Enpro Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022. The interim financial statements are unaudited and prepared under U.S. GAAP. Enpro designs, manufactures, services and markets engineered industrial products through Sealing Technologies, Advanced Surface Technologies and Engineered Materials.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $333.3 million | $298.6 million | $662.0 million | $577.9 million |
| Gross profit | $130.5 million | $117.0 million | $245.1 million | $226.4 million |
| Gross margin | 39.2% | 39.2% | 37.0% | 39.2% |
| Operating income | $49.7 million | $31.9 million | $77.1 million | $59.1 million |
| Operating margin | 14.9% | 10.7% | 11.6% | 10.2% |
| Net income attributable to Enpro | $33.1 million | $29.3 million | $49.3 million | $47.3 million |
| Diluted EPS | $1.59 | $1.41 | $2.36 | $2.28 |
| Adjusted EBITDA | $82.0 million | $57.2 million | $150.0 million | $109.3 million |
Business performance and material changes
- Second-quarter sales increased 11.6%; six-month sales increased 14.6%. Management attributed growth to organic expansion across all segments, the December 2021 NxEdge acquisition, pricing actions and strong semiconductor, aerospace, food and pharmaceutical, oil and gas and power-generation demand.
- Advanced Surface Technologies sales increased 105.2% in Q2 and 109.1% for the six months, primarily reflecting NxEdge and semiconductor demand. Organic sales increased 19.1% in Q2 and 19.4% for the six months.
- Sealing Technologies reported Q2 sales down 4.1% and six-month sales essentially flat, but organic sales increased 6.3% and 9.9%, respectively, excluding divestitures and foreign exchange.
- Engineered Materials sales declined 29.4% in Q2 and 28.0% for the six months, principally because of the December 2021 divestiture of Compressor Products International and foreign-exchange effects. Organic sales increased 7.6% and 7.0%, respectively.
- Total Adjusted Segment EBITDA increased to $89.8 million in Q2 from $71.0 million and to $167.4 million for the six months from $134.9 million. Reported results benefited from NxEdge, pricing and operating leverage, while inflation, labor costs and supply-chain pressures offset part of the gains.
Cash flow, liquidity and capital structure
- Operating cash flow was $67.1 million for the first six months, compared with $58.5 million in the prior-year period. Capital expenditures were $8.5 million, and investing activities used $5.5 million.
- Financing activities used $154.4 million, including $162.5 million of debt repayments, $26.6 million of new borrowings and $11.7 million of dividends. Cash declined to $222.1 million from $338.1 million at December 31, 2021, including a $23.2 million unfavorable foreign-exchange effect.
- At June 30, 2022, current maturities and short-term debt totaled $114.2 million and long-term debt was $876.7 million, for reported debt of approximately $990.9 million. This compares with approximately $1.126 billion at December 31, 2021.
- Revolving-credit availability was $294.2 million after $95.0 million of borrowings and $10.8 million of letters of credit. Outstanding balances included $139.7 million under Term Loan A-1, $311.1 million under Term Loan A-2 and $100.0 million under the 364-Day Facility.
- The company was in compliance with its credit-facility and senior-note covenants at June 30, 2022. The $350.0 million of 5.75% senior notes mature October 15, 2026. Management targeted repatriating an additional $100 million by December 31, 2022 for further debt repayment.
- Dividends paid were $11.7 million, or $0.56 per share, during the six months. The board declared an additional $0.28-per-share dividend payable September 14, 2022. The $50 million share-repurchase authorization remained unused.
Guidance, outlook, risks and unusual items
- No specific quantitative full-year revenue or earnings guidance is provided in the filing. Management stated that demand for industrial technology applications remained high and that it would continue evaluating acquisitions and potential divestitures aligned with its portfolio strategy.
- Key operating risks include COVID-19 uncertainty, supply-chain constraints, raw-material and labor inflation, geopolitical developments involving Ukraine and Taiwan, foreign-exchange and interest-rate fluctuations, cyclical end markets and the ability to achieve expected semiconductor and technology-market growth.
- The company identified a triggering event for an interim goodwill assessment of the Alluxa reporting unit. Its estimated fair value exceeded carrying value by 21%; a one-percentage-point increase in the discount rate would reduce the excess to approximately 12%. Further deterioration could result in an impairment charge.
- Q2 included a $2.8 million expense from reducing the asbestos insurance receivable. The company also recorded $45.2 million of environmental liabilities, including $6.6 million for the Lower Passaic River matter and $13.3 million for Arizona uranium mines. The filing states that reasonably possible losses beyond recorded environmental liabilities generally cannot be estimated.
- The effective tax rate increased to 16.0% in Q2 from 2.6% and to 18.2% for the six months from 11.2%, partly because of Taiwan legal-entity conversion, an intercompany asset sale and foreign-currency effects on dividends. Prior-year tax benefits included foreign valuation-allowance and IRS examination items.
- The $200 million Original Swap was scheduled to mature September 15, 2022; its June 30 fair value was $21.9 million. A separate $100 million cross-currency swap matures October 15, 2026.
Important facts for investors to verify
- Whether semiconductor demand and NxEdge integration sustain Advanced Surface Technologies’ elevated growth and margins.
- Progress on the planned $100 million foreign-cash repatriation and additional debt repayment, including the maturity of the 364-Day Facility.
- Exposure to raw-material, labor, supply-chain, foreign-exchange and interest-rate pressures and the company’s ability to recover inflation through pricing.
- Future Alluxa performance and assumptions supporting the goodwill valuation; the filing does not provide a quantitative impairment sensitivity beyond the disclosed discount-rate scenario.
- Developments in the Lower Passaic River, Arizona uranium-mine and other environmental matters, for which ultimate costs may exceed recorded reserves.
- Actual settlement and accounting effects when the $200 million Original Swap matures.