«Our Business Segments ENGINE PRODUCTS AND SERVICES SEALING PRODUCTS ENGINEERED PRODUCTS Our Engine Products and Services segment Our Sealing Products ...»
Shaping EnPro For The Future
2010 ANNUAL REPORT
Aftermarket Mix Markets Served
Consolidated 2010 Sales
Our Business Segments
SEALING PRODUCTS ENGINEERED PRODUCTS
reﬁning and petrochemical markets.
• 46% of consolidated 2010 sales • 19% of consolidated 2010 sales
The year 2010 was one of signiﬁcant change for EnPro Industries.
It was a year in which:
• Our markets continued the recovery they began in late 2009;
• Our ﬁnancial performance improved signiﬁcantly;
• We completed the divestiture of Quincy Compressor and began to reinvest the proceeds to strengthen our company; and
• Our Garlock Sealing Technologies LLC (GST) subsidiary moved to permanently resolve its asbestos liability.
Each of these developments is signiﬁcant in its own right, but combined, they point toward a promising future for EnPro.
Rebounding Markets By late 2009, the recessionary conditions of 2008-09 were easing. The declining order rates we had seen since mid-2008 had begun to reverse. Our customers were showing greater conﬁdence about prospects for the coming year and once again planning for growth.
So we entered 2010 with cautious optimism, but by the end of the year, our business had recovered at a pace much more robust than the modest rate we and many outside industry observers had forecast at the beginning of the year. Growing demand led to sales increases of 15% or more in our operations, except at Fairbanks Morse Engine (FME), where, as we had expected at the beginning of the year, sales were ﬂat with the record levels of 2009, but segment proﬁts exceeded the prior year’s record.
Our consolidated sales grew to $865.0 million, an 8% increase, despite the deconsolidation of GST’s sales beginning June 5, 2010, when it moved to permanently resolve all current and future asbestos claims against it. GST, which recorded sales growth of 22% for the full year of 2010, had an additional $104.9 million in third-party sales following its deconsolidation.
An Improved Financial Performance During 2009, we took steps to align our company with the then-current conditions of our markets. We reduced costs and focused on achieving our goals for excellence across our company. As our markets improved in 2010 and demand for our products grew, these actions and the results from our Continuous Improvement programs helped us realize signiﬁcant earnings growth even with the deconsolidation of GST.
In addition to growing demand, we also realized beneﬁts from our Continuous Improvement initiatives. These programs are creating consistent and sustainable improvement in our ﬁnancial results by managing raw material input costs, improving productivity, enhancing our margins and strengthening our go-to-market strategy. As our markets recovered, the beneﬁts of these programs accelerated, and we were able to produce more without adding back the full level of costs we had eliminated.
Improving markets and the beneﬁts of our Continuous Improvement programs helped us to record a nearly 40% improvement in our consolidated net income before asbestos-related expenses and other selected items in 2010. On that basis, income grew to $49.0 million from $34.8 million in 2009. The ﬁgures for 2010 don’t include an additional $11.8 million in adjusted net income from GST following its deconsolidation. Under generally accepted accounting principles, or GAAP, we reported consolidated net income of $155.4 million in 2010 after a loss of $139.3 million in 2009.
A Year for Acquisitions Late in 2009, we announced our intent to sell Quincy Compressor, one of the original EnPro companies, for $190 million. While Quincy was a sound business with attractive products, it was not a business we felt we could grow effectively because of its much larger competitors.
As we announced at the time, our plan was to reinvest the proceeds into areas where EnPro had more attractive opportunities.
We believe that GST’s asbestos liability has been the result of highly ﬂawed and unfair tort systems found in many states. These systems allow the presentation of questionable scientiﬁc testimony and, more importantly, do not properly account for payments made to claimants from the 524(g) trusts created by GST’s former co-defendants, companies that produced dangerous insulation and other products that caused the plaintiffs’ injuries. To seek a ﬁnal and permanent resolution to this situation, GST turned to the federal courts to initiate what we have termed the Asbestos Claims Resolution Process, or ACRP. In the process, GST seeks to resolve all pending and future asbestos claims by establishing its own trust under Section 524(g) of the U.S. Bankruptcy Code that will become solely responsible for resolving pending and future claims against GST.
