Enpro Industries, Inc. — 2022 Q3 Form 10-Q Summary
Business context and reporting period
EnPro is an industrial technology company serving semiconductor, photonics, industrial process, aerospace, food, biopharma, life sciences and other critical-application markets. It reports two continuing-operation segments: Sealing Technologies and Advanced Surface Technologies (AST). This filing covers the quarter and nine months ended September 30, 2022, with comparisons to the same periods in 2021.
Engineered Materials, including GGB and Garlock Pipeline Technologies (GPT), was classified as discontinued operations after GGB was placed under an agreement for sale and GPT was designated for sale. Prior periods were recast accordingly. The December 2021 NxEdge acquisition is included in AST results.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $280.1 million | $209.7 million | $827.3 million | $627.7 million |
| Gross profit | $110.8 million | $83.7 million | $317.8 million | $249.4 million |
| Gross margin | 39.6% | 39.9% | 38.4% | 39.7% |
| Operating income | $44.9 million | $23.6 million | $110.4 million | $65.0 million |
| Income from continuing operations attributable to EnPro | $26.2 million | $24.0 million | $64.2 million | $58.5 million |
| Diluted EPS from continuing operations | $1.26 | $1.16 | $3.08 | $2.82 |
| Net income attributable to EnPro | $26.9 million | $27.9 million | $78.1 million | $75.4 million |
| Adjusted EBITDA | $71.3 million | $41.9 million | $203.9 million | $124.1 million |
| Adjusted diluted EPS | $1.91 | $1.16 | $5.56 | $3.35 |
Q3 sales increased 33.6%, while nine-month sales increased 31.8%. Q3 operating margin was 16.0%, compared with 11.3% in the prior-year quarter. Continuing-operations income attributable to EnPro increased 9.2% in Q3 and 9.7% for the nine-month period. Gross margin declined modestly, reflecting inflationary manufacturing and raw-material costs.
- Sealing Technologies: Q3 sales increased 7.5% to $157.9 million and Adjusted Segment EBITDA increased 15.1% to $39.7 million. Segment margin rose to 25.1% from 23.5%.
- Advanced Surface Technologies: Q3 sales increased 90.5% to $122.5 million, primarily from NxEdge and semiconductor demand. Adjusted Segment EBITDA increased 105.7% to $39.9 million, with margin rising to 32.6% from 30.2%.
- Nine-month segment results: Sealing Technologies sales were $467.4 million and Adjusted Segment EBITDA was $118.1 million; AST sales were $360.7 million and Adjusted Segment EBITDA was $112.6 million.
- Backlog: Remaining performance obligations were $335.0 million at September 30, 2022, with approximately 93% expected to be satisfied within one year. Management cautions that backlog is not necessarily predictive of future sales.
Cash flow, liquidity and capital structure
- Operating cash flow from continuing operations was $111.6 million for the first nine months of 2022, compared with $77.5 million in 2021.
- Investing cash flow from continuing operations was $20.7 million, including $27.4 million from derivative settlements, $10.2 million of capital expenditures and $2.9 million of acquisition spending.
- Financing cash flow was negative $269.1 million, including $304.2 million of debt repayments, $60.5 million of new borrowings and $17.6 million of dividends.
- Cash and cash equivalents declined to $166.2 million at September 30, 2022, from $338.1 million at December 31, 2021. Approximately $142.9 million was held outside the United States.
- Total debt was approximately $883.6 million at September 30, 2022, consisting principally of $868.1 million of long-term debt and $15.5 million of current maturities. The $150.0 million 364-day facility was repaid during Q3.
- Revolving-credit borrowings were $90.0 million, with $299.2 million of availability after $10.8 million of letters of credit. Term Loan A-1 and A-2 balances were $138.8 million and $309.1 million, respectively.
- The company was in compliance with its credit-facility and senior-note covenants at September 30, 2022. Management targeted an additional $52.0 million of foreign-cash repatriation by December 31, 2022 for further debt reduction.
Material changes, outlook and unusual items
- NxEdge: The December 2021 acquisition materially increased AST sales and earnings but also increased amortization, interest expense and acquisition-related costs.
- Portfolio reshaping: GGB was sold to The Timken Company on November 4, 2022 for total proceeds of $305 million, subject to closing adjustments. Management expected a pre-tax gain of approximately $190 million in Q4 2022. The company anticipated completing the GPT sale by December 31, 2022.
- Cost environment: Management cited pricing actions, organic volume growth and operating leverage as favorable factors, partially offset by inflation in raw materials, labor and manufacturing costs, supply-chain challenges, foreign-exchange effects and higher interest expense.
- Accounting change: Effective July 1, 2022, EnPro changed certain inventories from LIFO to FIFO and retrospectively adjusted prior periods. Management stated that Q3 2022 cost of sales would have been $3.1 million higher under LIFO.
- Goodwill risk: The Alluxa reporting unit exceeded carrying value by an estimated 21% at June 30, 2022. Management planned its annual goodwill impairment testing as of November 1, 2022; changes in discount rates, projections or market multiples could result in impairment.
- Environmental contingencies: Environmental liabilities accrued at September 30, 2022 totaled $37.9 million, including $11.0 million current. EnPro paid $5.9 million in September 2022 toward a Lower Passaic River settlement, and held a $0.7 million reserve for that site. The Arizona uranium-mine reserve was $13.3 million, with potential additional liabilities not estimable.
- Capital allocation: The board declared a $0.28-per-share dividend payable in December 2022 and authorized up to $50.0 million for share repurchases through October 2024. No repurchases had been made under the authorization.
- Key risks include cyclical demand, semiconductor-market execution, raw-material availability and pricing, inflation, labor constraints, foreign exchange, interest rates, geopolitical developments involving Ukraine and Taiwan, COVID-19 effects, customer and supplier disruptions, goodwill impairment and legacy environmental or other contingent liabilities.
Investor verification points
- Verify the final proceeds, closing adjustments and realized gain from the GGB sale, and the timing and terms of the GPT divestiture.
- Assess AST and semiconductor exposure separately from acquisition-driven growth, including the sustainability of NxEdge growth and segment margins.
- Reconcile reported earnings with Adjusted EBITDA and adjusted EPS, particularly amortization, acquisition-related costs, environmental items, pension income and other adjustments.
- Monitor debt reduction, interest expense, covenant headroom, revolver utilization and the planned $52.0 million cash repatriation.
- Review the November 2022 goodwill impairment test, especially the Alluxa reporting unit’s sensitivity to discount rates and revised forecasts.
- Evaluate the ultimate cost and timing of environmental obligations, including the Lower Passaic River and Arizona uranium-mine matters.
- Consider the effects of foreign-exchange movements, supply-chain constraints, raw-material inflation and changing semiconductor demand on future margins and cash flow.