Enpro Industries, Inc. — Q2 2021 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 quarter and six months ended June 30, 2021; interim financial statements are unaudited.
Management continues repositioning the portfolio toward materials-science businesses serving semiconductor, life sciences, industrial and other markets with recurring demand and favorable secular trends. The company operated 45 primary manufacturing and service facilities in 13 countries.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $298.6 million | $247.0 million | $577.9 million | $529.7 million |
| Gross profit | $117.0 million | $82.5 million | $226.4 million | $177.8 million |
| Gross margin | 39.2% | 33.4% | 39.2% | 33.6% |
| Operating income | $31.9 million | $1.8 million | $59.1 million | $22.3 million |
| Income from continuing operations attributable to Enpro | $29.3 million | $(3.3) million | $47.3 million | $6.8 million |
| Diluted EPS from continuing operations | $1.41 | $(0.16) | $2.28 | $0.33 |
| Adjusted EBITDA | $57.2 million | $37.5 million | $109.3 million | $78.1 million |
| Operating cash flow | Not separately provided | Not separately provided | $58.5 million | $33.4 million |
Q2 operating margin was approximately 10.7%, compared with 0.7% in the prior-year quarter. The Q2 effective tax rate was 2.6%, compared with negative 123.5% in 2020, primarily reflecting valuation-allowance releases, a favorable IRS examination conclusion and releases of uncertain tax positions. The six-month effective tax rate was 11.2%, compared with 57.3%.
- Sealing Technologies Q2 sales increased 7.9% to $162.5 million; adjusted segment EBITDA increased 39.0% to $42.4 million, with margin rising to 26.1% from 20.3%.
- Advanced Surface Technologies Q2 sales increased 48.0% to $59.2 million, aided by the Alluxa acquisition and semiconductor demand; adjusted segment EBITDA increased 41.8% to $15.6 million.
- Engineered Materials Q2 sales increased 36.5% to $80.0 million; adjusted segment EBITDA increased 165.3% to $13.0 million, with margin rising to 16.3% from 8.4%.
Liquidity, cash flow and debt
- Cash and cash equivalents were $261.9 million at June 30, 2021, up from $229.5 million at December 31, 2020. The company held $186.6 million outside the United States.
- Six-month cash flow from operations was $58.5 million. Capital expenditures were $10.2 million, investing activities used $12.0 million, financing activities used $14.8 million, and dividends paid were $11.3 million.
- Total debt was approximately $490.2 million, consisting primarily of $143.4 million outstanding under the term loan and $350.0 million of 5.75% senior notes due October 2026. Current maturities were $3.9 million.
- Revolver availability was $388.6 million after $11.4 million of outstanding letters of credit. Enpro was in compliance with all credit agreement covenants at June 30, 2021.
- The board declared a $0.27-per-share dividend in July 2021, payable September 15, 2021. No repurchases were made under the $50 million authorization through October 2022.
Material changes versus the prior comparable period
- Q2 sales increased 20.9% year over year, while six-month sales increased 9.1%. Reported comparisons reflect the October 2020 Alluxa acquisition, multiple 2020 divestitures and favorable foreign-currency effects.
- Management reported broad-based demand improvement as economies recovered from the pandemic, particularly in semiconductor, general industrial, food and pharmaceutical, automotive, petrochemical and heavy-duty truck markets.
- Q2 gross profit increased $34.5 million and operating income increased $30.1 million. The prior-year quarter included $17.5 million of restructuring and impairment expense, compared with $2.7 million in Q2 2021.
- Six-month continuing-operations earnings improved substantially, but the prior-year period included $205.4 million of income from discontinued operations, principally the gain on the 2020 sale of Fairbanks Morse. Total net income therefore declined from $212.4 million to $47.3 million.
- Accounts receivable increased to $166.5 million and inventories increased to $149.1 million from December 31, 2020, reflecting working-capital investment and stronger activity.
Guidance, outlook, risks and unusual items
Enpro did not provide specific quantitative revenue or earnings guidance in the filing. Management said demand momentum remained strong, expected continued strength in many served industries, and anticipated that some early-2021 benefit reflected customer restocking that could not be quantified. The company continues to evaluate acquisitions and potential divestitures aligned with its portfolio strategy.
- Supply-chain constraints affected certain metals and rubber-related chemicals. Management stated that facilities were open and had generally not experienced significant disruption, but future COVID-19 variants, government actions and demand changes remain uncertain.
- Other key risks include cyclical end markets, raw-material prices and availability, foreign-exchange movements, product-development delays, delivery penalties, competition, pricing pressure and contingent liabilities.
- Environmental liabilities were accrued at $39.9 million at June 30, 2021. Enpro remains involved in remediation matters at 20 sites, including the Lower Passaic River Superfund matter; further reserve adjustments are possible.
- Asbestos-related insurance receivables and recoveries remain subject to collection risk. The company reported approximately $4.2 million of available coverage from solvent carriers and a $0.9 million amount billed to an insurer.
- The IRS examination of 2014–2017 federal returns concluded during Q2. Enpro expects a cash refund of approximately $24.7 million plus applicable interest, with timing potentially affected by COVID-19 processing delays.
- The company identified prior accounting errors related to the 2020 Air Springs disposal. It concluded the errors were not material to 2020 and recorded an approximately $2.0 million pretax out-of-period loss in Q1 2021.
- On August 2, 2021, after the reporting period, CEO Marvin Riley resigned by mutual agreement. The company expects approximately $0.6 million of separation expense in Q3 2021, and Eric Vaillancourt became interim CEO.
Important facts for investors to verify
- Whether strong organic growth persists after customer restocking effects, acquisition contributions and favorable currency effects are normalized.
- The sustainability of improved segment margins amid inflation, supply-chain constraints, capacity-expansion costs and higher incentive compensation.
- Timing and collection of the expected $24.7 million IRS refund and its effect on cash balances.
- Debt reduction plans, covenant headroom and the maturity/refinancing implications of the 2026 senior notes.
- Potential changes in environmental, asbestos and other legacy liabilities, particularly the Lower Passaic River matter.
- The operational and strategic effects of the August 2021 CEO transition and any associated restructuring or compensation costs.
- The company’s non-GAAP adjustments, including restructuring, amortization, acquisition-related compensation and pension income, when assessing underlying earnings and EBITDA.