to various market and performance-based incentive awards. As of
December 31, 2007, there are 1.9 million shares available for future awards. The Companys policy
is to issue new shares to satisfy share option exercises.
Under the terms of the Plan, performance share awards were granted to executives and other key
employees during 2007, 2006 and 2005. Each grant will vest if the Company achieves specific
financial objectives at the end of a three-year performance period. Additional shares may be
awarded if objectives are exceeded, but some or all shares may be forfeited if objectives are not
met. Performance shares earned at the end of a performance period, if any, will be paid in actual
shares of Company common stock, less the number of shares equal in value to applicable withholding
taxes if the employee chooses. During the performance period, a grantee receives dividend
equivalents accrued in cash (if any), and shares are forfeited if a grantee terminates employment.
73
A summary of the performance share activity during the year ended December 31, 2007, is
presented below. The number of performance share awards shown in the table below represents the
maximum number that could be issued.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
Nonvested at January 1, 2007 |
|
|
398,527 |
|
|
$ |
28.50 |
|
Granted |
|
|
203,187 |
|
|
|
36.69 |
|
Vested |
|
|
(167,247 |
) |
|
|
28.28 |
|
Forfeited |
|
|
(34,523 |
) |
|
|
33.43 |
|
Achievement level adjustment |
|
|
(22,749 |
) |
|
|
28.28 |
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007 |
|
|
377,195 |
|
|
$ |
32.57 |
|
|
|
|
|
|
|
|
The performance share awards granted had a fair value, which approximated market value, at the
grant date of $5.0 million, $4.3 million and $4.0 million or $36.69, $28.71 and $28.28 per share in
2007, 2006 and 2005, respectively. Compensation expense related to the performance shares is
recorded over the applicable performance period and amounted to $4.8 million, $5.0 million and $2.5
million in 2007, 2006 and 2005, respectively. The related income tax benefit was $1.8 million,
$1.9 million and $0.9 million, respectively. The 2005 performance share awards vested as of
December 31, 2007 and were paid in February 2008.
As of December 31, 2007, there was $4.6 million of unrecognized compensation cost related to
nonvested performance share awards that is expected to be recognized over a period of two years.
Non-qualified and incentive stock options were granted in 2003 and 2002. No stock option has
a term exceeding 10 years from the date of grant. All stock options were granted at not less than
100% of fair market value (as defined) on the date of grant. Compensation expense related to the
stock options amounted to $0.2 million in 2005, after which they were fully expensed.
A summary of option activity under the Plan as of December 31, 2007, and changes during the
year then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
Share |
|
|
Weighted |
|
|
|
Options |
|
|
Average |
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
903,273 |
|
|
$ |
4.89 |
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
234,453 |
|
|
|
4.63 |
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
668,820 |
|
|
$ |
4.97 |
|
|
|
|
|
|
|
|
All outstanding share options are exercisable as of December 31, 2007. The weighted-average
remaining contractual life of the outstanding options is 3.6 years. As of December 31, 2007, the
aggregate intrinsic value of the outstanding and exercisable shares was $17.2 million. The total
intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005, was
$8.3 million, $5.7 million and $5.2 million, respectively.
All outstanding share options were fully vested by December 31, 2006. The total fair value of
share options vested during the years ended December 31, 2006 and 2005 was $0.5 million and $1.5
million, respectively.
74
Cash received from option exercises under the Plan for the years ended December 31, 2007, 2006
and 2005 was $1.0 million, $0.7 million and $1.1 million, respectively. The tax benefit realized
for the tax deductions from option exercises totaled $2.5 million, $1.3 million and $1.3 million
for the years ended December 31, 2007, 2006 and 2005, respectively.
Each non-employee director receives a one-time initial grant of phantom shares equal in value
to $30,000 upon election to the board of directors. Each non-employee director also receives an
annual grant of phantom shares equal in value to $25,000, beginning in the year following the
directors election to the board of directors and continuing through the tenth year of service as a
director. The Company will pay each non-employee director in cash the fair market value of all the
directors phantom shares granted prior to 2005, subject to applicable withholding taxes, upon
termination of service as a member of the board of directors. Phantom shares granted in 2005 and
thereafter will be paid out in the form of one share of Company common stock for each phantom
share, with the value of any fractional phantom shares paid in cash. Expense recognized in the
years ended December 31, 2007, 2006 and 2005 related to these phantom share grants was $0.1
million, $0.6 million and $0.0 million, respectively. Cash payments of $0.4 million were used to
settle phantom shares during 2007. No cash was used to settle any phantom shares in 2006 and 2005.
