EnPro Industries Reports Results for the Third Quarter of 2018

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

Key Developments

• All segments experienced strong organic sales and profit growth in the third quarter, with total company sales and segment profit increasing by 9.4% and 19.6%, respectively, compared to pro forma sales and segment profit in the third quarter of last year.
• Capital allocation highlights:
  • Completed the $50 million share repurchase program authorized by the Board of Directors in October 2017. Through the duration of the program, a total of 665,984 shares were repurchased.
  • Paid a $0.24 per share quarterly dividend with a total value of $5 million.
  • Collected $4.6 million of asbestos-related insurance recoveries in the third quarter, bringing the total collections during the first nine months of the year to $16.8 million.
• Revised guidance for 2018 Adjusted EBITDA from a range of $214 million to $220 million to a range of $217 million to $220 million, reflecting confidence that strong end-market demand will continue through the end of the year.

“I am pleased to announce that we had a very good quarter across all of our segments,” said Steve Macadam, President and CEO. “We generated year-over-year sales and segment profit growth, driven by continued favorable demand in many of the markets that we serve. Sales to the semiconductor, aerospace, food & pharma, heavy-duty tractor and trailer builds, general industrial, metals & mining, and oil & gas markets grew year-over-year. We also successfully addressed several discrete issues that negatively impacted our profitability in the first half of the year, including winding-down our industrial gas turbine facility and addressing two warranty issues in our heavy-duty truck brake products group. As we have discussed throughout the year, we have expected Power Systems’ performance to be heavily weighted towards the second half of the year. We experienced the anticipated improvement in the third quarter, and with a record level backlog, Power Systems is poised to deliver strong results in the fourth quarter. Favorable demand conditions in Sealing Products and Engineered Products give us further confidence that we will have a positive finish to the year.”

“Given current macroeconomic forecasts, a robust backlog in Power Systems, and positive demand patterns in many of our markets, we believe that our sales momentum will continue through the end of the year, resulting in full-year sales growth of between 8% and 9% over 2017 pro forma sales, and we’ve tightened our full-year adjusted EBITDA outlook to between $217 million and $220 million. This narrower range reflects our confidence in Power Systems’ ability to execute on its backlog and in current order trends in our other businesses,” said Mr. Macadam.

Full-year guidance excludes impacts from future acquisitions and acquisition-related costs, restructuring costs, the impact of foreign exchange rate changes subsequent to quarter-end, and any litigation or environmental charges.

Consolidated results for the periods after July 31, 2017 reflect the reconsolidation of GST, its subsidiaries and OldCo as a result of the completion of the Asbestos Claims Resolution Process. Given that consolidated results in the third quarter of 2017 did not reflect all of EnPro’s entities, investors may find comparisons of consolidated results for the third quarter of 2018 to pro forma results for the prior-year period to be most illustrative of the year-over-year performance of all of EnPro’s businesses. Pro forma results for the quarter and nine months ended September 30, 2017 reflect the performance of all of these businesses for that period.

Demand in semiconductor, aerospace, food & pharma, heavy-duty tractor and trailer builds, general industrial, metals & mining, and U.S. oil & gas pipeline construction markets continued to be strong during the quarter. Nuclear demand increased slightly relative to last year. This positive momentum was partially offset by softness in the automotive and U.S. oil & gas pipeline construction markets. In total, acquisitions contributed 0.1% sales growth, and foreign exchange translation reduced sales by 0.6% on a consolidated basis versus pro forma sales in the third quarter of 2017.

Segment profit in the third quarter was up year-over-year on a consolidated basis compared to pro forma segment profit from the same period of the prior year due to a variety of factors. In Sealing Products and Engineered Products, consolidated segment profit increased versus pro forma segment profit in the third quarter of last year due to strong sales growth and a $4.0 million net credit related to a legal matter in the heavy-duty truck business, partially offset by tariff-related cost increases in the heavy-duty truck business. In Power Systems, consolidated segment profit increased versus pro forma segment profit in the third quarter of 2017 driven primarily by higher aftermarket sales and a favorable mix of engine sales. Excluding the impact of acquisitions and divestitures and related costs, foreign exchange translation, the impact of the change in the loss reserve due to foreign exchange on the EDF contract, inventory fair value adjustment, and restructuring charges, total consolidated segment profit was 30.7% higher compared to the total pro forma segment profit in the third quarter of last year.

