Enpro Inc. 2024 First-Quarter Form 10-Q Summary
Business context and reporting period
Enpro is an industrial technology company serving semiconductor, industrial process, aerospace, food, photonics, biopharmaceutical, life sciences and other critical-application markets. It operates through two reportable segments: Sealing Technologies and Advanced Surface Technologies. This unaudited report covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023. Prior-period results have been recast to present the divested Engineered Materials business as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $257.5 million | $282.6 million | Down 8.9% |
| Gross profit | $106.2 million | $116.1 million | Down 8.5% |
| Gross margin | 41.2% | 41.1% | Up approximately 10 bps |
| Operating income | $28.0 million | $43.8 million | Down 36.1% |
| Operating margin | 10.9% | 15.5% | Down approximately 460 bps |
| Income from continuing operations | $12.5 million | $26.0 million | Down 51.9% |
| Diluted EPS from continuing operations | $0.59 | $1.24 | Down 52.4% |
| Adjusted EBITDA | $58.4 million | $68.6 million | Down 14.9% |
| Adjusted diluted EPS | $1.57 | $1.95 | Down 19.5% |
| Operating cash flow from continuing operations | $6.3 million | $26.4 million | Down $20.1 million |
Net income was $12.5 million, or $0.59 diluted EPS, compared with $37.4 million, or $1.79 diluted EPS, in the prior-year quarter. The 2023 results included $11.4 million of income from discontinued operations, including a gain on sale; there was no comparable discontinued-operation income in 2024.
Sealing Technologies sales decreased 1.0% to $171.6 million, while Adjusted Segment EBITDA increased 6.6% to $53.0 million and its margin increased to 30.9% from 28.7%. Advanced Surface Technologies sales decreased 21.4% to $86.0 million, and Adjusted Segment EBITDA decreased 41.2% to $17.3 million, reducing its margin to 20.1% from 26.9%. Semiconductor weakness was the primary driver of the AST decline.
Cash and cash equivalents were $163.9 million at March 31, 2024, down from $369.8 million at December 31, 2023. The decrease primarily reflected the $208.9 million AMI acquisition, capital expenditures and working-capital effects. Total debt, including current maturities, was $680.1 million at quarter-end versus $646.8 million at year-end 2023. Revolver availability was $355.0 million after $35.0 million of borrowings and $10.0 million of letters of credit. The company was in compliance with its credit facility and Senior Notes covenants.
Enpro paid $6.4 million of dividends during the quarter, representing $0.30 per share. In May 2024, the board declared another $0.30-per-share dividend. The company has a $50.0 million share-repurchase authorization through October 2024 but reported no repurchases under that program.
Material changes versus the prior comparable period
- Sales declined 8.9%, primarily because of the semiconductor downturn, weaker commercial vehicle demand, and lower food and pharmaceutical sales.
- AST sales declined 21.4% and AST Adjusted Segment EBITDA declined 41.2% due primarily to lower semiconductor-related volumes.
- Sealing Technologies benefited from pricing, product mix, aerospace and nuclear demand, and cost reductions, partially offsetting volume declines.
- Operating expenses increased to $78.2 million from $72.3 million. The 2024 amount included $3.3 million of AMI acquisition costs.
- Other expense increased to $5.5 million from $1.8 million, primarily because of a $4.5 million reserve against a long-term promissory note received in a prior divestiture.
- The effective tax rate decreased to 12.6% from 23.7%, primarily due to favorable state amended-return filings and additional tax benefits related to share-based compensation.
- On January 29, 2024, Enpro acquired Advanced Micro Instruments for $208.9 million net of cash acquired. AMI contributed $7.3 million of sales and $0.8 million of pretax income from the acquisition date through March 31, 2024.
- In February 2024, Enpro acquired the remaining Alluxa non-controlling interest for $17.9 million and became Alluxa’s sole owner.
Outlook, management commentary, risks and unusual items
Management remains focused on earnings growth, free cash flow generation, technology and new-product investment, productivity initiatives, and acquisitions that offer strong margins, recurring or aftermarket revenue, proprietary technology and favorable secular growth. The filing does not provide specific quantitative revenue, earnings or cash-flow guidance.
Backlog was $242.8 million at March 31, 2024, with approximately 93% expected to be satisfied within one year. Management cautions that backlog is not necessarily predictive because of short lead times, seasonality and the possibility that orders may not convert to sales at the stated timing or amounts.
- Key market risks include cyclical economic conditions, semiconductor demand, customer concentration in AST, geopolitical conflicts, tariffs and trade restrictions, raw-material prices, foreign exchange and interest-rate volatility.
- Enpro faces execution and integration risk related to acquisitions, including the AMI integration and final purchase-price adjustments. Approximately $0.6 million of additional AMI consideration was expected in the second quarter of 2024.
- Environmental liabilities totaled $37.8 million at March 31, 2024. The company has reserves for multiple sites, including $0.7 million for the Lower Passaic River matter and $11.3 million for Arizona uranium mine sites; potential losses could exceed recorded reserves, and the filing does not provide a reasonably possible upper range for several matters.
- The long-term promissory note from a prior divestiture had a $4.5 million reserve recorded in Q1 2024 and a remaining net book value of $4.0 million. The note matures in 2026 and remains subject to collectability risk.
- Long-term debt includes $350.0 million of 5.75% Senior Notes due October 2026 and $297.3 million outstanding under the Term Loan A-2 Facility. The filing identifies covenant, refinancing, interest-rate and liquidity risks but reports covenant compliance at quarter-end.
- Foreign subsidiaries held $161.9 million of cash at March 31, 2024, compared with $2.1 million held in the United States. Management targeted repatriation of an additional $165.0 million by December 31, 2024 for potential debt repayment.
Important facts for investors to verify
- Whether semiconductor demand and AST volumes recover, and the resulting effect on AST margins and consolidated earnings.
- AMI’s contribution, integration progress, final purchase-price allocation and any additional consideration.
- Cash generation, working-capital requirements and the pace of debt repayment following the acquisition.
- Availability and terms of the revolving credit facility, upcoming debt maturities and compliance with leverage and interest-coverage covenants.
- Potential changes to environmental reserves, particularly for the Lower Passaic River and Arizona uranium mine matters.
- Collectability of the divestiture-related promissory note and whether further reserves are required.
- The sustainability of the lower effective tax rate, the $0.30 quarterly dividend and management’s planned foreign-cash repatriation.
- The company’s non-GAAP adjustments, including acquisition expenses, amortization, restructuring, environmental items and the promissory-note reserve, when comparing adjusted results with GAAP performance.