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EnPro Industries Reports Results for the Second Quarter of 2018

August 1, 2018

CHARLOTTE, N.C.--(BUSINESS WIRE)--Aug 1, 2018--EnPro Industries, Inc. (NYSE: NPO) today announced its financial results for the three-month and six-month periods ended June 30, 2018.

Key Developments

All segments experienced strong sales growth in the second quarter, with total company sales growth of 13% compared to pro forma sales in the second quarter of last year. Profitability declined due to results in Sealing Products and Power Systems, partially offset by an increase in Engineered Products. Profitability in Sealing Products declined due to continued softness in the industrial gas turbine business and profitability challenges in heavy-duty trucking. Profitability in Engineered Products increased due to strong sales growth and the positive impact of foreign exchange translation. Profitability in Power Systems declined due to the negative impact of currency adjustments applicable to the EDF loss reserve resulting from the strengthening dollar, partially offset by an increase in profit on aftermarket parts and services. Received a tax refund of $96 million during the second quarter related to the 2017 loss resulting from asbestos-related expenses and trust payments, and, subject to normal IRS review, the company expects to receive the remaining $32 million of tax refunds in the second half of 2018. Collected $11 million of asbestos-related insurance recoveries in the second quarter. Second quarter capital allocation highlights: Repurchased 441,285 shares for approximately $32.9 million under the $50.0 million share repurchase program authorized by the Board of Directors in October 2017. Paid a $0.24 per share quarterly dividend with a total value of $5.0 million. Repatriated $30.6 million and $114.0 million of previously taxed earnings from foreign subsidiaries during the second quarter and first six months of the year, respectively. Lowered guidance for 2018 Adjusted EBITDA from a range of $224 million to $230 million to a range of $214 million to $220 million, stemming from the impact of the stronger dollar in the second quarter and from second-quarter profitability challenges in heavy-duty trucking.

“We had a difficult second quarter; however, the high-level numbers don’t tell the full story. Four of our six divisions did well in the second quarter, and all of our businesses generated year-over-year sales growth. In total, our sales were up 13% year-over-year compared to pro forma sales in the second quarter of last year. Many of our core end markets continued to experience favorable market conditions in the quarter, including semiconductor, food & pharma, general industrial, metals & mining, and European oil & gas,” said Steve Macadam, President and CEO. “Profitability was challenged by three primary items: first, continued softness in the industrial gas turbine market, which led to our decision to exit our facility servicing that market; second, challenges in our heavy-duty trucking brake products group, including booking a large warranty reserve; and third, the negative impact of currency adjustments on the EDF program resulting from the strengthening dollar and a significant first-half vs. second-half performance profile in Power Systems. We expect stronger second-half performance in Sealing Products and Power Systems and remain optimistic about our overall financial performance in the back half of 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. We expect full-year adjusted EBITDA of between $214 million and $220 million, down from previous guidance of $224 million to $230 million. This $10 million reduction from our previous guidance is attributable to the impact of the stronger dollar and second-quarter profitability challenges in heavy-duty trucking. This new range reflects a slightly improved outlook for the balance of the year,” 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 second quarter of 2017 did not reflect all of EnPro’s entities, investors may find comparisons of consolidated results for the second 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 ended June 30, 2017 reflect the performance of all of these businesses for that period.

Demand in semiconductor, food & pharma, general industrial, metals & mining, aerospace, and European oil & gas continued to be strong during the quarter. Nuclear demand was very strong relative to last year, while automotive markets increased modestly. This positive momentum was partially offset by continued softness in the industrial gas turbine market. In total, acquisitions contributed 0.6% sales growth, and foreign exchange translation contributed 2.0% sales growth on a consolidated basis versus pro forma sales in the second quarter of 2017.

Segment profit in the second quarter was down year-over-year on a consolidated basis compared to pro forma segment profit from the same period of the prior year primarily due to results in Sealing Products and Power Systems, partially offset by robust results in Engineered Products. Excluding the impact of acquisitions and divestitures and related costs, foreign exchange translation, impact of the change in the loss reserve due to foreign exchange on the EDF contract, and restructuring charges, total consolidated segment profit was 10.6% lower compared to the total pro forma segment profit in the second quarter of last year.

In Sealing Products, consolidated segment profit decreased in the second quarter versus pro forma segment profit in the second quarter of last year as higher sales volumes were more than offset by lower volume in the industrial gas turbine business, commodity cost increases in heavy-duty trucking that were primarily tariff-related, and unusual warranty charges and productivity issues in the segment’s heavy-duty trucking business.

In Engineered Products, consolidated segment profit increased in the second quarter versus pro forma segment profit in the second quarter of last year due primarily to strong sales growth and positive impacts from foreign exchange translation. Excluding the impact of restructuring costs and favorable foreign exchange translation, consolidated segment profit increased 23.3% compared to pro forma segment profit in the prior-year period.

In Power Systems, consolidated segment profit decreased in the second quarter versus pro forma segment profit in the second quarter of last year driven by the impact of currency adjustments on the Euro-denominated EDF program partially offset by an increase in profit on aftermarket parts and services. Excluding a small restructuring charge and the impact of foreign exchange on the EDF contract, which had a negative impact of $3.5 million in the second quarter of 2018 and positive impact of $3.8 million in the second quarter of 2017, segment profit increased 25.0%.

Total restructuring costs of $6.5 million were incurred during the second quarter, $6.2 million of which was in Sealing Products related to exiting the industrial gas turbine facility in Oxford, MA, and restructuring in heavy-duty trucking that was completed in May. The restructuring of the industrial gas turbine business included the sale of the building, which more than offset the cash impact of second quarter restructuring actions. The before-tax, net cash impact of restructuring announced in the quarter was a positive $24 million.

The company’s average diluted share count in the second quarter of 2018 was 21.1 million shares, approximately 0.7 million less than in the same period a year ago. The decrease was primarily due to share repurchases in connection with the $50 million repurchase program authorized in October 2017, partially offset by stock compensation award grants. Repurchases under the October 2017 authorization began in the first quarter of 2018, and through the second quarter, the company had purchased 664,859 shares at a total cost of $49.9 million. In early July 2018, the company completed the $50 million share repurchase program. With the completion of the recent share repurchase authorization, the permitted share repurchases under the indenture governing the senior notes have now been substantially exhausted.

Pro Forma Results Including 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 six months ended June 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, August 2, at 10:00 a.m. Eastern Time to discuss second 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 53479826. 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 six months ended June 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; fluctuations in relevant foreign currency exchange rates; 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

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