On June 26, 2018, the company entered into an agreement to purchase a group annuity contract to transfer approximately $68 million of outstanding projected pension benefit obligations related to certain U.S. retirees or beneficiaries. The transaction closed on July 3, 2018 and was funded with pension plan assets with a value of $70.9 million. As a result of this transaction, a non-cash pre-tax pension settlement charge of approximately $12.8 million was recognized in the third quarter of 2018. This charge was recorded in other (non-operating) expense on the Consolidated Statements of Operations.

On October 17, 2018, the company closed an offering of $350 million 5.75% senior notes due 2026, and on October 31, 2018, the preexisting $450 million 5.875% senior notes due 2022 were redeemed in full. In addition to lowering the fixed interest rate and extending the tenor by an additional four years, the new issuance provides greater flexibility to pay down debt and more favorable indenture provisions.

EnPro’s Board of Directors authorized the company to repurchase up to $50 million of its common shares over a two year period of time. Under this new authorization, which became effective on October 31, 2018, the company may repurchase shares in both open market and privately negotiated transactions. The company’s management will determine the timing and amount of the transactions based on its evaluation of market conditions, capital alternatives, and other factors. Repurchases may also be made under Rule 10b5-1 plans, which permit the company to repurchase shares when it otherwise would be precluded from doing so under insider trading laws. The repurchase program may be suspended or discontinued at any time and expires in two years.

The company’s average diluted share count in the third quarter of 2018 was 20.9 million shares, approximately 0.9 million less than in the same period a year ago. The decrease was primarily due to share repurchases. During the third quarter, the company completed its $50 million share repurchase program authorized by its Board of Directors, under which 665,984 shares were repurchased.

Pro Forma Results Including Formerly Deconsolidated Subsidiaries
To aid comparisons of year-over-year data, the company has included information in this press release showing key operating metrics for EnPro and its formerly deconsolidated subsidiaries, GST and OldCo, on a pro forma reconsolidated basis for the three months and nine months ended September 30, 2017. These metrics are derived from tables attached to this press release that illustrate, on a pro forma basis, financial results for these periods of 2017 as if GST and OldCo were reconsolidated with EnPro throughout each period based on consummation of the joint plan of reorganization, which was consummated on July 31, 2017. In response to requests from investors, we are providing the pro forma financial information in this release as supplemental comparative information as it reflects the performance of all of our subsidiaries during those periods.

Conference Call and Webcast Information
EnPro will hold a conference call tomorrow, November 1, at 10:00 a.m. Eastern Time to discuss third quarter 2018 results. Investors who wish to participate in the call should dial 1-800-851-4704 approximately 10 minutes before the call begins and provide conference ID number 53479827. A live audio webcast of the call and accompanying slide presentation will be accessible from the company’s website, http://www.enproindustries.com. To access the presentation, log on to the webcast by clicking the link on the company’s home page.

Non-GAAP Financial Information
This press release contains financial measures that have not been prepared in conformity with GAAP. They include adjusted net income, adjusted diluted earnings per share, pro forma adjusted net income, adjusted EBITDA, pro forma adjusted EBITDA, adjusted EBITDA margin and pro forma adjusted EBITDA margin, as well as segment adjusted EBITDA, segment adjusted EBITDA margin, pro forma segment adjusted EBITDA and pro forma segment adjusted EBITDA margin. Tables showing the effect of these non-GAAP financial measures for the three months and nine months ended September 30, 2017 and 2018 are attached to the release. Adjusted EBITDA anticipated for full year 2018 is calculated in a manner consistent with the presentation of adjusted EBITDA in the attached tables. Because of the forward-looking nature of this estimate of adjusted EBITDA, it is impractical to present a quantitative reconciliation of such measure to a comparable GAAP measure, and accordingly no such GAAP measure is being presented.