16. Business Segment Information
The Company has three reportable segments. The Sealing Products segment manufactures sealing
and PTFE products. The Engineered Products segment manufactures metal and metal polymer bearings
and filament wound products, air compressor systems and vacuum pumps, and reciprocating compressor
components. The Engine Products and Services segment manufactures and services heavy-duty,
medium-speed diesel, natural gas and dual fuel reciprocating engines. The Companys reportable
segments are managed separately based on differences in their products and services and their
end-customers. Segment profit is total segment revenue reduced by operating expenses and
restructuring and other costs identifiable with the segment. Corporate expenses include general
corporate administrative costs. Expenses not directly attributable to the segments, corporate
expenses, net interest expense, asbestos-related expenses, gains/losses or impairments related to
the sale of assets 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 the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(in millions) |
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
Sealing Products |
|
$ |
457.3 |
|
|
$ |
432.5 |
|
|
$ |
392.9 |
|
Engineered Products |
|
|
445.5 |
|
|
|
391.7 |
|
|
|
346.0 |
|
Engine Products and Services |
|
|
128.1 |
|
|
|
105.2 |
|
|
|
101.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,030.9 |
|
|
|
929.4 |
|
|
|
840.0 |
|
Intersegment sales |
|
|
(0.9 |
) |
|
|
(1.0 |
) |
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
1,030.0 |
|
|
$ |
928.4 |
|
|
$ |
838.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Profit |
|
|
|
|
|
|
|
|
|
|
|
|
Sealing Products |
|
$ |
78.0 |
|
|
$ |
76.5 |
|
|
$ |
66.1 |
|
Engineered Products |
|
|
69.4 |
|
|
|
61.5 |
|
|
|
45.4 |
|
Engine Products and Services |
|
|
15.3 |
|
|
|
4.9 |
|
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
|
Total segment profit |
|
|
162.7 |
|
|
|
142.9 |
|
|
|
117.4 |
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Corporate expenses |
|
|
(34.1 |
) |
|
|
(31.6 |
) |
|
|
(25.5 |
) |
Asbestos-related expenses |
|
|
(68.4 |
) |
|
|
(359.4 |
) |
|
|
(11.7 |
) |
Gain (loss) on sale of assets, net |
|
|
|
|
|
|
(0.6 |
) |
|
|
5.8 |
|
Interest income (expense), net |
|
|
0.2 |
|
|
|
(3.2 |
) |
|
|
(6.1 |
) |
Other income (expense), net |
|
|
(2.4 |
) |
|
|
(2.3 |
) |
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
58.0 |
|
|
$ |
(254.2 |
) |
|
$ |
92.1 |
|
|
|
|
|
|
|
|
|
|
|
No customer accounted for 10% or more of net sales in 2007, 2006 or 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(in millions) |
|
Capital Expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
Sealing Products |
|
$ |
27.4 |
|
|
$ |
22.3 |
|
|
$ |
12.7 |
|
Engineered Products |
|
|
16.8 |
|
|
|
14.5 |
|
|
|
14.9 |
|
Engine Products and Services |
|
|
2.2 |
|
|
|
4.4 |
|
|
|
2.8 |
|
Corporate |
|
|
0.4 |
|
|
|
0.1 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
46.8 |
|
|
$ |
41.3 |
|
|
$ |
32.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Sealing Products |
|
$ |
14.8 |
|
|
$ |
13.5 |
|
|
$ |
11.3 |
|
Engineered Products |
|
|
20.6 |
|
|
|
17.2 |
|
|
|
15.9 |
|
Engine Products and Services |
|
|
4.0 |
|
|
|
3.7 |
|
|
|
3.4 |
|
Corporate |
|
|
0.8 |
|
|
|
0.8 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
40.2 |
|
|
$ |
35.2 |
|
|
$ |
31.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Areas |
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
565.7 |
|
|
$ |
543.0 |
|
|
$ |
485.6 |
|
Europe |
|
|
277.8 |
|
|
|
222.8 |
|
|
|
212.1 |
|
Other foreign |
|
|
186.5 |
|
|
|
162.6 |
|
|
|
140.9 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,030.0 |
|
|
$ |
928.4 |
|
|
$ |
838.6 |
|
|
|
|
|
|
|
|
|
|
|
Net sales are attributed to countries based on location of the customer.
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Assets |
|
|
|
|
|
|
|
|
Sealing Products |
|
$ |
246.8 |
|
|
$ |
224.3 |
|
Engineered Products |
|
|
464.3 |
|
|
|
337.0 |
|
Engine Products and Services |
|
|
72.2 |
|
|
|
76.0 |
|
Corporate |
|
|
687.0 |
|
|
|
769.3 |
|
|
|
|
|
|
|
|
|
|
$ |
1,470.3 |
|
|
$ |
1,406.6 |
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Long-Lived Assets |
|
|
|
|
|
|
|
|
United States |
|
$ |
231.6 |
|
|
$ |
225.5 |
|
Germany |
|
|
74.5 |
|
|
|
63.9 |
|
France |
|
|
71.2 |
|
|
|
61.9 |
|
United Kingdom |
|
|
67.4 |
|
|
|
0.2 |
|
Other foreign |
|
|
66.1 |
|
|
|
46.5 |
|
|
|
|
|
|
|
|
Total |
|
$ |
510.8 |
|
|
$ |
398.0 |
|
|
|
|
|
|
|
|
Corporate assets include all of the Companys cash and cash equivalents, asbestos insurance
receivables, restricted cash and noncurrent deferred income taxes. Long-lived assets consist of
property, plant and equipment, goodwill and other intangible assets.
17. Commitments and Contingencies
General
Various claims, lawsuits and administrative proceedings, all arising in the ordinary course of
business with respect to commercial, product liability, asbestos and environmental matters, are
pending or threatened against the Company or its subsidiaries and seek monetary damages and/or
other remedies. The Company believes that any liability that may finally be determined with
respect to commercial and non-asbestos product liability claims should not have a material effect
on the Companys consolidated financial condition or results of operations. From time to time, the
Company and its subsidiaries are also involved as plaintiffs in legal proceedings involving
contract, patent protection, environmental, insurance and other matters.
Environmental
The Companys facilities and operations are subject to federal, state and local environmental
and occupational health and safety requirements of the U.S. and foreign countries. The Company
takes a proactive approach in its efforts to comply with all environmental, health and safety laws
as they relate to its manufacturing operations and in proposing and implementing any remedial plans
that may be necessary. The Company also regularly conducts comprehensive environmental, health and
safety audits at its facilities to maintain compliance and improve operational efficiency.
Although the Company believes past operations were in substantial compliance with the then
applicable regulations, the Company or one of its subsidiaries has been named as a potentially
responsible party or is otherwise involved at 21 sites where the costs to it are expected to exceed
$100,000. Investigations have been completed for 15 sites and are in progress at the other six
sites. The majority of these sites relate to remediation projects at former operating facilities
that were sold or closed and primarily deal with soil and groundwater contamination.
The Companys policy is to accrue environmental investigation and remediation costs when it is
probable that a liability has been incurred and the amount can be reasonably estimated. The
measurement of the liability is based on an evaluation of currently available facts with respect to
each individual situation and takes into consideration factors such as existing technology,
presently enacted laws and regulations and prior experience in remediation of contaminated sites.
