With Asbestos Claims Managed, Gasket Maker Goes On The Offense

Tag : asbestos
With Asbestos Claims Managed, Gasket Maker Goes On The Offense
BY VICTOR REKLAITIS
INVESTOR'S BUSINESS DAILY
Posted 9/30/2008
Asbestos claims, bearings and gaskets might not sound like thingsthat would figure prominently in a fast-growing company's history.
Nonetheless, they've all played big roles in EnPro Industries ' ( NPO ) recent past.
The diversified manufacturer of bearings, gaskets and otherindustrial products started out in 2002 as a spinoff from aerospacegiant Goodrich . ( GR ) Goodrich viewed the spinoff partly as a way to help insulateitself from thousands of asbestos-related claims tied to an EnProsubsidiary.
Six years later, analysts say the claims are declining and EnPro iseffectively managing its many settlements. The Charlotte,N.C.-based company has switched from defense to offense, accordingto analyst Gary Farber of C.L. King & Associates.
"In the 2002 time frame, they probably were in survival mode. Theyhad to pay down the asbestos, and the claims were large," saidFarber, whose firm is seeking investment-banking work from EnPro.
"Now that's an ongoing cash requirement, but they're not insurvival mode. They're more in offensive mode," he said.
EnPro's main strengths include a diverse customer base buying itswide array of industrial products. No single customer accounted formore than 4% of its $1.03 billion in revenue last year. The companysells to more than 20 different end markets.
Its biggest markets include the recently thriving hydrocarbons andchemicals sector, which provided 13% of 2007 revenue, and theslumping heavy-duty trucking industry, which contributed 11%. Otherstrong markets in recent months are the power-generation and miningsectors. EnPro CFO Bill Dries points out that it's unlikely for allof the company's many end markets to slide at the same time —or boom at the same time.
"So while on the one hand the diversity tends to temper our growth,it provides a good balance," Dries told IBD.
Stability also comes from EnPro's aftermarket business, whichconsists of replacement part sales. Last year, 50% of revenue wasreplacement-related, with the other 50% consisting of sales tooriginal equipment manufacturers.
"The aftermarket is less susceptible to the cyclical ups anddowns," Dries said. It's provided "a fairly nice, steady stream ofbusiness," the CFO said.
EnPro's products include gaskets and other types of seals made byits Garlock and Stemco subsidiaries, including a seal used innuclear reactor containment vessels. The sealing products segmentcontributed 45% of 2007 sales.
About 43% of last year's revenue came from EnPro's engineeredproducts unit, which makes bearings, compressors and other itemssold under the brands GGB, Quincy and CPI. The remaining 12% camefrom EnPro's engine products and services segment, which owns theFairbanks Morse brand.
EnPro emphasizes that although it's just six years old, some of itsbrands (such as Garlock, Fairbanks Morse, Quincy and Stemco) dateback to the 1800s or 1920s. Over the decades, these brands haveestablished strong market positions around the world. About 45% ofEnPro's sales came from outside of the U.S. last year, with 27%from Europe and 18% from other regions like Asia and Latin America.
In the most recent quarter, EnPro reported that adjusted per-shareprofit grew 22% to $1.23, beating forecasts. Revenue in the secondquarter increased 25% to $316.8 million. For the current quarter,analysts expect earnings per share to rise 24% to $1.07 as salesgain 12% to $283.4 million.
While predicting steady growth, analysts see a number of challengesthat could trip up EnPro. For starters, asbestos claims remain asignificant expense, with the company projecting average net annualoutflows of $35 million for the next several years.
On the plus side, EnPro says the claims have dropped from a peak ofabout 40,000 in 2003 to a run rate of 5,000 for this year. Inaddition, the company stresses that its insurance recoveries forasbestos are predictable thanks to agreements with its insurers.
The asbestos issue is "less of a problem than it was," said analystJoseph Mondillo of Sidoti & Co. Mondillo predicts that asbestosclaims will remain an expense "for at least the next 10 to 20years" but that the claims probably won't increase and will becomegradually smaller relative to EnPro's growing sales.
Other challenges for EnPro are raw materials costs, a strongerdollar hurting its overseas business and weakness in some marketsin North America and Europe. Dries, the EnPro CFO, says the companygenerally has addressed the materials-costs issue through priceincreases.
"We've been fairly successful in being able to pass those on to ourcustomer base," he said.
EnPro also has to deal with a number of rival manufacturers. Itssealing products division's competitors include Federal-Mogul , ( FDML ) while some of its engineered products unit's rivals are Dresser-Rand ( DRC ) and Gardner Denver . ( GDI ) EnPro's engines division competes with firms like Caterpillar . ( CAT )
An activist shareholder has posed challenges, too. Earlier thisyear, EnPro faced a proxy battle with hedge fund Steel Partners.But EnPro struck a deal with the fund, in a move that expanded itsboard in June to include a candidate backed by Steel Partners.
Looking ahead, company officials say EnPro has lots of ways togrow. One focus is stepping up the development of new products sothat they provide 20% of sales each year, up from 15% to 16% today.
"That was clearly an area that we were weak in at the time of thespin," Dries told IBD. He said EnPro has worked since 2002 to"reinvigorate the whole new product development process," addingthat it's "made a fair amount of headway."
Another focus is ramping up the pace of acquisitions. This year ithas already bought several companies, including China-based SinflexSealing Technologies and Michigan-based V.W. Kaiser Engineering,which makes replacement parts for heavy-duty trucks.
"We've decided to step up our efforts and grow a little moreaggressively than we have in the past," Dries said. "Having saidthat, we have been and will continue to be very judicious."
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