Forward-Looking Statements
Statements in this press release that express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements under the Private Securities Litigation Reform Act of 1995. They involve a number of risks and uncertainties that may cause actual events and results to differ materially from such forward-looking statements. These risks and uncertainties include, but are not limited to: general economic conditions in the markets served by our businesses, some of which are cyclical and experience periodic downturns; prices and availability of raw materials; the impact of fluctuations in relevant foreign currency exchange rates; unanticipated delays or problems in introducing new products; the incurrence of contractual penalties for the late delivery of long lead-time products; announcements by competitors of new products, services or technological innovations; changes in our pricing policies or the pricing policies of our competitors; and the amount of any payments required to satisfy contingent liabilities related to discontinued operations of our predecessors, including liabilities for certain products, environmental matters, employee benefit obligations and other matters. Our filings with the Securities and Exchange Commission, including the Form 10-K for the year ended December 31, 2017, describe these and other risks and uncertainties in more detail. We do not undertake to update any forward-looking statements made in this press release to reflect any change in management’s expectations or any change in the assumptions or circumstances on which such statements are based.

About EnPro Industries
EnPro Industries, Inc. is a leader in sealing products, metal polymer and filament wound bearings, components and service for reciprocating compressors, diesel and dual-fuel engines and other engineered products for use in critical applications by industries worldwide. For more information about EnPro, visit the company’s website at http://www.enproindustries.com.

Sealing Products Segment

Segment Highlights

• Consolidated sales increased in the third quarter versus pro forma sales in the prior-year period due to strength in the semiconductor, aerospace, food & pharma, heavy-duty tractor and trailer builds, and metals & mining markets. Nuclear demand increased slightly relative to last year. This positive momentum was partially offset by softness in the industrial gas turbine market.
• Consolidated segment profit increased in the third quarter versus pro forma segment profit in the third quarter of last year, driven by higher sales volumes and a $4.0 million net credit related to a legal matter in the heavy-duty truck business, partially offset by tariff-related cost increases in the heavy-duty truck business. Excluding the impact of restructuring costs, inventory fair value adjustments, acquisitions and divestitures, and unfavorable foreign exchange translation, consolidated segment profit increased 32.1% compared to pro forma segment profit in the prior-year period.

Engineered Products Segment

Segment Highlights

• Consolidated sales increased in the third quarter versus pro forma sales in the prior-year period due to volume gains in the oil & gas and general industrial markets, while automotive and aerospace markets were down relative to last year. Excluding the impact of foreign exchange translation, consolidated sales increased 4.7% compared to pro forma sales in the prior-year period.
• Consolidated segment profit increased in the third quarter versus pro forma segment profit in the third quarter of last year due primarily to strong sales growth partially offset by unfavorable product mix. Excluding the impact of restructuring costs and unfavorable foreign exchange translation, consolidated segment profit increased 14.8% compared to pro forma segment profit in the prior-year period.

Power Systems Segment

Segment Highlights

• Consolidated sales increased in the third quarter versus pro forma sales in the prior-year period due to higher aftermarket parts and service revenue.

• Consolidated segment profit increased in the third quarter versus pro forma segment profit in the prior-year period primarily due to an increase in profit on aftermarket parts and services and lower research and development expenses. Segment profit increased 43.5% excluding the impact of foreign exchange on the EDF contract, which had a negative impact of $0.2 million in the third quarter of 2018 and a positive impact of $2.3 million in the third quarter of 2017.

Unaudited Pro Forma Information Reflecting the Reconsolidation of Garlock Sealing Technologies and Other Formerly Deconsolidated Subsidiaries

The historical business operations of EnPro’s subsidiaries, Garlock Sealing Technologies LLC (“GST LLC”) and The Anchor Packing Company (“Anchor”), resulted in a substantial volume of asbestos litigation in which plaintiffs alleged personal injury or death as a result of exposure to asbestos fibers. Those subsidiaries manufactured and/or sold industrial sealing products, predominately gaskets and packing, that contained encapsulated asbestos fibers. Anchor was an inactive and insolvent indirect subsidiary of EnPro. EnPro’s subsidiaries’ exposure to asbestos litigation and their relationships with insurance carriers have been managed through another subsidiary, Garrison Litigation Management Group, Ltd. (“Garrison”). GST LLC, Anchor and Garrison are collectively referred to as “GST.”

On June 5, 2010 (the “Petition Date”), GST filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Western District of North Carolina in Charlotte (the “Bankruptcy Court”). The filings were the initial step in an asbestos claims resolution process.

The financial results of GST and its subsidiaries had been included in EnPro’s consolidated results through June 4, 2010, the day prior to the Petition Date. However, U.S. generally accepted accounting principles require an entity that files for protection under the U.S. Bankruptcy Code, whether solvent or insolvent, whose financial statements were previously consolidated with those of its parent, as GST’s and its subsidiaries’ were with EnPro’s, generally must be prospectively deconsolidated from the parent and the investment accounted for using the cost method. Accordingly, the financial results of GST and its subsidiaries are not included in EnPro’s consolidated results after June 4, 2010 until the reconsolidation described below.

On March 17, 2016, EnPro announced that it had reached a comprehensive settlement to resolve current and future asbestos claims. The settlement was reached with the court-appointed committee representing current asbestos claimants (the “GST Committee”) and the court-appointed legal representative of future asbestos claimants (the “GST FCR”) in GST’s Chapter 11 case pending before the Bankruptcy Court. Representatives for current and future asbestos claimants (the “Coltec Representatives”) against Coltec Industries Inc (“Coltec”) (another subsidiary of EnPro and, at that time, GST’s direct parent) also joined in the settlement. Under the settlement, the GST Committee, the GST FCR and the Coltec Representatives agreed to join GST and Coltec in proposing a joint plan of reorganization that incorporates the settlement and to ask asbestos claimants and the court to approve the plan. The joint plan of reorganization was filed with the Bankruptcy Court on May 20, 2016 and amendments to the joint plan of reorganization were filed with the Bankruptcy Court on June 21, 2016, July 29, 2016, December 2, 2016, April 3, 2017, May 14, 2017, May 19, 2017, June 8, 2017, and June 9, 2017. The joint plan of reorganization was filed as Exhibit 2.1 to the Company’s Form 8-K filed on July 31, 2017. As so modified, the joint plan of reorganization superseded all prior plans of reorganization filed by GST with the Bankruptcy Court.

As contemplated by the settlement, following the approval of the joint plan of reorganization by asbestos claimants in December 2016, Coltec engaged in a series of corporate restructuring transactions in which all of its significant operating assets and subsidiaries, which included each of EnPro’s major business units, were distributed to a new direct EnPro subsidiary (“EnPro Holdings”). OldCo, LLC (“OldCo”), as the successor by merger to Coltec in those transactions, retained responsibility for all asbestos claims and rights to certain insurance assets. The restructuring was completed on December 31, 2016 and, as contemplated by the joint plan of reorganization and the settlement, OldCo filed a pre-packaged Chapter 11 bankruptcy petition with the Bankruptcy Court on January 30, 2017. Accordingly, the financial results of OldCo and its subsidiaries are not included in EnPro’s consolidated results after January 29, 2017 until the reconsolidation described below. On February 3, 2017, the Bankruptcy Court issued an order for the joint administration of the OldCo Chapter 11 proceedings with the GST Chapter 11 proceedings.

The settlement included as a condition to EnPro’s obligations to proceed with the settlement that EnPro, Coltec, GST LLC and Garlock of Canada Ltd (an indirect subsidiary of GST LLC) enter into a written agreement, to be consummated concurrently with the effective date of consummation of the joint plan of reorganization, with the Canadian provincial workers’ compensation boards (the “Provincial Boards”) resolving remedies the Provincial Boards may possess against Garlock of Canada Ltd, GST, Coltec or any of their affiliates, including releases and covenants not to sue, for any present or future asbestos-related claim, and that the agreement is either approved by the Bankruptcy Court following notice to interested parties or the Bankruptcy Court concludes that its approval is not required. On November 11, 2016, EnPro and such subsidiaries entered into such an agreement (the “Canadian Settlement”) with the Provincial Boards to resolve current and future claims against EnPro, GST, Garrison, Coltec, and Garlock of Canada Ltd. for recovery of a portion of amounts the Provincial Boards have paid and will pay in the future under asbestos-injury recovery statutes in Canada for claims relating to asbestos-containing products. The Canadian Settlement provided for an aggregate cash settlement payment to the Provincial Boards of $(U.S.) 20 million, payable on the fourth anniversary of the effective date of the joint plan of reorganization. Under the Canadian Settlement, after the effective date of the joint plan of reorganization, the Provincial Boards had the option of accelerating the payment, in which case the amount payable would be discounted from the fourth anniversary of the effective date of the joint plan of reorganization to the payment date at a discount rate of 4.5% per annum. On February 3, 2017, the Bankruptcy Court issued an order approving the Canadian Settlement. The Provincial Boards provided notice of their election to accelerate the payment. After application of the discount resulting from such acceleration of payment, the settlement payment of approximately $(U.S.) 16.7 million was made on August 11, 2017.

