Enpro Industries, Inc. — Fiscal 2022 Form 10-K Summary
Business context and reporting period
Enpro is an industrial technology company serving semiconductor, photonics, industrial process, aerospace, food, biopharma, life sciences, transportation and other critical-application markets. The filing covers the year ended December 31, 2022, including fourth-quarter results. Continuing operations comprise two segments: Sealing Technologies and Advanced Surface Technologies.
- Sealing Technologies: engineered sealing, gasket, fluid-transfer and heavy-duty commercial-vehicle products; approximately two-thirds of segment revenue is aftermarket or recurring.
- Advanced Surface Technologies: semiconductor-component cleaning, coating, refurbishment and testing, plus optical filters and thin-film coatings.
- 2022 sales were concentrated in semiconductors, which represented $437.0 million, or 40% of third-party sales. Medium- and heavy-duty truck sales were $191.2 million, or 17%.
Financial performance and key metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $1,099.2 million | $840.4 million | Up 30.8% |
| Gross profit | $423.3 million | $328.1 million | Up 29.0% |
| Gross margin | 38.5% | 39.0% | Down approximately 50 bps |
| Operating income | $72.2 million | $65.4 million | Up 10.4% |
| Operating margin | 6.6% | 7.8% | Down approximately 120 bps |
| Income from continuing operations attributable to Enpro | $6.7 million | $56.9 million | Down 88.2% |
| Diluted EPS from continuing operations | $0.32 | $2.74 | Down $2.42 |
| Net income attributable to Enpro | $205.1 million | $177.9 million | Up 15.3% |
| Adjusted EBITDA | $257.4 million | $162.4 million | Up 58.5% |
| Adjusted EBITDA margin | 23.4% | 19.3% | Up approximately 410 bps |
| Adjusted Segment EBITDA | $300.6 million | $215.1 million | Up 39.7% |
Reported continuing-operations earnings were reduced by a $65.2 million goodwill impairment charge related to Alluxa, a high 86.2% effective tax rate, higher interest expense and other unusual items. Net income included $198.4 million of income from discontinued operations, including a $189.1 million pretax gain on the GGB sale.
- Sealing Technologies: sales of $624.3 million, up 4.1%; Adjusted Segment EBITDA of $159.1 million, up 12.1%; margin increased from 23.7% to 25.5%.
- Advanced Surface Technologies: sales of $476.1 million, up 92.5%, substantially reflecting the December 2021 NxEdge acquisition and stronger semiconductor demand; Adjusted Segment EBITDA of $141.5 million, up 93.3%; margin increased slightly from 29.6% to 29.7%.
- Backlog was $310.7 million at year-end, up from $274.7 million, with approximately 7% expected to be fulfilled after 2023.
Cash flow, liquidity and capital structure
- Cash flow from continuing operations was $106.1 million, compared with $124.1 million in 2021. The decline primarily reflected higher income-tax payments, including taxes related to divestitures.
- Continuing-operations investing activities provided $268.6 million, including $301.9 million of proceeds from business sales, partly offset by $31.2 million for the LeanTeq minority-interest acquisition and $29.4 million of capital expenditures.
- Continuing-operations financing activities used $368.0 million, primarily because of $337.0 million of net debt repayments and $23.4 million of dividends.
- Cash and cash equivalents were $334.4 million at December 31, 2022, including $187.4 million in the United States and $147.0 million outside the United States.
- Debt was $790.7 million before current-maturity classification and debt discounts, compared with $976.6 million at year-end 2021. The balance comprised $347.2 million of senior notes, $442.6 million of term loans and $0.9 million of other notes.
- The $400 million revolving facility had $389.2 million of availability after $10.8 million of letters of credit and no borrowings. Term Loan A-1 and Term Loan A-2 balances were $137.0 million and $307.1 million, respectively.
- The $350 million principal amount of 5.75% senior notes matures in October 2026. Scheduled debt principal payments total $795.1 million, including $625.9 million due in 2026.
- Enpro was in compliance with its debt covenants at December 31, 2022. Variable-rate borrowings expose the company to higher interest expense if SOFR increases.
Material changes versus the prior comparable period
- Revenue and Adjusted Segment EBITDA increased substantially, led by the full-year contribution from NxEdge, acquired for $853.9 million in December 2021, and organic growth across both segments.