Liabilities are established for all sites based on the factors discussed above. As assessments and
remediation progress at individual sites, these liabilities are reviewed periodically and adjusted
to reflect additional technical data and legal
77
information. As of December 31, 2007 and 2006, EnPro had accrued liabilities of $27.7 million
and $33.2 million, respectively, for estimated future expenditures relating to environmental
contingencies. The amounts recorded in the Consolidated Financial Statements have been recorded on
an undiscounted basis.
The Company believes that its reserves for environmental contingencies are adequate based on
currently available information. Actual costs to be incurred for identified situations in future
periods may vary from estimates because of the inherent uncertainties in evaluating environmental
exposures due to unknown conditions, changing government regulations and legal standards regarding
liability. Subject to the imprecision in estimating future environmental costs, the Company
believes that maintaining compliance with current environmental laws and government regulations
will not require significant capital expenditures or have a material adverse effect on its
financial condition, but could be material to its results of operations or cash flows in a given
period.
Colt Firearms and Central Moloney
The Company has contingent liabilities related to divested businesses for which certain of its
subsidiaries retained liability or are obligated under indemnity agreements. These contingent
liabilities include, but are not limited to, potential product liability and associated claims
related to the Companys former Colt Firearms subsidiary for firearms manufactured prior to its
divestiture in 1990 and the Companys former Central Moloney subsidiary for electrical transformers
manufactured prior to its divestiture in 1994. No product liability claims are currently pending
against the Company related to Colt Firearms or Central Moloney. The Company also has ongoing
obligations, which are included in retained liabilities of previously owned businesses in the
Consolidated Balance Sheets, with regard to workers compensation, retiree medical and other
retiree benefit matters that relate to the Companys periods of ownership of these operations.
Crucible Materials Corporation
Crucible Materials Corporation (Crucible), which is engaged primarily in the manufacture and
distribution of specialty metal products, was a wholly owned subsidiary of Coltec until 1985 when a
majority of the outstanding shares were sold. Coltec sold its remaining minority interest in 2004.
In conjunction with the closure of a Crucible plant in the early 1980s, Coltec was required to
fund two trusts for retiree medical benefits for union employees at the plant. The first trust
(the Benefits Trust) pays for these retiree medical benefits on an ongoing basis. Coltec has no
ownership interest in the Benefits Trust, and thus the assets and liabilities of this trust are not
included in the Companys Consolidated Balance Sheets. Under the terms of the Benefits Trust
agreement, the trustees retained an actuary to assess the adequacy of the assets in the Benefits
Trust in 1995, another actuarial report was completed in 2005, and a third report will be required
in 2015. The actuarial reports in 1995 and 2005 determined that there were adequate assets to fund
the payment of future benefits. If it is determined in 2015 that the trust assets are not adequate
to fund the payment of future medical benefits, Coltec will be required to contribute additional
amounts to the Benefits Trust. In the event there are ever excess assets in the Benefits Trust,
those excess assets will not revert to Coltec.
Because of the possibility that Coltec could be required to make additional contributions to
the Benefits Trust to cover potential shortfalls, Coltec was required to establish a second trust
(the Back-Up Trust). The trust assets and a corresponding liability of the Back-Up Trust are
reflected in the Companys Consolidated Balance Sheets in other non-current assets and in retained
liabilities of previously owned businesses, respectively, and amounted to $21.1 million each at
December 31, 2007. As noted above, based on the valuation completed in early 2005, the actuary
determined that there were adequate assets in the Benefits Trust to fund the estimated payments by
the trust until the next valuation
78
date. Until such time as a payment is required or the remaining excess trust assets revert to
the Company, the trust assets and liabilities will be kept equal to each other on the Companys
Consolidated Balance Sheets.
The Company also has ongoing obligations, which are included in retained liabilities of
previously owned businesses in the Consolidated Balance Sheets, with regard to workers
compensation, retiree medical and other retiree benefit matters, in addition to those mentioned
previously, that relate to the Companys period of ownership of this operation.
Debt and Capital Lease Guarantees
As of December 31, 2007, the Company had contingent liabilities for potential payments on
guarantees of certain debt and lease obligations totaling $9.9 million. These guarantees arose
from the divestitures of Crucible, Central Moloney and Haber Tool, and expire at various dates
through 2010. There is no liability for these guarantees reflected in the Companys Consolidated
Balance Sheets. In the event that the other parties do not fulfill their obligations under the
debt or lease agreements, the Company could be responsible for these obligations.
Other Contingent Liability Matters
The Company provides warranties on many of its products. The specific terms and conditions of
these warranties vary depending on the product and the market in which the product is sold. The
Company records a liability based upon estimates of the costs that may be incurred under its
warranties after a review of historical warranty experience and information about specific warranty
claims. Adjustments are made to the liability as claims data and historical experience warrant.
Changes in the carrying amount of the product warranty liability for the years ended December
31, 2007 and 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Balance at beginning of year |
|
$ |
4.0 |
|
|
$ |
3.6 |
|
Charges to expense |
|
|
2.7 |
|
|
|
4.4 |
|
Charges to the accrual |
|
|
(3.1 |
) |
|
|
(4.0 |
) |
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
3.6 |
|
|
$ |
4.0 |
|
|
|
|
|
|
|
|
Asbestos
History. Certain of the Companys subsidiaries, primarily Garlock Sealing
Technologies LLC (Garlock) and The Anchor Packing Company (Anchor), are among a large number of
defendants in actions filed in various states by plaintiffs alleging injury or death as a result of
exposure to asbestos fibers. Among the products at issue in these actions are industrial sealing
products, including gaskets and packing products. The damages claimed vary from action to action,
and in some cases plaintiffs seek both compensatory and punitive damages. To date, neither Garlock
nor Anchor has been required to pay any punitive damage awards, although there can be no assurance
that they will not be required to do so in the future. Liability for compensatory damages has
historically been allocated among responsible defendants. Since the first asbestos-related
lawsuits were filed against Garlock in 1975, Garlock and Anchor have processed approximately
900,000 asbestos claims to conclusion (including judgments, settlements and dismissals) and,
together with their insurers, have paid approximately $1.3 billion in settlements and judgments and
over $400 million in fees and expenses.