While this process is pending, neither GST nor its subsidiaries will be included in the consolidated results of EnPro. During the process, GST and its afﬁliates are protected from asbestos claims, and the outﬂow of cash to resolve them is halted.
So far, the ACRP has received strong support from all of GST’s constituencies. It has been business as usual with employees, customers and suppliers. The ACRP has also been well-received by EnPro shareholders, and we are grateful and appreciative of your support. It is too early to be certain of the outcome of the ACRP, but we plan ultimately to re-consolidate the results of GST with considerable value for EnPro shareholders.
An Important Note for Our Employees Of course, all of our accomplishments have been made possible only by our employees. We strive to create a culture of empowerment and accountability at EnPro, and that shows up in a number of areas. One of the most important of these is safety. Across our company, we are striving to have the world’s safest workers, with a personal and public commitment to work safely every day and to be absolutely dedicated to creating an injury-free workplace.
As a result, our safety performance rates among the best of all companies and EnPro has been publicly recognized as an industry leader.
The beneﬁts may not be as apparent to outsiders as many of our other activities, but they are just as important to our success. Programs like our safety program make EnPro an attractive place to work and help us to recruit and retain highly capable people. Our safety accomplishments are a tribute to the spirit and dedication of our employees, and I am personally grateful for their achievements.
A Management Transition Early in 2011, Bill Dries, our chief ﬁnancial ofﬁcer since EnPro became an independent public company in May of 2002, announced his intention to retire in September 2011. Bill’s leadership and dedication have contributed greatly to our success. The policies and controls that he helped establish set the company on the right path from the beginning, and he has been a key contributor to our most important management decisions.
Bill will continue as chief ﬁnancial ofﬁcer through our annual shareholders’ meeting on May 5 and be succeeded in that role by Alex Pease.
Alex joined us on February 24, 2011, as senior vice president after eight years at McKinsey & Company, where he was involved in the ﬁrm’s Global Chemical and Oil & Gas practices and was a leader in its North American Corporate Finance practice. Alex has substantial knowledge of our markets and of areas that will be essential as we continue to grow, including capital allocation, acquisition strategy and risk management. He also brings knowledge of EnPro to the job, having served in a consulting capacity on many of our Continuous Improvement programs.
Bill has served EnPro with distinction and tireless dedication, and we are conﬁdent that Alex will likewise serve, as we continue to grow and enhance the value of EnPro for all of our stakeholders.
An Encouraging Outlook In the early months of 2011, we are encouraged by the trends we see in our markets. We expect increased industrial production in most regions of the world and healthy energy markets, which should beneﬁt our Sealing Products and Engineered Products segments. FME should also have another strong year, with sales comparable to 2010, although proﬁtability will reﬂect increased spending on research and development and a higher mix of new engine shipments, which tend to carry lower proﬁt margins. All of our operations should receive additional beneﬁts from our Continuous Improvement initiatives. We also expect acquisitions completed in 2010 and early 2011 to make a signiﬁcant contribution to sales and a modest but increasing contribution to proﬁts as we complete their integration into our operations.
We are conﬁdent our achievements in 2010 put us on course for continued growth in 2011, and we look forward to sharing the rewards of our growth with our investors.
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 registrant’s 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.
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Large accelerated filer Accelerated filer
The aggregate market value of voting and nonvoting common stock of the registrant held by non-affiliates of the registrant as of June 30, 2010 was $563,695,249. As of March 7, 2011, there were 20,674,141 shares of common stock of the registrant outstanding.
Item 1 Business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2 Properties
Item 3 Legal Proceedings
Item 4 [Removed and Reserved]
Executive Officers of the Registrant
Item 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 6 Selected Consolidated Financial Data
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8 Financial Statements and Supplementary Data
Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A Controls and Procedures
Item 9B Other Information
Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters