EnPro : Reports Results for the Second Quarter of 2016

EnPro Industries, Inc. (NYSE: NPO) today announced its financial results for the three and six month periods ended June 30, 2016.

Consolidated and Pro Forma Financial Highlights

(Amounts in millions except per share data and percentages)

¹ Consolidated results for the second quarters and first six months of 2016 and 2015 reflect the deconsolidation of Garlock Sealing Technologies LLC (GST) and its subsidiaries, effective June 5, 2010, when GST filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code to begin a process (the Asbestos Claims Resolutions Process, or ACRP) in pursuit of an efficient and permanent resolution to all current and future asbestos claims against it.

² See attached schedules for adjustments and reconciliations to GAAP numbers.

³ Pro forma financial information is presented as if GST were reconsolidated with EnPro based on confirmation and consummation of the joint plan of reorganization filed pursuant to the comprehensive settlement announced on March 17, 2016. See attached unaudited condensed consolidated pro forma statements of operations.

Second Quarter Business Highlights

• Consolidated adjusted net income increased 22.4% and pro forma adjusted net income increased 7.0% in the second quarter compared to the same period in 2015.
• All major milestones of the previously announced Sealing Products and Engineered Products restructuring plans are now complete.
• The company initiated an organization-wide cost reduction effort late in the second quarter with $20 million of estimated annualized savings on a pro forma basis.
• Power Systems was chosen as the engine supplier for the U.S. Navy’s new Lewis class of underway replenishment oiler ships. The program will have a total value to FME of approximately $240 million over the life of the program. FME received a $13 million order in July for the engines that will power the class’s lead ship, the John Lewis.
• Capital allocation highlights:
  • Sealing Products closed the acquisition of Rubber Fab on April 29. The company will serve as a platform for growth in the food and pharmaceutical markets.
  • The company purchased 191,250 shares for $9.5 million in the second quarter as part of the share repurchase program authorized in October 2015.
  • The company paid a $0.21 per share dividend with a total value of $4.5 million.
• ACRP is proceeding towards plan confirmation according to the expected timeline.

“Given the headwinds that we are facing in many of the markets we serve, we are very pleased with our performance this quarter,” said Steve Macadam, EnPro Industries’ CEO. “Our efforts over the past year to manage the business through this challenging business cycle have begun to bear fruit, as recent restructuring activities boosted segment profit significantly in Engineered Products despite a further market-driven sales decline and helped offset the negative impact of lower sales in Sealing Products in the quarter. We also benefited from lower input costs and increased production efficiencies in the same segments. Finally, Power Systems enjoyed a record quarter of aftermarket parts sales that further enhanced our overall results. While market conditions continue to be taxing, we are confident that our leadership position in each of our businesses remains strong and we expect increased demand for our products as the markets recover.”

Mr. Macadam continued, “We remain committed to our strategy to create shareholder value through earnings growth and balanced capital allocation, including disciplined investments for organic growth and innovation, strategic bolt-on acquisitions, and returning capital to shareholders through dividends and share repurchases. We continued to execute on this strategy in the second quarter through our cost reduction activities, R&D investments in Power Systems and Sealing Products, the acquisition of Rubber Fab, a $9.5 million repurchase of shares and a $0.21 per share dividend. In addition, we are working diligently to bring a close to our company’s asbestos chapter, and we remain on track for the confirmation and ultimate consummation of the joint plan of reorganization filed pursuant to the consensual comprehensive settlement announced on March 17, 2016. We expect to reconsolidate GST into EnPro late next summer.”

Excluding the impact of acquisitions and the effect of foreign exchange translation, the quarter’s consolidated net sales were 3.4% lower and pro forma net sales were 4.3% lower than the second quarter of 2015. The sales decline was driven primarily by weaker demand across many markets, including oil & gas, nuclear, gas turbine equipment, heavy duty trucking, and general industrial. Restructuring activities over the past year in the Engineered Products segment further contributed to the decline as eight underperforming sites were exited. GST, which is the deconsolidated entity included in the pro forma results, was further impacted by weak demand in the refining, steel and mining markets.