79
Claims Mix. Of those claims resolved, approximately 3% have been claims of plaintiffs
alleging the disease mesothelioma, approximately 6% have been claims of plaintiffs with lung or
other cancers, and more than 90% have been claims of plaintiffs alleging asbestosis, pleural
plaques or other non-malignant impairment of the respiratory system. The mix of cases filed in
2007 contains approximately 26% mesothelioma claims and 19% lung or other cancer claims. In the
remaining 55% of the new cases, either the plaintiffs alleged non-malignant impairment or the
disease or condition is not alleged and remains unknown to us. Of the 105,700 open cases at
December 31, 2007, the Company is aware of approximately 9,500 (9.0%) that involve claimants
alleging mesothelioma, lung cancer or some other cancer.
New Filings. The number of new actions filed against the Companys subsidiaries in
2007 (5,200) was lower than the number filed in 2006 (7,700) and 2005 (15,300). The number filed
against our subsidiaries in each of those three years was much lower than the number filed in the
peak filing year, 2003, when 44,700 new claims were filed. Possible factors in the decline
include, but are not limited to, tort reform in some high profile states, especially Mississippi,
Texas and Ohio; tort reform in Florida, Georgia, South Carolina, Kansas and Tennessee; actions
taken and rulings by some judges and court administrators that have had the effect of limiting
access to their courts for claimants without sufficient ties to the jurisdiction or claimants with
no discernible disease; acceleration of claims into past years; and declining incidence of
asbestos-related disease. The decline in new filings has been principally in non-malignant claims;
however, new filings of claims alleging mesothelioma, lung and other cancers declined in 2006.
Because the nature of the diseases or conditions alleged remains unknown in a number of the claims
filed, it is uncertain whether and to what extent that trend continued in 2007.
Product Defenses. The asbestos in products formerly sold by Garlock and Anchor was
encapsulated, which means the asbestos fibers were incorporated into the products during the
manufacturing process and sealed in a binder. The products were also nonfriable, which means they
could not be crumbled by hand pressure. The U.S. Occupational Safety and Health Administration,
which began generally requiring warnings on asbestos-containing products in 1972, has never
required that a warning be placed on products such as Garlocks gaskets. Even though no warning
label was required, Garlock included one on all of its asbestos-containing products beginning in
1978. Further, gaskets such as those previously manufactured and sold by Garlock are one of the
few asbestos-containing products still permitted to be manufactured under regulations of the U.S.
Environmental Protection Agency. Nevertheless, Garlock discontinued all manufacture and
distribution of asbestos-containing products in the U.S. during 2000 and worldwide in mid-2001.
From the mid-1980s until 2000, U.S. sales of asbestos-containing industrial sealing products were
not a material part of Garlocks sales and were predominantly to sophisticated purchasers such as
the U.S. Navy and large petrochemical facilities.
Garlocks product defenses have enabled it to be successful at trial, winning defense verdicts
in one of the two cases tried to verdict in 2007, and in 12 of 25 cases tried to verdict in the
years 2004 through 2007. In the successful jury trials, the juries determined that either
Garlocks products were not defective, that Garlock was not negligent, or that the claimant was not
exposed to Garlocks products.
Recent Trial Results. In 2007, Garlock began nine trials involving twelve plaintiffs.
A Massachusetts jury returned a defense verdict in favor of Garlock. In a Kentucky case, the jury
awarded the plaintiff $145,000 against Garlock. Garlock plans to appeal this verdict. Four
lawsuits in Pennsylvania settled during trial before the juries had reached a verdict. Garlock
also settled cases during trial in Louisiana, Maryland and Washington.
In 2006, Garlock began ten trials involving eleven plaintiffs. Garlock received jury verdicts
in its favor in Oakland, California; Easton, Pennsylvania; and Louisville, Kentucky. In
Pennsylvania, three other lawsuits involving four plaintiffs settled during trial before the juries
reached verdict. Garlock also
80
settled cases in Massachusetts, California and Texas during trial. In a retrial of a Kentucky
case, the jury awarded the plaintiff $900,000 against Garlock. The award was significantly less
than the $1.75 million award against Garlock in the previous trial, which Garlock successfully
appealed. Garlock has also appealed the new verdict. In addition, Garlock obtained dismissals in
two cases in Philadelphia after the juries were selected but before the trials began because there
was insufficient evidence of exposure to Garlock products.
During 2005, Garlock began thirteen trials. Six of these lawsuits settled during the trials.
In a mesothelioma case in Texas, the jury returned a defense verdict in Garlocks favor just after
settlement was reached. An Illinois jury and a Washington jury also each returned defense verdicts
for Garlock. A Los Angeles jury returned an award to a living mesothelioma claimant, but Garlock
was able to settle the claim as part of a large group settlement prior to the entry of judgment. A
Baltimore jury returned a verdict of $10.4 million against Garlock and two other defendants in a
mesothelioma case. Garlocks one-third share was approximately $3.5 million. A Dallas jury
returned a verdict of $260,000 in another mesothelioma case. Garlocks share was approximately
$10,000, 4% of the total verdict. An Illinois jury in an asbestosis case returned a verdict
against Garlock of $225,000, all of which was offset by settlements with other defendants. The
final 2005 trial was the Kentucky case described in the previous paragraph, which resulted in a
verdict that was later overturned and subsequently retried in 2006.
