Enpro Industries, Inc. — 2023 Q3 Form 10-Q Summary
Business Context and Reporting Period
EnPro is an industrial technology company serving semiconductor, photonics, industrial process, aerospace, food, biopharmaceutical, life sciences, nuclear and other markets. It operates through Sealing Technologies and Advanced Surface Technologies (AST).
This filing covers the quarter and nine months ended September 30, 2023. Results for the prior periods were recast to present the divested Engineered Materials businesses as discontinued operations.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $250.7 million | $280.1 million | $810.2 million | $827.3 million |
| Gross profit | $99.6 million | $110.8 million | $330.5 million | $317.8 million |
| Operating income | $31.9 million | $44.9 million | $56.3 million | $110.4 million |
| Income from continuing operations attributable to EnPro | $8.3 million | $26.2 million | $15.7 million | $64.2 million |
| Diluted EPS from continuing operations | $0.39 | $1.26 | $0.75 | $3.08 |
| Adjusted EBITDA | $57.7 million | $71.3 million | $191.1 million | $203.9 million |
| Adjusted diluted EPS | $1.58 | $1.89 | $5.35 | $5.49 |
Q3 gross margin was approximately 39.7%, compared with 39.6% in the prior-year quarter. Nine-month gross margin was approximately 40.8%, compared with 38.4% in the prior-year period. Q3 operating margin declined to approximately 12.7% from 16.0%; the nine-month margin declined to approximately 7.0% from 13.3%.
- Sealing Technologies: Q3 sales increased 2.2% to $161.4 million and Adjusted Segment EBITDA increased 20.9% to $48.0 million. Nine-month sales increased 9.4% to $511.4 million and Adjusted Segment EBITDA increased 30.3% to $153.9 million.
- Advanced Surface Technologies: Q3 sales decreased 27.0% to $89.4 million and Adjusted Segment EBITDA decreased 52.4% to $19.0 million. Nine-month sales decreased 17.1% to $299.1 million and Adjusted Segment EBITDA decreased 35.5% to $72.6 million.
- Cash flow: Operating activities from continuing operations generated $154.8 million in the first nine months, versus $111.6 million in the prior-year period. Capital expenditures were $20.7 million, versus $10.2 million.
- Liquidity: Cash and cash equivalents were $329.8 million at September 30, 2023, compared with $334.4 million at December 31, 2022. Revolver availability was $390.0 million after $10.0 million of letters of credit.
- Debt: Current maturities were $8.1 million and long-term debt was $640.5 million at September 30, 2023, compared with total debt of $790.7 million at December 31, 2022. The company prepaid the remaining $133.1 million Term Loan A-1 balance in July 2023. Term Loan A-2 borrowings were $301.2 million.
- Dividends: The company paid $18.3 million in dividends during the first nine months and declared a $0.29 per-share dividend payable in December 2023.
Material Changes Versus the Prior Comparable Period
- Consolidated Q3 sales declined 10.5%, primarily because of the semiconductor downturn affecting AST. Nine-month sales declined 2.1%.
- AST weakness more than offset Sealing Technologies growth. Semiconductor sales declined to $82.0 million in Q3 from $113.8 million and to $272.5 million for the first nine months from $333.1 million.
- In the second quarter, EnPro recorded a $60.8 million goodwill impairment related to Alluxa. No Alluxa goodwill remained at September 30, 2023.
- The effective tax rate increased to 63.9% in Q3 from 25.4% and to 59.8% for the first nine months from 23.4%, primarily due to the non-deductible goodwill impairment, foreign valuation allowances and higher foreign tax rates.
- Income from discontinued operations included an $11.2 million after-tax gain from the sale of GPT. GPT was sold on January 30, 2023 for gross proceeds of $31.4 million.
- Operating cash flow improved despite lower reported net income, primarily because of improved working capital and lower cash taxes.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal quantitative revenue or earnings guidance. Management stated that the semiconductor market slowdown remains a significant headwind, while strategic pricing, nuclear and power-generation demand, aerospace, commercial vehicle markets, productivity initiatives and cost controls support Sealing Technologies.
Management expects to complete its annual goodwill impairment assessment on November 1, 2023. AST's Semiconductor reporting unit exceeded carrying value by approximately 10% at the June 30 interim test. Management warned that lower growth, higher discount rates, failure to meet projections or lower market multiples could cause future impairment.
- AST depends on a relatively small number of significant customers and remains exposed to semiconductor market cyclicality.
- Other risks include economic and geopolitical conditions, Taiwan-related disruption, tariffs and trade restrictions, raw-material availability and prices, foreign exchange, interest rates, labor disputes and product-development delays.
- Environmental contingencies totaled $39.2 million at September 30, 2023. The Lower Passaic River reserve was $0.7 million; the Arizona uranium mines reserve was $11.9 million. The company cannot estimate the upper end of potential liability for the uranium sites or a reasonably possible loss range for several other environmental matters.
- The company expects to satisfy reinvestment requirements related to GGB and GPT divestiture proceeds, but could be required to offer to repurchase Senior Notes in early 2024 if applicable proceeds are not sufficiently reinvested or used to reduce specified debt.
- The company was in compliance with its credit agreement and Senior Notes covenants at September 30, 2023. Disclosure controls and procedures were determined to be effective.
Important Facts for Investors to Verify
- Whether semiconductor demand and AST operating margins recover, and whether the Semiconductor reporting unit avoids a future goodwill impairment.
- The sustainability of Sealing Technologies' pricing gains, volume growth and approximately 30% nine-month Adjusted Segment EBITDA margin.
- Debt repayment capacity, interest-rate exposure, the October 2026 Senior Notes maturity and the potential 2024 asset-sale-related repurchase obligation.
- The assumptions underlying the $39.2 million environmental liability and the potential for additional Lower Passaic River, uranium mine or other predecessor-related costs.
- The comparability of reported results, given the divestiture of Engineered Materials and the use of non-GAAP measures such as Adjusted EBITDA and adjusted EPS.