Focused efforts to improve profitability, including savings from the previously announced restructuring plan in the Engineered Products segment launched in late 2015, lower commodity prices, and record aftermarket parts shipments in Power Systems more than offset the profitability impact of the year-over-year sales decline. Excluding the impact of acquisitions, foreign exchange translation, and restructuring, and adjusting the Electricite de France (EDF) diesel engine generator set contract loss as if it were accounted for on a percentage-of-completion basis, consolidated segment profit was 16.0% higher and pro forma segment profit was 8.4% higher than the second quarter of 2015.

As of the end of the quarter, all actions associated with the previously announced Sealing Products and Engineered Products restructuring plans were substantially complete. As a result of continuing soft conditions across many of the company’s served markets, we began to implement an additional initiative to reduce costs across all segments and the corporate office. This plan is expected to reduce operating costs by approximately $20 million on an annualized basis, including savings from deconsolidated GST. Including restructuring costs related to actions initiated in 2015 and early 2016, consolidated segment profit for the quarter includes $2.4 million of restructuring costs, and pro forma segment profit includes $2.8 million of restructuring costs. On the same basis, total consolidated restructuring charges for the year are expected to be approximately $10.6 million and pro forma restructuring charges are expected to be approximately $11.3 million.

The company’s average diluted share count in the second quarter of 2016 decreased by 0.6 million shares to 21.9 million shares, down 2.7% from the same period a year ago. The decrease in the second quarter was driven by share repurchases as part of the $50 million share repurchase program that was authorized in October 2015. The cost of the shares repurchased in the second quarter was $9.5 million. Through the end of the second quarter, 497,660 shares were purchased for a total investment of $23.6 million.

Corporate and Other Expenses

Corporate expenses were $6.5 million in the second quarter compared to $3.4 million in the prior year. The year-over-year increase was primarily driven by abnormally low incentive compensation in the second quarter of 2015 offset partially by lower consulting costs in 2016.

Outlook

“While we experienced increased demand in some of the markets that we serve, such as semiconductor and mid-stream oil & gas, conditions in many of our markets continue to be quite soft. The macroeconomic drivers that affect our businesses suggest a mixed demand forecast through the end of the year. We are aggressively managing controllable factors to deliver value to shareholders. These include streamlining costs, focusing on production efficiencies, and cultivating demand in new ways through innovation and strategic bolt-on acquisitions. In addition, we remain committed to a balanced allocation of capital as evidenced by our actions over the past several quarters,” said Steve Macadam, President and Chief Executive Officer.

Deconsolidation and Pro Forma Results of Garlock Sealing Technologies LLC

To aid in comparisons of year-over-year data, the company has included information in this press release showing key operating measures for EnPro and GST on a pro forma reconsolidated basis. These measures are derived from tables attached to this press release that illustrate, on a pro forma basis, total financial results for the second quarters and first six months of 2016 and 2015 as if GST were reconsolidated with EnPro based on confirmation and consummation of the joint plan of reorganization filed pursuant to the consensual comprehensive settlement announced on March 17, 2016. The narrative preceding those tables includes an important discussion of the risks and uncertainties applicable to confirmation and consummation of the joint plan of reorganization. In response to requests from investors, we are providing the pro forma financial information in this release as supplemental information as it reflects the performance of all of our subsidiaries.

Conference Call and Webcast Information

EnPro will hold a conference call tomorrow, August 3, at 10:00 a.m. Eastern Time to discuss second quarter 2016 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 2509687. 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 accordance 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 second quarters and first six months of 2016 and 2015 are attached to the release.

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; 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. In addition, adverse developments could arise in regard to voluntary petitions filed by certain of our subsidiaries in U.S. Bankruptcy Court to establish a trust that would resolve all current and future asbestos claims. Our filings with the Securities and Exchange Commission, including the Form 10-K for the year ended December 31, 2015 and our Form 10-Q for the quarter ended March 31, 2016, describe these and other risks and uncertainties in more detail. We do not undertake to update any forward-looking statement 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.

