Enpro Industries, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2023, compared with March 31, 2022. Enpro operates two reportable segments: Sealing Technologies and Advanced Surface Technologies (AST), serving semiconductor, photonics, industrial process, aerospace, food, biopharma, life sciences and other critical-application markets.
Following the January 30, 2023 sale of Garlock Pipeline Technologies, Inc. (GPT), together with the 2022 divestiture of GGB, the former Engineered Materials segment is presented as discontinued operations for all periods.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $282.6 million | $270.1 million |
| Gross profit | $116.1 million | $94.7 million |
| Operating income | $43.8 million | $21.7 million |
| Income from continuing operations | $26.0 million | $12.2 million |
| Net income attributable to Enpro | $37.4 million | $16.8 million |
| Diluted EPS from continuing operations | $1.24 | $0.57 |
| Total diluted EPS | $1.79 | $0.81 |
| Adjusted EBITDA | $68.6 million | $59.0 million |
| Adjusted diluted EPS | $1.95 | $1.56 |
| Operating cash flow from continuing operations | $26.4 million | $27.4 million |
Gross margin increased to approximately 41.1% from 35.1%, while operating margin increased to approximately 15.5% from 8.0%. The reported total net income and EPS benefited from $11.2 million of after-tax gain on the GPT sale and $0.2 million of discontinued-operation earnings.
Sealing Technologies sales increased 12.8% to $173.3 million, and Adjusted Segment EBITDA increased 44.9% to $49.7 million; segment margin rose to 28.7% from 22.3%. AST sales declined 6.3% to $109.4 million, and Adjusted Segment EBITDA declined 15.5% to $29.5 million; segment margin fell to 27.0% from 29.9%.
Cash flow, debt and liquidity
- Cash and cash equivalents were $336.1 million at March 31, 2023, compared with $334.4 million at December 31, 2022. The company also held $35.0 million of short-term investments maturing in July 2023.
- Operating cash flow from continuing operations was $26.4 million. Capital expenditures were $5.0 million, net proceeds from business sales were $25.3 million, and $35.0 million was invested in short-term investments.
- Financing activities used $12.0 million, including $4.0 million of debt repayments and $6.2 million of dividends.
- Total debt was approximately $786.8 million, including $15.6 million of current maturities and $771.2 million of long-term debt. The balance included $134.9 million under Term Loan A-1, $305.3 million under Term Loan A-2 and $350.0 million of 5.75% senior notes due 2026.
- Revolving-credit availability was $389.2 million after $10.8 million of letters of credit. Enpro reported compliance with its credit-facility and senior-note covenants at March 31, 2023.
- Management targeted repatriation of an additional $90.0 million of foreign cash by December 31, 2023 for potential unscheduled debt repayments.
Material changes versus the prior comparable period
- Sales increased 4.6%, driven by 6.3% organic growth, partially offset by foreign-currency translation and divestitures.
- Sealing Technologies benefited from higher pricing, volume growth and lower SG&A, particularly in aerospace, nuclear power generation, commercial vehicles, general industrial, and food and pharmaceutical markets.
- AST results reflected a near-term slowdown in semiconductor capital-equipment spending, lower volume and unfavorable mix. Semiconductor sales declined to $99.5 million from $107.6 million.
- Interest expense, net increased by $1.0 million because of higher borrowing rates, partly offset by higher interest income on cash balances.
- The effective tax rate increased to 23.7% from 20.7%, primarily because of higher foreign jurisdiction tax rates, partly offset by a foreign valuation-allowance release and share-based-payment tax benefits.
- Comprehensive income attributable to Enpro increased to $44.5 million from $5.1 million, primarily reflecting favorable foreign-currency translation changes.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a specific quantitative earnings or revenue forecast. Management emphasized continued investment in new products, technology, productivity and continuous-improvement initiatives, and continued evaluation of strategic acquisitions. Consolidated backlog was $294.0 million at March 31, 2023, with approximately 95% expected to be satisfied within one year; management cautioned that backlog is not necessarily predictive of future sales.
- The semiconductor market slowdown remains a principal near-term pressure on AST, while management described demand as strong in several Sealing Technologies markets.
- Key risks include cyclical end markets, semiconductor and customer concentration, geopolitical developments including Taiwan and Ukraine, tariffs and sanctions, supply-chain and raw-material costs, labor issues, foreign exchange, higher interest rates, acquisitions and integration, and contingent liabilities.
- Environmental liabilities totaled $41.2 million at March 31, 2023. The company also carried a $12.4 million reserve for Arizona uranium mine matters and a $0.7 million reserve for the Lower Passaic River site; management cannot estimate the upper end of potential liability for the uranium matters.
- Net proceeds from the GGB and GPT divestitures could require an offer to repurchase senior notes in the first quarter of 2024 if proceeds are not sufficiently reinvested or used to repay specified debt.
- The board declared a quarterly dividend of $0.29 per share payable June 14, 2023. A $50.0 million share-repurchase authorization remains available through October 2024, but no repurchases were made under the authorization.
- The company reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate recurring operating performance from the $11.2 million after-tax GPT divestiture gain included in Q1 net income.
- Track whether the AST semiconductor slowdown persists and whether Sealing Technologies pricing and volume gains continue.
- Reconcile Adjusted EBITDA and adjusted EPS to GAAP results, including amortization, restructuring, environmental, foreign-exchange and other adjustments.
- Confirm progress on the planned $90.0 million foreign-cash repatriation and associated debt reduction.
- Assess refinancing and liquidity requirements for the September 2024 Term Loan A-1 maturity and the 2026 senior notes.
- Monitor environmental settlements, remediation costs and the possible 2024 senior-note repurchase obligation.