Appeals. Garlock has historically enjoyed success in a majority of its appeals. The
Company believes that Garlock will continue to be successful in the appellate process, although
there can be no assurance of success in any particular pending or future appeal. In March 2006, a
three-judge panel of the Ohio Court of Appeals, in a unanimous decision, overturned a $6.4 million
verdict that was entered against Garlock in 2003, granting a new trial. The case subsequently
settled. On the other hand, the Maryland Court of Appeals denied Garlocks appeal from the 2005
Baltimore verdict described above, and Garlock paid that verdict, with post-judgment interest, in
the fourth quarter of 2006. In a separate Baltimore case in the fourth quarter of 2006, the
Maryland Court of Special Appeals denied Garlocks appeal from another 2005 verdict. The
subsequent appeal of that decision was also denied and Garlock paid that verdict in the second
quarter of 2007. In June 2007, the New York Court of Appeals, in a unanimous decision, overturned
an $800,000 verdict that was entered against Garlock in 2004, granting a new trial. At December
31, 2007, three Garlock appeals were pending from adverse verdicts totaling $1.4 million, down from
$6.8 million at December 31, 2006, and more than $41 million at December 31, 2005.
In some cases, appeals require the provision of security in the form of appeal bonds,
potentially in amounts greater than the verdicts. The Company is required to provide cash
collateral to secure the full amount of the bonds, which can restrict the use of a significant
amount of the Companys cash for the periods of such appeals. At December 31, 2007, the Company
had $1.1 million of cash collateral relating to appeal bonds recorded as restricted cash on the
Consolidated Balance Sheet. This amount was reduced from $1.3 million at December 31, 2006 and
$41.1 million at December 31, 2005.
Settlements. Garlock settles and disposes of actions on a regular basis. Garlocks
historical settlement strategy was to settle only cases in advanced stages of litigation. In 1999
and 2000, however, Garlock employed a more aggressive settlement strategy. The purpose of this
strategy was to achieve a permanent reduction in the number of overall asbestos claims through the
settlement of a large number of claims, including some early-stage claims and some claims not yet
filed as lawsuits. Due to this short-term aggressive settlement strategy and a significant overall
increase in claims filings, the settlement amounts paid in those years and several subsequent years
were greater than the amounts paid in any year prior to 1999. In 2001, Garlock resumed its
historical settlement strategy and focused on reducing settlement commitments to match insurance
recoveries. As a result, Garlock reduced new settlement commitments from $180 million in 2000 to
$94 million in 2001 and $86 million in 2002. New settlement
commitments totaled $84 million in 2006 and $76 million in
2007.
81
Approximately
$15 million of the 2006 amount and approximately $5 million
of the 2007 amount were committed in settlements in 2006 to pay
verdicts that had been rendered in the years 2003 2005.
Settlements are made without any admission of liability. Settlement amounts vary depending
upon a number of factors, including the jurisdiction where the action was brought, the nature and
extent of the disease alleged and the associated medical evidence, the age and occupation of the
plaintiff, the presence or absence of other possible causes of the plaintiffs alleged illness,
alternative sources of payment available to the plaintiff, the availability of legal defenses, and
whether the action is an individual one or part of a group.
Before any payment on a settled claim is made, the claimant is required to submit a medical
report acceptable to Garlock substantiating the asbestos-related illness and meeting specific
criteria of disability. In addition, sworn testimony or other evidence that the claimant worked
with or around Garlock asbestos-containing products is required. The claimant is also required to
sign a full and unconditional release of Garlock, its subsidiaries, parent, officers, directors,
affiliates and related parties from any liability for asbestos-related injuries or claims.
Status of Anchor. Anchor is an inactive and insolvent indirect subsidiary of Coltec.
There is no remaining insurance coverage available to Anchor. Anchor has no remaining assets and
has not committed to settle any actions since 1998. As cases reach the trial stage, Anchor is
typically dismissed without payment.
Insurance Coverage. At December 31, 2007, Garlock had available $381.5 million of
solvent insurance and trust coverage that the Company believes will be available to cover future
asbestos claims and certain expense payments. In addition, at December 31, 2007, Garlock
classified $56 million of otherwise available insurance as insolvent. The Company believes that
Garlock will recover some of the insolvent insurance over time. In fact, Garlock collected
approximately $1 million from insolvent carriers in 2007, bringing total collections from insolvent
carriers from 2002 through 2007 to approximately $39.3 million. There can be no assurance that
Garlock will collect any of the remaining insolvent insurance.
Of the $381.5 million of collectible insurance and trust assets, the Company considers $333
million (87%) to be of high quality because (a) the insurance policies are written or guaranteed by
U.S.-based carriers whose credit rating by S&P is investment grade (BBB) or better, and whose AM
Best rating is excellent (A-) or better, or (b) in the form of cash or liquid investments held in
insurance trusts resulting from commutation agreements. The Company considers $48 million (13%) to
be of moderate quality because the insurance policies are written with (a) other solvent U.S.
carriers who are unrated or below investment grade ($42 million) or (b) with various London market
carriers ($6 million). Of the $381.5 million, $252.0 million is allocated to claims that have been
paid by Garlock and submitted to its insurance companies for reimbursement and the remainder is
allocated to pending and estimated future claims as described later in this section.
Arrangements with Garlocks insurance carriers limit the amount of insurance proceeds that
Garlock is entitled to receive in any one year. Amounts paid by Garlock in excess of insurance
recoveries that would be recoverable from insurance if there was no limit may be collected from the
insurance companies in subsequent years, so long as insurance is available, subject to the limits
in subsequent years.
During the fourth quarter of 2006, the Company reached an agreement with a significant group
of related U.S. insurers. These insurers had withheld payments pending resolution of a dispute.
The agreement provides for the payment of the full amount of the insurance policies ($194 million)
in various annual payments to be made from 2007 through 2018. Under the agreement, Garlock
received $22 million in 2007.
82
In May 2006, the Company reached agreement with a U.S. insurer that resolved two lawsuits and
an arbitration proceeding. Pursuant to the settlement, Garlock received $3 million in 2007 and $4
million in 2006 and will receive another $14 million in the future.