APPENDIX

Highlights of Segment Results: Second Quarter and First Six Months of 2016

Consolidated Financial Information and Reconciliations

Introduction of Unaudited Pro Forma Financial Information

Pro Forma Financial Information and Reconciliations

Sealing Products Segment

Second Quarter Segment Highlights

• Consolidated net sales were affected by increased demand in mid-stream oil & gas and semiconductor offset by weak demand in nuclear, gas turbine equipment, and general industrial. Aerospace was relatively flat while heavy duty trucking was slightly down. Especially robust nuclear activity in the second quarter of 2015 further weighed on year-over-year comparisons. Pro forma net sales were impacted by the above factors plus weakness in refining, steel and mining.
• Excluding the impact of acquisitions and foreign exchange translation, consolidated sales decreased 7.6% and pro forma sales decreased 8.2% compared to the second quarter of 2015. Excluding the same items plus restructuring, consolidated segment profit increased 7.3% and pro forma segment profit decreased 0.6%.
• Lower input costs due to supply chain optimization, gains in production efficiencies and other cost reduction measures drove consolidated segment margins higher.
• Consolidated segment margins and pro forma segment margins were diluted slightly by the margins of acquired business which have historically been lower than Sealing Products’ average margins. Acquisitions completed since July 1, 2015 lowered second quarter consolidated segment margins by 0.6 points and pro forma segment margins by 0.4 points.
• Restructuring charges further lowered both consolidated segment margins and pro forma segment margins by 0.7 points. Consolidated segment profit included $1.3 million of restructuring costs and pro forma segment profit included $1.6 million of restructuring costs in the second quarter. Little savings were achieved in the quarter related to the recently initiated company-wide cost reduction effort due to the timing of the implementation.

Engineered Products Segment

Second Quarter Segment Highlights

• Sales declined in the second quarter versus prior year as revenue reductions resulting from planned site exits completed during the past twelve months, weakness in the fluid power, oil & gas, and industrial markets, and a slight reduction in automotive shipments more than offset growth in European sales of compressor parts and service. Excluding the impact of foreign exchange translation and the impact of divestitures, consolidated sales declined 5.4% and pro forma sales declined 5.5% in the second quarter versus the same period in 2015.
• Segment profit increased despite the decline in sales due to cost savings related to eight underperforming facilities that were either closed or divested within the past year, cost savings related to two facilities that were consolidated into existing sites and two facilities that were moved from leased to new owned facilities, input cost savings due to supply chain optimization, and labor efficiencies. Excluding the impact of restructuring costs and foreign exchange translation, consolidated segment profit increased 33.3% and pro forma segment profit increased 29.2%.
• Both consolidated segment profit and pro forma segment profit included $0.6 million of restructuring costs in the second quarter. Little savings were achieved in the quarter related to the recently initiated company-wide cost reduction effort due to the timing of the implementation.

Power Systems Segment

Second Quarter Segment Highlights

• Sales increased in the second quarter due to record aftermarket parts sales. Excluding the impact of foreign exchange, consolidated sales increased 14.2% and pro forma sales increased 14.9%.
• Segment profit increased due to record aftermarket parts sales offset by a $1.7 million charge for the EDF contract, resulting from the quarter-end dollar to euro exchange rate. Excluding the impact of restructuring and adjusting the EDF diesel engine generator set contract loss as if it were accounted for on a percentage-of-completion basis, consolidated segment profit was 34.4% higher and pro forma segment profit was 37.1% higher than the second quarter of 2015.
• Both consolidated segment profit and pro forma segment profit included $0.5 million of restructuring costs related to the company-wide cost reduction effort started in the second quarter; little savings were achieved in the quarter due to the timing of the implementation.
• Power Systems was chosen as the engine supplier for the U.S. Navy’s new Lewis class of underway replenishment oiler ships. The total value of the program to FME will be approximately $240 million over the life of the program. FME received a $13 million order in July for the engines that will power the class’s lead ship, the John Lewis.

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, asset impairments, gains/losses 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.

