Enpro Industries, Inc. 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 quarter and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Management is repositioning the portfolio toward materials-science businesses serving semiconductor, life sciences and other technology markets.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $283.1 million | $268.3 million | $861.0 million | $798.0 million |
| Gross profit | $109.5 million | $94.5 million | $335.9 million | $272.3 million |
| Gross margin | 38.7% | 35.2% | 39.0% | 34.1% |
| Operating income | $28.6 million | $(7.5) million | $87.7 million | $14.8 million |
| Operating margin | 10.1% | (2.8)% | 10.2% | 1.9% |
| Income from continuing operations attributable to EnPro | $27.5 million | $(21.6) million | $74.8 million | $(14.8) million |
| Diluted EPS from continuing operations | $1.33 | $(1.05) | $3.61 | $(0.72) |
| Adjusted EBITDA | $51.5 million | $42.1 million | $160.8 million | $120.2 million |
| Adjusted diluted EPS | $1.40 | $1.01 | $4.33 | $2.84 |
Q3 sales increased 5.5% year over year, while nine-month sales increased 7.9%. Q3 and nine-month adjusted EBITDA increased 22.3% and 33.8%, respectively. Total adjusted segment EBITDA was $62.7 million in Q3 and $197.5 million for the nine months, compared with $53.3 million and $148.9 million, respectively, in the prior-year periods.
- Advanced Surface Technologies sales increased 44.2% in Q3 and 46.9% year to date, primarily from semiconductor demand and the Alluxa acquisition. Segment EBITDA margin was 30.2% in Q3 and 29.3% year to date.
- Sealing Technologies sales declined 6.9% in Q3 and 5.4% year to date because of divestitures, but organic sales increased 15.7% and 13.4%, respectively. Segment EBITDA margin improved to 23.5% in Q3 and 24.3% year to date.
- Engineered Materials sales increased 9.0% in Q3 and 16.3% year to date. Year-to-date segment EBITDA margin improved to 14.7% from 10.5%.
Other income in Q3 included a $19.5 million pretax gain on the sale of the polymer components business. The nine-month effective tax rate was 21.9%, benefiting from a foreign tax valuation allowance release, the favorable conclusion of an IRS examination and releases of uncertain tax positions. Q3 tax expense reflected nondeductible tax goodwill related to the divestiture and higher foreign tax rates.
Cash flow, balance sheet, debt and liquidity
- Cash provided by operating activities was $97.8 million for the first nine months of 2021, compared with $48.4 million in 2020.
- Capital expenditures were $13.4 million. Investing activities provided $25.9 million, including $38.9 million of net proceeds from business sales.
- Financing activities used $21.3 million, including $16.8 million of dividends and $3.0 million of debt repayments.
- Cash and cash equivalents were $330.0 million at September 30, 2021, up from $229.5 million at December 31, 2020. Approximately $212.3 million was held outside the United States.
- Total debt was approximately $489.4 million, consisting primarily of $142.5 million outstanding under the term loan and $350.0 million of 5.75% senior notes due 2026, net of applicable balance-sheet presentation differences.
- Revolving credit availability was $388.5 million after $11.5 million of letters of credit. EnPro was in compliance with all credit facility and senior note covenants.
- Backlog was $298.3 million at September 30, 2021, with approximately 96% expected to be satisfied within one year; management cautions that backlog is not necessarily predictive of future revenue.
Material changes versus the prior comparable period
- Profitability improved substantially, with Q3 operating income moving from a $7.5 million loss to $28.6 million of income and nine-month continuing-operations income attributable to EnPro moving from a $14.8 million loss to $74.8 million of income.
- Prior-year results included significant impairment charges, a legal settlement and higher environmental charges; these items did not recur at comparable levels in 2021.
- The 2021 portfolio included the October 2020 acquisition of Alluxa and the September 2021 divestiture of the polymer components business. Several additional businesses were divested during 2020.
- Working capital absorbed cash in 2021: accounts receivable increased $27.7 million and inventories increased $15.1 million during the first nine months.
- In October 2021, the company received a $24.7 million IRS refund plus $1.2 million of interest following completion of an audit of its 2014–2017 federal returns.
Guidance, outlook, risks and unusual items
Management reported strong demand and improved momentum across the businesses, particularly in semiconductor, food and pharmaceutical, petrochemical, heavy-duty truck and general industrial markets. Results may have benefited from customer restocking as economies recovered from the pandemic, although the company could not quantify that benefit. No specific earnings or revenue guidance was provided.
- On October 12, 2021, EnPro agreed to sell its CPI Business for an aggregate purchase price of $195.0 million and expects a pretax book gain exceeding $100 million. Closing was expected by the end of the first quarter of 2022, subject to customary conditions.
- On November 4, 2021, EnPro agreed to acquire NxEdge, a semiconductor-focused manufacturing, cleaning, coating and refurbishment business, for $850.0 million in cash. Funding was expected from cash, revolver borrowings and new term loans, including commitments for a $265 million incremental term loan and a $135 million 364-day facility.
- COVID-19, supply-chain constraints, raw-material prices, labor shortages, currency movements, cyclical end markets and semiconductor-market execution remain key operating risks.
- Environmental liabilities were accrued at $42.9 million. The company also maintained a $13.4 million reserve for Arizona uranium mine remediation and a $5.4 million reserve for the Lower Passaic River matter after increasing that reserve by $4.5 million in Q3.
- The company remains exposed to asbestos-related insurance recovery uncertainty and other legacy environmental, product liability and divestiture-related contingencies.
- The filing disclosed two nonmaterial accounting errors related to the 2020 Air Springs disposal; the company recorded a $2.0 million pretax out-of-period adjustment in Q1 2021.
Most important facts for investors to verify
- Whether the CPI divestiture and NxEdge acquisition closed on the anticipated terms and timing, including final purchase-price adjustments and financing.
- The sustainability of organic growth and margin expansion after separating acquisition, divestiture, foreign-currency and customer-restocking effects.
- Post-NxEdge leverage, covenant headroom, interest expense and liquidity.
- The ultimate cost and timing of environmental, asbestos and other legacy contingencies, particularly the Lower Passaic River and Arizona uranium mine matters.
- Whether semiconductor demand and Alluxa/NxEdge integration deliver the expected growth and synergies.
- The reconciliation of adjusted EBITDA and adjusted EPS to GAAP results, including recurring versus unusual adjustments.