During the first quarter of 2005, the Company reached agreement with two of Garlocks U.S.
insurers. The insurers agreed to pay Garlock a total of $21 million in three equal bi-annual
payments of $7 million. The first and second payments were received in May 2005 and April 2007,
respectively; the third payment is due in May 2009. The payments are guaranteed by the parent
company of the settling insurers.
In the second quarter of 2004, the Company reached agreement with Equitas, the London-based
entity responsible for the pre-1993 Lloyds of London policies in the Companys insurance block,
concerning settlement of its exposure to the Companys subsidiaries asbestos claims. As a result
of the settlement, $88 million was placed in an independent trust. In the fourth quarter of 2004,
the Company reached agreement with a group of London market carriers (other than Equitas) and one
of its U.S. carriers that has some policies reinsured through the London market. As a result of
the settlement, $55.5 million was placed in an independent trust. At December 31, 2007, the market
value of the funds remaining in the two trusts was $43.6 million, which was included in the $382
million of insurance and trust coverage available to pay future asbestos-related claims and
expenses.
Insurance coverage for asbestos claims is not available to cover exposures initially occurring
on and after July 1, 1984. Although Garlock and Anchor continue to be named as defendants in new
actions, only a few allege initial exposure after July 1, 1984. To date, no payments have been
made with respect to these few claims, pursuant to a settlement or otherwise. Garlock and Anchor
believe that they have substantial defenses to these claims and therefore automatically reject them
for settlement. However, there can be no assurance that any or all of these defenses will be
successful in the future.
The Companys Liability Estimate. Prior to mid-2004, the Company maintained that its
subsidiaries liability for unasserted claims was not reasonably estimable. The Company estimated
and recorded liabilities only for pending claims in advanced stages of processing, for which it
believed it had a basis for making a reasonable estimate. The Company disclosed the significance
of the total potential liability for unasserted claims in considerable detail. By 2004, however,
most asbestos defendants who disclose their liabilities were recording estimates of their
liabilities for pending and unasserted claims. In view of the change in practice by other
defendants, during 2004 the Company authorized counsel to retain a recognized expert to assist in
estimating the Companys subsidiaries liability for pending and future asbestos claims. After
interviewing and qualifying several recognized experts with the Company, counsel selected Bates
White.
Bates Whites first report, dated February 17, 2005, provided an estimate of the liability as
of December 31, 2004 for the following ten years, which represented a time horizon within which
Bates White believed such liability was both probable and estimable within a range of values.
Bates White opined that each value within the range of $227 million to $382 million was an equally
likely estimate of the liability. The Company adopted the Bates White estimate and, accordingly,
recorded an additional liability for pending and unasserted claims as of December 31, 2004 to
increase the Companys liability to an amount equal to the low end of the estimated range ($227
million). The recording of such increased asbestos liability resulted in the Company also
recording an increase to its insurance receivable.
Bates White has updated its estimate every quarter since the end of 2004. The estimated range
of potential liabilities provided by Bates White at December 31, 2007 was $431 million to $626
million. According to Bates White, increases have been attributable primarily to (1) an increase
in settlement values of mesothelioma claims, (2) an increase in claims filings and values in some
jurisdictions, most
83
notably California, and (3) the delay in, and uncertain impact of, the funding and
implementation of trusts formed under Section 524(g) of the United States Bankruptcy Code to pay
asbestos claims against numerous defendants in Chapter 11 reorganization cases. Because the 524(g)
trusts are estimated to have more than $30 billion that will be available for the payment of
asbestos claims, they could have a significant impact on the Companys future settlement payments
and could therefore significantly affect its liability.
Each quarter until the fourth quarter of 2006, the Company adopted the Bates White estimate
and adjusted the liability to equal the low end of the then-current range. Until the second
quarter of 2006, the additional liability was recorded with a corresponding increase in the
Companys insurance receivable, and thus did not affect net income. During the second quarter of
2006, however, the Companys insurance was fully allocated to past, present and future claims, and
therefore subsequent changes to the Bates White estimate were recorded as charges to income.
The Company has independently developed internal estimates for asbestos-related liabilities.
The Company has used those estimates for a variety of purposes, including guidance for settlement
negotiations and trial strategy, in its strategic planning, budgeting and cash flow planning
processes, and in setting targets for annual and long-term incentive compensation. Until the end
of 2006, the Company did not have sufficient history comparing claims payments to its internal
estimates to allow it to identify a most likely point within the Bates White range. Therefore,
prior to the fourth quarter of 2006, the Company had adopted the low-end of the range provided by
Bates White. However, the Companys internal estimate has been within the Bates White range of
equally likely estimates and has proven to be a more precise predictor of the actual amounts spent
on settlements and verdicts than the low end of the range. As a result, while the low end of the
Bates White range still provides a reasonable lower boundary of possible outcomes, Bates White and
management believe that the Companys internal estimate for the next ten years represents the most
likely point within the range. Accordingly, the Company has adjusted the recorded liability from
the low end of the Bates White estimate to its point estimate in the fourth quarter of 2006 and has
adjusted the liability in each subsequent quarter consistent with managements internal estimates.
During the fourth quarter of 2006, the Company recorded a pre-tax charge of $305.1 million to
reflect its estimate.
The Company focuses on future cash flows to prepare its estimate. It makes assumptions about
declining future asbestos spending based on (1) past trends, (2) publicly available epidemiological
data, (3) current agreements with plaintiff firms and its judgment about the current and future
litigation environment, (4) the availability to claimants of other payment sources, both
co-defendants and the 524(g) trusts, and (5) the input and insight provided to the Company by Bates
White. The Company adjusts its estimate when current cash flow results and long-term trends
suggest that its targets cannot be met. As a result, the Company has a process that it believes
produces the best estimate of the future liability for the ten-year time period within the Bates
White range.
