Enpro Industries, Inc. — FY2020 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2020. Although the request references 2020 Q4, the source is an annual Form 10-K and does not provide a complete standalone fourth-quarter income statement. EnPro designs, manufactures, services and markets engineered industrial products through three segments: Sealing Technologies, Advanced Surface Technologies, and Engineered Materials. Continuing operations had 45 primary manufacturing and service facilities in 13 countries and approximately 4,400 employees.
Management continued reshaping the portfolio toward materials-science businesses with technology differentiation, recurring revenue and exposure to semiconductor, life-sciences and other technology markets. The Advanced Surface Technologies segment was established as a separate reporting segment in 2020.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $1,074.0 million | $1,205.7 million | Down 10.9% |
| Gross profit | $375.8 million | $403.8 million | Gross margin 35.0% vs. 33.5% |
| Operating income | $25.9 million | $56.6 million | Down $30.7 million |
| Income from continuing operations attributable to EnPro | $(23.7) million | $7.8 million | Turned to loss |
| Diluted EPS from continuing operations | $(1.15) | $0.38 | Down $1.53 |
| Net income attributable to EnPro | $184.4 million | $38.3 million | Includes Fairbanks Morse disposal gain |
| Adjusted income from continuing operations | $83.9 million | $81.1 million | Up 3.5% |
| Adjusted diluted EPS from continuing operations | $4.07 | $3.90 | Up 4.4% |
| Adjusted Segment EBITDA | $210.6 million | $208.6 million | Up 1.0% |
| Adjusted EBITDA | $168.3 million | $169.4 million | Down 0.6% |
| Cash flow from continuing operations | $57.6 million | $130.8 million | Down $73.2 million |
| Capital expenditures | $18.3 million | $21.6 million | Down $3.3 million |
Reported continuing-operations results were affected by COVID-19-related demand weakness, restructuring and impairment charges, environmental reserves, a legal settlement and divestiture costs. The reported gross margin increased despite lower sales, reflecting mix, pricing and cost actions.
Segment performance
| Segment | 2020 sales | Sales change | 2020 Adjusted Segment EBITDA | 2020 margin |
|---|---|---|---|---|
| Sealing Technologies | $636.7 million | Down 16.5% | $131.0 million | 20.6% |
| Advanced Surface Technologies | $171.2 million | Up 42.4% | $47.1 million | 27.5% |
| Engineered Materials | $275.0 million | Down 17.0% | $32.5 million | 11.8% |
Advanced Surface Technologies benefited from semiconductor demand and acquisitions, including LeanTeq and Alluxa. Sealing Technologies was pressured by heavy-duty trucking, general industrial and aerospace weakness. Engineered Materials declined primarily because of automotive, oil and gas and general industrial weakness.
Cash, liquidity and debt
- Cash and cash equivalents were $229.5 million at December 31, 2020, compared with $121.2 million at year-end 2019. Cash included $83.4 million in the United States and $146.1 million outside the United States.
- Available borrowing capacity under the $400 million revolving credit facility was $388.6 million after $11.4 million of outstanding letters of credit.
- Total long-term debt, including current maturities, was $491.3 million on the balance sheet, consisting principally of $350 million of 5.75% senior notes due 2026 and $145.4 million outstanding under the term loan facility.
- Contractual principal debt payments totaled $495.4 million, including $129.4 million due in 2024 and $350.0 million due thereafter.
- EnPro was in compliance with its credit-facility covenants at year-end. A January 2021 amendment waived a required term-loan prepayment related to remaining Fairbanks Morse sale proceeds.
- Operating, investing and financing cash flows from continuing operations were $57.6 million, $216.1 million and $(167.3) million, respectively. Investing cash flow benefited from $475.1 million of business-sale proceeds and was reduced by $238.3 million for the Alluxa acquisition.
Material changes versus the prior comparable period
- COVID-19 reduced demand in several end markets and led to temporary facility closures, employee-protection measures and cost controls.
- EnPro acquired Alluxa on October 26, 2020 for $238.4 million net of cash acquired, plus rollover equity. Alluxa contributed $5.7 million of 2020 sales and a $6.1 million pretax loss, reflecting only a partial year of ownership.
- EnPro completed the sale of Fairbanks Morse on January 21, 2020 for approximately $444.3 million of net proceeds and recognized a $274.3 million pretax gain. Fairbanks Morse is reported as discontinued operations for all periods.
- EnPro sold or exited several lower-priority businesses, including Air Springs, the Motor Wheel and Crewson brands, Lunar air disc brakes, the Dieuze bushing-block business and Technetics Group UK.
- Restructuring and impairment costs increased to $46.7 million from $35.1 million. The 2020 charges included a $16.1 million trademark impairment and significant charges associated with divestitures and workforce reductions totaling 289 positions.
- Other expense increased principally because of $38.2 million of environmental reserve expense and a $7.5 million legal settlement related to products last supplied in 2008.
- Environmental liabilities increased to $42.2 million from $36.0 million. Fourth-quarter reserve increases included $12.5 million for Water Valley, $12.9 million for Arizona uranium mines and $2.8 million for Pine Bluff.
- The previously disclosed material weakness related to income-tax controls was remediated as of December 31, 2020. Management concluded that disclosure controls and internal control over financial reporting were effective; Alluxa was excluded from the 2020 internal-control assessment because it was acquired during the year.
Guidance, outlook, risks and unusual items
Management did not provide formal numerical 2021 revenue or earnings guidance. It expects challenging conditions to continue in some businesses but anticipates increased 2021 Adjusted Segment EBITDA from cost management, portfolio reshaping and acquisition contributions. Management expects additional restructuring charges in 2021 as it implements a shared-services structure in Sealing Technologies.
- COVID-19 duration, demand effects, facility disruptions and supply-chain interruptions remain significant uncertainties.
- Semiconductor growth creates opportunity but also increases dependence on a limited number of major equipment customers. One customer represented approximately $132.2 million of 2020 consolidated sales.
- Goodwill was $621.8 million at year-end. The newly formed Semiconductor reporting unit had only a 2% excess of fair value over carrying value; management estimated that a one-percentage-point increase in the discount rate could produce an approximately $20 million impairment.
- Environmental and legacy liabilities remain difficult to estimate. EnPro cannot estimate the upper end of potential losses for several sites, including Water Valley, Arizona and Pine Bluff.
- Approximately $10 million of excess Fairbanks Morse sale proceeds remained subject to reinvestment or debt-repayment requirements by April 25, 2021 to avoid a potential senior-notes repurchase offer.
- Other risks include cyclical industrial markets, raw-material and tariff pressures, foreign exchange, cybersecurity, product liability, intellectual-property protection, acquisitions, international operations and potential changes toward electric or clean-energy technologies.
- Backlog was $212.5 million at December 31, 2020, versus $190.7 million in 2019; approximately 6.1% was expected to be filled beyond 2021. Management cautions that backlog is not highly predictive for much of the business.
Most important facts for an investor to verify
- Reconcile reported net income of $184.4 million to the $(23.7) million loss from continuing operations and isolate the $208.1 million contribution from discontinued operations.
- Assess whether semiconductor and life-sciences growth can offset continued weakness in Sealing Technologies and Engineered Materials.
- Review the valuation assumptions supporting $621.8 million of goodwill and the limited cushion in the Semiconductor reporting unit.
- Monitor environmental reserves of $42.2 million and unresolved exposure above recorded amounts, particularly at Water Valley, Arizona and Pine Bluff.
- Confirm the final use of the approximately $10 million of remaining Fairbanks Morse sale proceeds and any resulting debt repayment or senior-notes tender obligation.
- Evaluate Alluxa integration, the future cost of exercising or settling executive rollover put and call rights, and the acquisition’s recurring profitability.
- Review the company’s non-GAAP reconciliations because Adjusted Income, Adjusted EBITDA and Adjusted Segment EBITDA exclude substantial recurring or potentially recurring items.