Enpro Inc. 2023 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023. Enpro is an industrial technology company operating through Sealing Technologies and Advanced Surface Technologies (AST), serving semiconductor, commercial vehicle, aerospace, industrial, power generation, food, pharmaceutical and life-sciences markets. The filing reports continuing operations separately from divested Engineered Materials businesses.
Financial performance and liquidity
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net sales | $1,059.3 million | $1,099.2 million | (3.6%) |
| Gross profit | $426.8 million | $423.3 million | +0.8% |
| Gross margin | 40.3% | 38.5% | +180 bps |
| Operating income | $76.8 million | $72.2 million | +6.4% |
| Income from continuing operations attributable to Enpro | $10.8 million | $6.7 million | +61% |
| Diluted EPS from continuing operations | $0.51 | $0.32 | +59% |
| Net income attributable to Enpro | $22.2 million | $205.1 million | Lower due to prior-year divestiture gain |
| Adjusted income from continuing operations | $137.0 million | $141.8 million | (3.4%) |
| Adjusted diluted EPS | $6.54 | $6.79 | (3.7%) |
| Adjusted EBITDA | $238.0 million | $257.4 million | (7.5%) |
| Operating cash flow from continuing operations | $208.4 million | $106.1 million | +$102.3 million |
| Capital expenditures | $33.9 million | $29.4 million | +$4.5 million |
Reported continuing-operations profit was affected by a $60.8 million non-cash goodwill impairment charge related to Alluxa, $5.0 million of restructuring and impairment costs, $30.8 million of income tax expense and $45.0 million of interest expense. The effective tax rate was unusually high at 81.6%, primarily because the Alluxa goodwill impairment was not tax deductible and because of foreign tax-rate differences and valuation-allowance changes.
- Sealing Technologies: Sales rose 5.5% to $658.4 million. Adjusted Segment EBITDA increased 20.9% to $192.3 million, and margin expanded from 25.5% to 29.2%, primarily due to pricing, favorable mix and sales optimization.
- Advanced Surface Technologies: Sales declined 15.7% to $401.2 million as the semiconductor industry entered a downturn. Adjusted Segment EBITDA fell 32.5% to $95.5 million, with margin declining from 29.7% to 23.8% due primarily to lower volumes, higher labor costs and LeanTeq start-up expenses.
- Revenue concentration: One customer represented approximately $270.3 million, or about 26%, of consolidated 2023 sales.
- Backlog: Backlog was $225.4 million at year-end versus $310.7 million a year earlier; approximately 5% was expected to be filled after 2024.
Cash and cash equivalents totaled $369.8 million at December 31, 2023, including $214.1 million in the United States and $155.7 million outside the United States. Debt totaled $646.8 million on the balance sheet, comprising approximately $347.9 million of senior notes and $298.1 million of term-loan facilities. The company prepaid the remaining $133.1 million Term Loan A-1 balance in July 2023. Revolver availability was $390.0 million after $10.0 million of letters of credit. Contractual debt principal payments totaled $650.1 million, including $625.8 million due in 2026. Enpro was in compliance with its debt covenants at year-end.
Material changes and unusual items
- Sales declined because AST was affected by the semiconductor downturn, partially offset by growth in Sealing Technologies.
- Alluxa’s remaining goodwill was fully impaired in 2023 following weaker-than-expected actual and forecast performance. Alluxa had no goodwill remaining at year-end.
- GPT was sold on January 30, 2023 for net proceeds of $28.9 million, producing a pretax gain of $14.6 million. Discontinued operations contributed $11.4 million after tax in 2023, compared with $198.4 million in 2022, when the GGB divestiture generated a substantial gain.
- Operating cash flow increased substantially due principally to lower income-tax payments and improved working capital.
- Dividends paid were $24.3 million, or $1.12 per share. The company had made no share repurchases under its $50 million authorization through year-end.
Outlook, commentary and risks
Management did not provide a specific quantified 2024 revenue, earnings or cash-flow guidance in the provided filing text. Management stated that it remains focused on organic growth, innovation, disciplined acquisitions and returning capital to shareholders. The quarterly dividend was increased to $0.30 per share beginning in March 2024.
On January 29, 2024, Enpro completed the $210 million cash acquisition of Advanced Micro Instruments (AMI). AMI will be included in Sealing Technologies; its 2023 results are not included in Enpro’s financial statements. On February 21, 2024, Enpro acquired the remaining Alluxa equity interests for $17.9 million and became Alluxa’s sole owner.
- Semiconductor and other cyclical markets may experience further demand declines, excess capacity or pricing pressure.
- AST depends significantly on a small number of semiconductor-equipment customers, including one customer representing approximately 26% of consolidated sales.
- Variable-rate debt exposes results and cash flow to higher SOFR and other interest-rate increases.
- Supply-chain disruptions, raw-material costs, tariffs and limited sources for certain materials could pressure margins.
- Environmental liabilities totaled $39.0 million at year-end. The company also retains contingent liabilities associated with former businesses, including the Lower Passaic River and Arizona uranium mine matters; the filing states that potential losses beyond recorded reserves generally cannot be estimated.
- Goodwill and intangible assets remain material: goodwill was $808.4 million and other intangible assets were $733.5 million at year-end. The semiconductor reporting unit had $532.2 million of goodwill and was sensitive to changes in forecast sales and discount rates.
- Cybersecurity incidents, product liability, warranty claims, international operations, foreign exchange, PFAS regulation and acquisition-integration risks could materially affect results.
Investor verification points
- Confirm the pace and duration of the semiconductor recovery and its effect on AST volumes, margins and the semiconductor reporting unit’s goodwill valuation.
- Review the AMI acquisition financing, purchase accounting, integration progress and contribution to Sealing Technologies results beginning January 29, 2024.
- Assess debt maturities, refinancing plans for the $625.8 million of principal due in 2026, variable-rate exposure and covenant headroom.
- Reconcile GAAP results with adjusted income and adjusted EBITDA, particularly the Alluxa impairment, amortization, restructuring, environmental and divestiture-related adjustments.
- Monitor environmental and legacy-business contingencies, including the Lower Passaic River and Arizona uranium mine matters, against recorded reserves.
- Evaluate customer concentration, backlog conversion and the significance of the $225.4 million year-end backlog, which is not guaranteed to convert to sales on the stated schedule.