The Company currently estimates that the liability of its subsidiaries for the indemnity cost
of resolving asbestos claims for the next ten years will be $519.0 million. The estimated
liability of $519.0 million is before any tax benefit and is not discounted to present value, and
it does not include fees and expenses, which are recorded as incurred. The recorded liability will
continue to be impacted by its actual claims and settlement experience and any change in the legal
environment that could cause a significant increase or decrease in the long-term expectations of
management and Bates White. The Company expects the recorded liability to fluctuate, perhaps
significantly. Any significant change in the estimated liability could have a material effect on
the Companys consolidated financial position and results of operations.
Although the Company believes that its estimate is the best estimate within the Bates White
range of reasonable and probable estimates of Garlocks future obligation, it notes that Bates
White also
84
indicated a broader range of potential estimates from $199 million to $733 million. The
Company cautions that points within that broader range remain possible outcomes. Also, while the
Company agrees with its expert that beyond two to four years for Garlocks economically-driven
non-malignant claims and beyond ten years for Garlocks cancer claims and medically-driven
non-malignant claims, there are reasonable scenarios in which the [asbestos] expenditure is de
minimus, it cautions that the process of estimating future liabilities is highly uncertain.
Adjusting the Companys liability to the best estimate within the range does not change that fact.
In the words of the Bates White report, the reliability of estimates of future probable
expenditures of Garlock for asbestos-related personal injury claims declines significantly for each
year further into the future. Scenarios continue to exist that could result in a total future
asbestos liability for Garlock in excess of $1 billion.
As previously mentioned, the liability estimate does not include legal fees and expenses,
which add considerably to the costs each year. Over the last two years, these expenses have
averaged approximately $7 million per quarter. In addition to these legal fees and expenses, the
Company expects to continue to record charges to income in future quarters for:
|
|
|
Increases, if any, in the Companys estimate of Garlocks potential liability, plus |
|
|
|
|
Increases, if any, that result from additional quarters added to maintain the
ten-year estimation period (increases of this type have averaged approximately $7 8
million per quarter for the last two years), plus |
|
|
|
|
Amounts, if any, of solvent insurance lost or commuted, offset by insolvent
recoveries and earnings from insurance settlement trusts. |
In 2007, the Company recorded a pre-tax charge to income of $68.4 million to reflect net cash
outlays of $25.8 million for legal fees and expenses incurred during the year, and a $42.6 million
non-cash charge. The non-cash charge included $23.2 million related to the addition of periods to
maintain a ten-year liability estimate and $19.4 million to adjust the liability based on revisions
to managements estimate. A portion of the non-cash charge ($19.4 million) resulted from
adjustments made to managements estimation model in the fourth quarter of 2007. The Company made
this adjustment based on its review of negotiations and payment trends and its belief that it is
more likely that, in the future, a higher percentage of settlement commitments made in any year
will also be paid in that same year.
Quantitative Claims and Insurance Information. The Companys liability as of December
31, 2007 was $524.4 million (the Companys estimate of the liability described above of $519.0
million plus $5.4 million of accrued legal and other fees already incurred but not yet paid). The
total liability as of December 31, 2007, included $86.9 million classified as a current liability
and $437.5 million classified as a noncurrent liability. The recorded amounts do not include legal
fees and expenses to be incurred in the future.
As of December 31, 2007, the Company had remaining solvent insurance and trust coverage of
$381.5 million which is reflected on its balance sheet as a receivable ($70.0 million classified in
current assets and $311.5 classified in non-current assets) and which it believes will be available
for the payment of asbestos-related claims. Included in the receivable is $252.0 million in
insured claims and expenses that our subsidiaries have paid out in excess of amounts recovered from
insurance. These amounts are recoverable under its insurance policies and have been billed to the
insurance carriers. The remaining $129.5 million will be available for pending and future claims.
The table below quantitatively depicts the number of pending cases, asbestos-related cash
flows, the amount that the Company expects Garlock to recover from insurance related to this
liability, and an analysis of the liability.
85
|
|
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|
|
|
|
|
|
|
|
|
|
|
As of and for the |
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Pending Cases (1) |
|
|
|
|
|
|
|
|
|
|
|
|
New actions filed during period |
|
|
5,200 |
|
|
|
7,700 |
|
|
|
15,300 |
|
Open actions at period-end |
|
|
105,700 |
|
|
|
106,500 |
|
|
|
120,500 |
|
Cash Flow (dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Payments (2) |
|
$ |
(115.1 |
) |
|
$ |
(125.7 |
) |
|
$ |
(129.0 |
) |
Insurance recoveries (3) |
|
|
90.2 |
|
|
|
87.7 |
|
|
|
107.2 |
|
|
|
|
|
|
|
|
|
|
|
Net cash flow |
|
$ |
(24.9 |
) |
|
$ |
(38.0 |
) |
|
$ |
(21.8 |
) |
|
|
|
|
|
|
|
|
|
|
Solvent Insurance and Trust Assets (dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance receivable for previously paid claims (4) |
|
$ |
252.0 |
|
|
$ |
251.2 |
|
|
$ |
231.6 |
|
Insurance available for pending and future claims |
|
|
129.5 |
|
|
|
216.9 |
|
|
|
338.5 |
|
|
|
|
|
|
|
|
|
|
|
Remaining solvent insurance and trust assets |
|
$ |
381.5 |
|
|
$ |
468.1 |
|
|
$ |
570.1 |
|
|
|
|
|
|
|
|
|
|
|
Liability Analysis (dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Liability for pending and future claims (5)(6) |
|
$ |
524.4 |
|
|
$ |
567.9 |
|
|
$ |
271.3 |
|
Insurance available for pending and future claims |
|
|
129.5 |
|
|
|
216.9 |
|
|
|
338.5 |
|
|
|
|
|
|
|
|
|
|
|
Liability in excess of insurance coverage (6) |
|
|
394.9 |
|
|
|
351.0 |
|
|
|
|
|
Insurance receivable for previously paid claims |
|
|
252.0 |
|
|
|
251.2 |
|
|
|
231.6 |
|
|
|
|
|
|
|
|
|
|
|
Liability in excess of anticipated insurance collections (6) |
|
$ |
142.9 |
|
|
$ |
99.8 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes actions actually filed with a court of competent jurisdiction. Each action in which
both Garlock and one or more other of our subsidiaries is named as a defendant is shown as a
single action. Multiple actions filed on behalf of the same plaintiff in multiple
jurisdictions are also counted as one action. Claims not filed as actions in court but that
are submitted and paid as part of previous settlements (approximately 900 in 2007, 700 in 2006
and 4,400 in 2005 are not included. |
|
(2) |
|
Includes all payments for judgments, settlements, fees and expenses made in the period. |
|
(3) |
|
Includes all recoveries from insurance received in the period. |
|
(4) |
|
Includes previous payments for which Garlock is entitled to receive corresponding insurance
recoveries but has not received payment, in large part due to annual limits imposed under
insurance arrangements. |
|
(5) |
|
For 2007 and 2006, the liability represents managements best estimate of the future payments
for the following ten-year period. For 2005, the liability represents the low end of a range
of equally likely future payments for the following ten-year period. Amounts shown include
$5.4 million, $6.9 million and $10.7 million at December 31, 2007, 2006 and 2005,
respectively, of accrued fees and expenses for services previously rendered but unpaid. |
|
(6) |
|
Does not include fees and expenses to be incurred in the future, which are recorded as a
charge to income when incurred. |
Other Commitments
The Company has several operating leases primarily for real estate, equipment and vehicles.