On May 15, 2017, the Bankruptcy Court announced its decision recommending that the U.S. District Court for the Western District of North Carolina (the “District Court”) confirm the joint plan of reorganization, and on June 12, 2017 the District Court issued an order confirming the joint plan of reorganization. The joint plan of reorganization has been consummated, with an effective date of 12:01 a.m. on July 31, 2017 (the “Joint Plan Effective Date”).

The joint plan of reorganization provides for the establishment of a trust (the “Trust”), which was funded (i) with aggregate cash contributions by GST LLC and Garrison of $350 million made immediately prior to the Joint Plan Effective Date, (ii) by the contribution made by OldCo immediately prior to the Joint Plan Effective Date of $50 million in cash and an option (the “Option”), exercisable one year after the Joint Plan Effective Date, permitting the Trust to purchase for $1 shares of EnPro common stock having a value of $20 million (with OldCo having the right to call the option for payment of $20 million in cash at any time prior to the first anniversary of the Joint Plan Effective Date, with the Trust having the right to put the option to OldCo for payment by OldCo of $20 million on the day prior to the first anniversary of the Joint Plan Effective Date and with the option terminating on the second anniversary of the Joint Plan Effective Date in return for payment to the Trust of $20 million), and (iii) by the obligations under the Joint Plan of OldCo to make a deferred contribution of $40 million in cash and of GST LLC and Garrison to make an aggregate deferred contribution of $20 million in cash no later than one year after the Joint Plan Effective Date. These deferred contributions were guaranteed by EnPro and secured by a pledge of 50.1% of the outstanding voting equity interests of GST LLC and Garrison. Under the joint plan of reorganization, the Trust has assumed responsibility for all present and future asbestos claims arising from the operations or products of GST or Coltec/OldCo. Under the joint plan of reorganization, EnPro, through its subsidiaries, retained ownership of OldCo, GST LLC and Garrison. Anchor, which has not conducted business operations for many years and had nominal assets, has been dissolved. On November 29, 2017, GST LLC, EnPro Holdings and EnPro entered into an agreement with the Trust to provide for the early settlement of the deferred contributions to the Trust under the Joint Plan and for the call of the Option by EnPro Holdings, as the successor by merger to OldCo. Under that agreement, in full satisfaction of the $60 million of aggregate deferred contribution obligations under the Joint Plan and payment of the $20 million call payment under the Option, on December 1, 2017 GST LLC, EnPro Holdings and EnPro paid $78.8 million (the “Early Cash Settlement Amount”) to the Trust and agreed to make a further payment to the Trust to the extent that total interest earned through July 31, 2018, with respect to a fixed income account in which the Early Cash Settlement Amount was invested by the Trust is less than $1.2 million, which further payment of approximately $0.5 million was made to the Trust in August 2018.

Pursuant to applicable accounting rules, upon and as of the Joint Plan Effective Date, the assets and liabilities of both GST and OldCo were reconsolidated into the EnPro balance sheet and EnPro’s consolidated financial statements include the sales, income, expenses and cash flows of both GST and OldCo beginning on the Joint Plan Effective Date.

The accompanying unaudited pro forma condensed consolidated statement of operations for the three and nine months ended September 30, 2017 has been prepared to illustrate the effects of the reconsolidation of GST and OldCo and their respective subsidiaries with EnPro assuming the confirmation and consummation of the joint plan of reorganization and the consummation of the Canadian Settlement to give effect to the reconsolidation as if it had occurred on January 1, 2017.

The unaudited pro forma condensed consolidated statement of operations for the three and nine months ended September 30, 2017 is based on estimates and assumptions, which have been made solely for the purposes of developing such pro forma information. The unaudited pro forma condensed consolidated statement of operations also include certain adjustments such as increased depreciation and amortization expense on tangible and intangible assets, increased interest expense on the debt incurred to complete the reconsolidation as well as the tax impacts related to these adjustments. The pro forma adjustments are based upon available information and certain assumptions that EnPro believes are reasonable.

EnPro is providing the accompanying unaudited pro forma condensed consolidated statement of operations in light of specific requests for such pro forma information by investors. The unaudited pro forma condensed consolidated statement of operations is provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations or the consolidated financial position of EnPro would have been had the reconsolidation of GST and OldCo occurred on the date assumed.