- Sealing Technologies benefited from pricing and demand in food and pharmaceuticals, petrochemical, heavy-duty truck and aerospace markets, but faced higher material and labor costs and unfavorable foreign exchange.
- Advanced Surface Technologies benefited from semiconductor demand and NxEdge; the segment remained exposed to a concentrated semiconductor customer base.
- Interest expense increased to $35.6 million from $16.2 million because of debt incurred to fund the NxEdge acquisition and higher borrowing costs.
- Alluxa goodwill was impaired by $65.2 million in the fourth quarter. Management cited lower projected cash flows and an increase in the discount rate from 12.0% to 14.6%.
- GGB was sold to The Timken Company in November 2022 for total proceeds of $305 million, producing a $189.1 million pretax gain. GPT was sold in January 2023 for approximately $31 million, with an expected pretax gain of approximately $14 million.
- Enpro acquired the remaining LeanTeq ownership interests for a minimum payment of $41.9 million in December 2022 and expects an additional payment of approximately $0.8 million in December 2023, subject to performance.
- The company changed certain inventory costing from LIFO to FIFO effective July 1, 2022 and retrospectively adjusted prior periods. The change increased January 1, 2020 retained earnings by $9.7 million, net of tax.
- The board authorized a $50.0 million share-repurchase program through October 2024, but no repurchases had been made under the authorization at year-end. The quarterly dividend was increased to $0.29 per share beginning in March 2023.
Outlook, management commentary, risks and unusual items
Management emphasized continued investment in organic growth and innovation, strategic acquisitions and shareholder returns. The filing does not provide formal 2023 revenue or earnings guidance. Management expects to continue evaluating acquisitions focused on high-margin, technology-based businesses with strong cash-flow returns and favorable secular trends.
- Key market risks include cyclical demand, especially in semiconductor wafer-fab equipment, industrial capital equipment, chemical processing and heavy-duty trucking.
- A single customer accounted for approximately $296.5 million, or about 27%, of 2022 consolidated sales. Advanced Surface Technologies is particularly dependent on a limited number of semiconductor equipment customers.
- Raw-material, labor, supply-chain, tariff and foreign-exchange pressures could reduce margins. The company stated that most raw-material prices increased in 2022 and that passing through all cost increases may not be possible.
- Debt covenants restrict additional indebtedness, investments, dividends, repurchases and other corporate actions. The company also faces refinancing and interest-rate exposure, particularly around the 2026 senior-note maturity.
- Environmental liabilities were accrued at $42.1 million at year-end, including $12.7 million for eight Arizona uranium mines and $0.7 million for the Lower Passaic River site. The company cannot estimate a reasonably possible loss range above recorded environmental reserves.
- The company paid $5.9 million in September 2022 toward a Lower Passaic River settlement, subject to court approval, and expects $3.3 million of reimbursement from the U.S. government related to Arizona mine remediation.
- Other unusual 2022 items included $5.1 million of environmental reserve increases, a $3.8 million foreign-exchange loss related to the GGB divestiture, a $2.8 million asbestos-receivable adjustment, $3.0 million of restructuring and impairment costs excluding goodwill, and a $24.4 million continuing-operations tax expense.
- Goodwill and intangible-asset valuations remain sensitive to projected revenue, margins, discount rates and market multiples. A one-percentage-point increase in Alluxa’s discount rate would have increased the impairment by approximately $11.2 million.
- Management stated that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, and the independent auditor issued unqualified opinions. The critical audit matter was the Alluxa goodwill impairment assessment.
Most important facts for investors to verify
- Reconcile reported net income of $205.1 million with continuing-operations income attributable to Enpro of only $6.7 million; separate recurring operating performance from the GGB divestiture gain and other adjustments.
- Assess whether the strong Advanced Surface Technologies results and 2022 backlog can be sustained after accounting for semiconductor-cycle risk and customer concentration.
- Review Alluxa’s post-impairment outlook, including projected cash flows, discount-rate assumptions and potential for further impairment.
- Evaluate leverage, variable-rate exposure and the ability to refinance or repay approximately $625.9 million of scheduled debt due in 2026.
- Confirm the actual proceeds, tax effects and final accounting for the GPT sale completed in January 2023.
- Review environmental, asbestos, product-liability and other discontinued-business contingencies against the recorded reserves and indemnities.
- Consider the effect of FIFO adoption, foreign-exchange movements, higher input costs and the unusually high 2022 effective tax rate on future comparability.