Operating lease arrangements are generally utilized to secure the use of assets if the terms and
conditions of the lease or the nature of the asset makes the lease arrangement more favorable than
a purchase. Future minimum lease payments by year and in the aggregate, under noncancelable
operating leases with initial
86
or remaining noncancelable lease terms in excess of one year, consisted of the following at
December 31, 2007:
|
|
|
|
|
|
|
(in millions) |
|
2008 |
|
$ |
9.8 |
|
2009 |
|
|
8.9 |
|
2010 |
|
|
7.1 |
|
2011 |
|
|
5.5 |
|
2012 |
|
|
4.9 |
|
Thereafter |
|
|
7.7 |
|
|
|
|
|
Total minimum payments |
|
$ |
43.9 |
|
|
|
|
|
Net rent expense was $12.0 million, $10.8 million and $12.6 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
87
18. Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
(in millions, except per share data) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
247.3 |
|
|
$ |
228.3 |
|
|
$ |
254.4 |
|
|
$ |
226.7 |
|
|
$ |
252.7 |
|
|
$ |
228.6 |
|
|
$ |
275.6 |
|
|
$ |
244.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit* |
|
$ |
88.5 |
|
|
$ |
78.4 |
|
|
$ |
91.4 |
|
|
$ |
77.4 |
|
|
$ |
89.5 |
|
|
$ |
71.9 |
|
|
$ |
90.6 |
|
|
$ |
79.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary
item |
|
$ |
12.3 |
|
|
$ |
14.8 |
|
|
$ |
13.8 |
|
|
$ |
4.2 |
|
|
$ |
12.3 |
|
|
$ |
(4.3 |
) |
|
$ |
(0.7 |
) |
|
$ |
(173.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary item, net of taxes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2.5 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
12.3 |
|
|
$ |
14.8 |
|
|
$ |
13.8 |
|
|
$ |
4.2 |
|
|
$ |
12.3 |
|
|
$ |
(4.3 |
) |
|
$ |
1.8 |
|
|
$ |
(173.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
extraordinary item |
|
$ |
0.58 |
|
|
$ |
0.71 |
|
|
$ |
0.65 |
|
|
$ |
0.20 |
|
|
$ |
0.58 |
|
|
$ |
(0.20 |
) |
|
$ |
(0.04 |
) |
|
$ |
(8.28 |
) |
Extraordinary item |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.58 |
|
|
$ |
0.71 |
|
|
$ |
0.65 |
|
|
$ |
0.20 |
|
|
$ |
0.58 |
|
|
$ |
(0.20 |
) |
|
$ |
0.08 |
|
|
$ |
(8.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
extraordinary item |
|
$ |
0.56 |
|
|
$ |
0.69 |
|
|
$ |
0.61 |
|
|
$ |
0.19 |
|
|
$ |
0.54 |
|
|
$ |
(0.20 |
) |
|
$ |
(0.04 |
) |
|
$ |
(8.28 |
) |
Extraordinary item |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.56 |
|
|
$ |
0.69 |
|
|
$ |
0.61 |
|
|
$ |
0.19 |
|
|
$ |
0.54 |
|
|
$ |
(0.20 |
) |
|
$ |
0.08 |
|
|
$ |
(8.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents sales less cost of sales. |
88
SCHEDULE II
Valuation and Qualifying Accounts
For the Years Ended December 31, 2007, 2006 and 2005
(In millions)
Allowance for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
Charge |
|
Write-off of |
|
|
|
|
|
Balance, |
|
|
of Year |
|
to Expense |
|
Receivables |
|
Other (1) |
|
End of Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
$ |
2.8 |
|
|
$ |
0.8 |
|
|
$ |
(0.6 |
) |
|
$ |
0.6 |
|
|
$ |
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
$ |
2.8 |
|
|
$ |
1.2 |
|
|
$ |
(1.4 |
) |
|
$ |
0.2 |
|
|
$ |
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
$ |
3.6 |
|
|
$ |
0.7 |
|
|
$ |
(1.4 |
) |
|
$ |
(0.1 |
) |
|
$ |
2.8 |
|
|
|
|
(1) |
|
Consists primarily of acquisitions and the effect of changes in currency rates. |
89