Management of the Company believes that it would be helpful to the readers of the financial statements to understand the impact of certain selected items on the Company's reported net income, earnings per share, and segment profit, including items that may recur from time to time. The items adjusted for in this schedule are those that are excluded by managment in budgeting or projecting for performance in future periods, as they typically relate to events specific to the period in which they occur. This presentation enables readers to better compare EnPro Industries, Inc. to other diversified industrial manufacturing companies that do not incur the sporadic impact of restructuring activities or other selected items. Management acknowledges that there are many items that impact a company's reported results and this list is not intended to present all items that may have impacted these results.

The fair value adjustment to acquisition date inventory is included in cost of sales, the acquisition expenses are included in selling, general and administrative expenses, and the restructuring costs, loss on exchange and repurchase of convertible debentures, environmental reserve adjustment, and other are included as part of other operating expense and other expense.

The income tax expense calculated for adjusted pre-tax income above is calculated using a normalized company-wide effective tax rate excluding discrete items of 32.5%. Per share amounts were calculated by dividing by the weighted-average shares of diluted common stock outstanding during the periods. For the quarter ended June 30, 2015 there 1.1 million, and for the six months ended June 30, 2016 and 2015 there were 0.2 million and 1.4 million, respectively of dilutive shares included in the calculation of Adjusted net income per share that were not included in the calculation of net loss per share since they were antidilutive. Additionally, adjusted net income per share for the quarter and six months ended June 30, 2015 reflects the impact of of shares deliverable to us under the outstanding convertible debenture hedge during these periods.

For a reconciliation of segment profit to net income, please refer to the Segment Information (Unaudited) schedule.

Unaudited Pro Forma Information Reflecting the Reconsolidation of Garlock Sealing Technologies

The historical business operations of 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 is an inactive and insolvent indirect subsidiary of Coltec Industries Inc (“Coltec”). EnPro’s subsidiaries’ exposure to asbestos litigation and their relationships with insurance carriers have been managed through another Coltec 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, which is ongoing. The filings did not include EnPro Industries, Inc., or any other EnPro Industries, Inc. operating subsidiary.

The financial results of GST and its subsidiaries are included in our consolidated results through June 4, 2010, the day prior to the Petition Date. However, U.S. generally accepted accounting principles require an entity that files for protection under the U.S. Bankruptcy Code, whether solvent or insolvent, whose financial statements were previously consolidated with those of its parent, as GST’s and its subsidiaries’ were with 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.

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 (EnPro’s direct subsidiary and GST’s direct parent) also joined in the settlement. The terms of the settlement are set forth in the Term Sheet for Permanent Resolution of All Present and Future GST Asbestos Claims and Coltec Asbestos Claims dated March 17, 2016 among EnPro, Coltec, GST, the GST Committee, the GST FCR and the Coltec Representatives included as Exhibit 99.2 to EnPro’s Form 8-K filed on March 18, 2016. 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 technical amendments to the joint plan of reorganization were filed with the Bankruptcy Court on June 21, 2016 and July 29, 2016. The joint plan of reorganization is subject to approval by a vote of at least 75% of asbestos claimants in favor of the plan and by the Bankruptcy Court and the U.S. District Court for the Western District of North Carolina (the “District Court”) and, if approved and consummated, will provide permanent protection from asbestos claims under Section 524(g) of the U.S. Bankruptcy Code. On July 29, 2016, the Bankruptcy Court entered orders that, among other things, approved the disclosure statement for the joint plan, set December 9, 2016 as the deadline for asbestos claimants to vote on approving the joint plan, and scheduled the confirmation hearing on the joint plan to commence on May 15, 2017.

If the joint plan of reorganization is approved by asbestos claimants, the settlement contemplates that Coltec will, subject to the receipt of necessary consents, undergo a corporate restructuring in which all of its significant operating assets and subsidiaries, which include each of EnPro’s major business units, would be transferred into a new direct EnPro subsidiary (“NewCo”). The restructured Coltec (“OldCo”) would retain responsibility for all asbestos claims and rights to certain insurance assets. Upon completion of the restructuring, the settlement and the joint plan of reorganization contemplate that OldCo will file a pre-packaged Chapter 11 bankruptcy petition, which EnPro expects will be administered with GST’s Chapter 11 case.

