Enpro Industries, Inc. — Form 10-Q Summary
Business context and reporting period
EnPro designs, manufactures, services and markets engineered industrial products through three segments: Sealing Technologies, Advanced Surface Technologies and Engineered Materials. The filing covers the unaudited three months ended March 31, 2022, compared with the same period of 2021. The company continues to reposition its portfolio toward industrial technology businesses serving semiconductor, life sciences and other technology markets.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $328.7 million | $279.3 million | Up 17.7% |
| Gross profit | $114.6 million | $109.4 million | Up 4.8% |
| Gross margin | 34.9% | 39.2% | Down 4.3 percentage points |
| Operating income | $27.4 million | $27.2 million | Up 0.7% |
| Operating margin | 8.3% | 9.7% | Down 1.4 percentage points |
| Net income attributable to EnPro | $16.2 million | $18.0 million | Down 10.0% |
| Diluted EPS | $0.77 | $0.87 | Down $0.10 |
| Adjusted EBITDA | $67.9 million | $52.0 million | Up 30.6% |
| Adjusted EBITDA margin | 20.7% | 18.6% | Up 2.1 percentage points |
| Operating cash flow | $30.7 million | $20.3 million | Up $10.4 million |
| Capital expenditures | $3.8 million | $6.2 million | Down $2.4 million |
Cash and cash equivalents were $293.4 million at March 31, 2022, compared with $338.1 million at December 31, 2021. Total reported debt was approximately $1.08 billion, consisting of current maturities, short-term debt and long-term debt, versus approximately $1.13 billion at year-end 2021. Revolver availability was $258.6 million after $130.0 million of borrowings and $11.4 million of letters of credit. The company was in compliance with its credit facility and senior note covenants.
Working capital increased, with accounts receivable rising to $196.4 million from $177.0 million and inventories rising to $164.0 million from $160.0 million. The company held $277.8 million of cash outside the United States. It repatriated $42.9 million during the quarter for debt repayment and targeted an additional $125 million of repatriations by December 31, 2022.
Material changes versus the prior comparable period
- Advanced Surface Technologies sales increased 113.3% to $116.7 million, primarily from the December 2021 NxEdge acquisition and semiconductor demand. Segment Adjusted EBITDA increased 101.7% to $34.9 million.
- Sealing Technologies sales increased 4.8% to $153.6 million, but Adjusted EBITDA decreased 1.2% to $33.5 million as higher pricing and volume were offset by material, personnel and other manufacturing costs.
- Engineered Materials sales declined 26.6% to $59.0 million, principally reflecting the December 2021 divestiture of Compressor Products International. Adjusted EBITDA declined 27.0% to $9.2 million.
- Consolidated sales growth included a 13.5% organic increase, a 5.8% acquisition contribution and a 1.6% divestiture-related reduction, with foreign currency reducing growth by 1.6%.
- Net income and GAAP EPS declined despite higher sales because of increased interest expense, acquisition-related amortization and fair-value inventory amortization. Interest expense, net increased to $6.9 million from $3.8 million.
- Adjusted income attributable to EnPro increased to $38.3 million from $28.3 million, and adjusted diluted EPS increased to $1.83 from $1.37. These are non-GAAP measures.
- Financing activities used $60.4 million of cash, including $52.4 million of debt repayments and $5.9 million of dividends. Net cash declined by $44.7 million, including an $11.5 million adverse foreign exchange effect.
Guidance, outlook, risks and unusual items
The filing does not provide specific quantitative revenue, earnings or EBITDA guidance. Management reported continued momentum in semiconductor, heavy-duty truck, aerospace, food and pharmaceutical markets and expects to continue evaluating acquisitions and potential divestitures consistent with its portfolio strategy.
Management cited inflationary raw-material and labor costs, supply-chain constraints affecting metals and rubber-related chemicals, and continuing COVID-19 uncertainty. Other identified risks include cyclical end markets, geopolitical activity including the Ukraine conflict, foreign-exchange and interest-rate volatility, labor disputes, competitive pressures, product-development delays and the ability to achieve semiconductor and technology-market growth.
The NxEdge acquisition generated $11.6 million of pre-tax acquisition-related costs in the quarter, including backlog intangible amortization, fair-value inventory amortization and transaction expenses. Total amortization expense was $20.0 million, compared with $11.9 million in the prior-year quarter. The purchase price allocation remains subject to revision, with finalization expected no later than the fourth quarter of 2022.
Environmental liabilities totaled $46.0 million at March 31, 2022, including $6.6 million for the Lower Passaic River matter and $13.4 million for Arizona uranium mine matters. The company stated that it cannot estimate a reasonably possible loss range in excess of recorded environmental liabilities. Legacy asbestos insurance receipts totaled $2.2 million in the quarter.
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
- Whether semiconductor demand and NxEdge integration sustain the sharp Advanced Surface Technologies growth and margin contribution.
- Whether pricing actions offset inflation in raw materials, labor and other operating costs without weakening demand.
- The timing and amount of additional foreign cash repatriations and debt repayments, particularly the targeted $125 million by year-end 2022.
- Refinancing and liquidity requirements associated with the $150.0 million 364-day term facility and other scheduled debt maturities.
- Potential changes to the NxEdge purchase price allocation and the resulting amortization, taxes and reported earnings.
- Developments in the Lower Passaic River, Arizona uranium mine and other environmental contingencies beyond recorded reserves.
- The effect of foreign currency movements, rising interest rates, geopolitical conditions and supply-chain disruptions on cash flow and margins.
- Backlog conversion: consolidated backlog was $394.1 million at March 31, 2022, with approximately 90% expected to be satisfied within one year, although the filing states that backlog is not necessarily predictive of future sales.