The joint plan of reorganization provides for the establishment of a trust (the Trust) to be fully funded within a year of consummation of the joint plan of reorganization. The Trust is to be funded with aggregate cash contributions by GST LLC and Garrison of $370 million made at the effective date of the plan and by the contribution made by OldCo at the effective date of the plan of $30 million in cash and an option, exercisable one-year after the effective date of the plan, permitting the Trust to purchase for $1 shares of EnPro common stock having a value of $20 million and the obligation of OldCo to make a deferred contribution of $60 million in cash no later than one year after the effective date of the plan. This deferred contribution is to be guaranteed by EnPro and secured by a pledge of 50.1% of the outstanding voting equity interests of GST LLC and Garrison. The joint plan of reorganization permits, at EnPro’s election, any of these contributions to be funded by EnPro or any affiliate of EnPro. Under the joint plan of reorganization, the Trust will assume 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, all non-asbestos creditors will be paid in full and EnPro will retain ownership of OldCo, GST LLC and Garrison.

If the joint plan of reorganization is approved by asbestos claimants, the Bankruptcy Court and the District Court and is consummated, GST will be re-consolidated with EnPro’s results for financial reporting purposes. As noted above, the joint plan of reorganization is subject to approval by asbestos claimants (by a 75% vote), the Bankruptcy Court and the District Court, and EnPro cannot assure you that necessary approvals of the joint plan of reorganization will be obtained and that the joint plan of reorganization will be consummated. In addition, the restructuring of Coltec contemplated by the settlement is subject to certain approvals and consents by third parties, and EnPro cannot assure you that these approvals and consents necessary for this restructuring can be obtained.

Confirmation and consummation of the joint plan of reorganization are subject to a number of risks and uncertainties, including the actions and decisions of third parties that have an interest in the bankruptcy proceedings, delays in the confirmation or effective date of the joint plan of reorganization due to factors beyond GST's, OldCo’s or EnPro’s control, which would result in greater costs and the impairment of value of GST, appeals and other challenges to the joint plan of reorganization and risks and uncertainties affecting GST and OldCo's ability to fund anticipated contributions under the joint plan of reorganization as a result of adverse changes in their results of operations, financial condition and capital resources, including as a result of economic factors beyond their control.

EnPro is providing the unaudited pro forma condensed consolidated financial information which assumes, with respect to GST, the confirmation and consummation of the joint plan of reorganization for illustrative purposes only, in light of specific requests for such pro forma information by investors. The unaudited pro forma condensed consolidated financial information presented below has been prepared to illustrate the effects of the reconsolidation of GST and its subsidiaries with EnPro assuming the confirmation and consummation of the joint plan of reorganization and is based upon the historical balance sheet of EnPro as of June 30, 2016, the estimated fair value of assets and liabilities of GST as of June 30, 2016 and the historical results of GST operations after consideration of the adjustments to the fair value of assets and liabilities. The unaudited pro forma condensed consolidated balance sheet as of June 30, 2016 gives effect to the reconsolidation as if it occurred on June 30, 2016. The unaudited pro forma condensed consolidated statements of operations for the three and six-month periods ended June 30, 2016 and 2015 give effect to the reconsolidation as if it had occurred on January 1, 2015.

Under generally accepted accounting principles, the reconsolidation of GST requires that the tangible and intangible assets and liabilities of GST be reflected at their estimated fair values. The preliminary fair value amounts used in the unaudited pro forma condensed consolidated financial information reflects management’s best estimates of fair value. Upon completion of detailed valuation studies and the final determination of fair value, EnPro may make additional adjustments to the fair value allocation, which may differ significantly from the valuations set forth in the unaudited pro forma condensed consolidated financial information.

The unaudited pro forma condensed consolidated statements of operations are 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 statements 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.

The unaudited pro forma condensed consolidated financial information has been presented for information purposes only and is not necessarily indicative of what the consolidated company’s financial position or results of operations actually would have been had the reconsolidation been completed as of the dates indicated, nor is it necessarily indicative of the future operating results or financial position of the consolidated company. Therefore, the actual amounts recorded at the date the reconsolidation occurs may differ from the information presented herein.