Enpro Industries, Inc. — FY2021 Form 10-K 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 fiscal year ended December 31, 2021; references to “Q4 2021” relate to the fourth quarter within the full-year filing, but the principal reported metrics below are annual.
EnPro continued repositioning its portfolio toward materials-science businesses serving semiconductor, life sciences and other technology markets. It operated 19 primary manufacturing and service facilities in seven countries and had approximately 4,400 employees. Approximately 53% of 2021 revenue was generated outside the United States.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $1,141.8 million | $1,074.0 million | +6.3% |
| Gross profit | $436.6 million | $375.8 million | +16.2% |
| Gross margin | 38.2% | 35.0% | +3.2 percentage points |
| Operating income | $94.3 million | $25.9 million | +264.1% |
| Income from continuing operations attributable to EnPro | $177.2 million | $(23.7) million | Improved by $200.9 million |
| Diluted EPS from continuing operations | $8.53 | $(1.15) | Improved by $9.68 |
| Adjusted income from continuing operations | $115.3 million | $83.9 million | +37.4% |
| Adjusted diluted EPS | $5.55 | $4.07 | +36.4% |
| Adjusted EBITDA | $208.4 million | $168.3 million | +23.8% |
| Adjusted Segment EBITDA | $257.9 million | $210.6 million | +22.5% |
| Operating cash flow from continuing operations | $142.0 million | $57.6 million | +$84.4 million |
| Capital expenditures | $18.8 million | $18.3 million | +$0.5 million |
Net income attributable to EnPro was $177.2 million, or $8.53 diluted EPS, compared with $184.4 million, or $8.98 diluted EPS, in 2020. The 2020 result included $208.1 million of after-tax income from discontinued operations, principally the Fairbanks Morse sale; 2021 had no discontinued-operations income.
Segment performance and material changes
| Segment | 2021 sales | 2020 sales | 2021 Adjusted Segment EBITDA | 2021 margin |
|---|---|---|---|---|
| Sealing Technologies | $599.8 million | $636.7 million | $141.4 million | 23.6% |
| Advanced Surface Technologies | $247.3 million | $171.2 million | $73.2 million | 29.6% |
| Engineered Materials | $302.4 million | $275.0 million | $43.3 million | 14.3% |
- Sealing Technologies: Reported sales declined 5.8% because of divestitures, but comparable sales increased 13.0%. Demand improved in food and pharmaceuticals, petrochemicals and heavy-duty trucking; aerospace remained weaker. Segment EBITDA increased 7.9%.
- Advanced Surface Technologies: Sales increased 44.5%, primarily from semiconductor demand and the contribution of Alluxa. Segment EBITDA increased 55.4%, with margin rising from 27.5% to 29.6%.
- Engineered Materials: Sales increased 10.0%, driven by automotive and general industrial demand, partly offset by oil and gas and power-generation weakness. Segment EBITDA increased 33.2% and margin rose from 11.8% to 14.3%.
- NxEdge acquisition: On December 17, 2021, EnPro acquired semiconductor manufacturing, cleaning, coating and refurbishment company NxEdge for $856.8 million, net of cash acquired. The acquisition was funded with cash and new borrowings. NxEdge contributed $8.6 million of sales and a $1.9 million pretax loss during the brief post-acquisition period. Preliminary purchase accounting included $359.5 million of goodwill and $413.0 million of identifiable intangible assets.
- Divestitures: EnPro sold its CPI business on December 21, 2021 for $185.7 million of cash proceeds, net of transaction fees and cash sold, and recorded a $117.6 million pretax gain. It also sold its polymer components business and recorded a $19.5 million pretax gain. Total 2021 pretax gains on business sales were approximately $135.2 million.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $338.1 million at December 31, 2021, compared with $229.5 million at year-end 2020. Cash included $28.4 million in the United States and $309.7 million outside the United States.
- Operating cash flow increased to $142.0 million, supported by stronger operating performance and a $24.7 million federal tax refund plus $1.7 million of related interest. Working capital investment in receivables and inventories partially offset cash generation.
- Investing activities used $651.2 million, principally because of the $856.8 million NxEdge acquisition, partly offset by $224.3 million of business-sale proceeds.
- Financing activities provided $618.2 million, including a $175.0 million net revolving-credit draw and $465.0 million of new term-loan borrowings. Dividends paid were $22.4 million.
- Debt consisted of $350.0 million principal amount of 5.75% senior notes due 2026, $175.0 million of revolver borrowings, $141.6 million outstanding under Term Loan A-1, $315.0 million under Term Loan A-2 and $150.0 million under a 364-day facility. The balance-sheet carrying amount of total debt was approximately $1.126 billion, including current and long-term debt.
- Revolver availability was $213.6 million at year-end after $175.0 million of borrowings and $11.4 million of letters of credit. EnPro was in compliance with its debt covenants at December 31, 2021.
- Contractual obligations totaled $1.396 billion, including $982.0 million of long-term debt, $150.0 million of short-term debt, $152.8 million of contractual interest, $61.1 million of operating leases and $46.6 million of environmental liabilities.
Guidance, outlook, risks and unusual items
Management did not provide specific numerical 2022 revenue or earnings guidance in the filing. Management expects strong demand in many served industries during 2022 and remains focused on organic growth, innovation, strategic acquisitions, portfolio divestitures and shareholder returns. The quarterly dividend was increased from $0.27 to $0.28 per share beginning in March 2022. A $50.0 million share-repurchase authorization remained available through October 2022, but no repurchases had been made under that authorization.
- COVID-19 effects were less severe in 2021 than in 2020, but demand volatility, employee impacts and supply constraints remained risks. Certain raw-material and component shortages, including metals and rubber-related chemicals, affected operations.
- Raw-material inflation, freight costs, labor availability, foreign exchange, tariffs and broader supply-chain disruptions may pressure margins. Management passed through some price increases but cannot assure continued recovery of higher costs.
- The semiconductor business has customer concentration and depends on a limited number of major equipment manufacturers and integrated-device manufacturers. Semiconductor demand is also cyclical.
- Goodwill increased to $953.2 million, including $126.0 million related to Alluxa. Alluxa’s estimated fair value exceeded carrying value by 28%; a deterioration in forecasts or higher discount rates could result in impairment.
- Environmental liabilities totaled $46.6 million at year-end. Material contingencies include the Lower Passaic River Study Area and eight Arizona uranium mines. EnPro’s reserve for the Lower Passaic site was $6.6 million, and its Arizona mines reserve was $13.5 million; the filing states that additional reasonably possible losses cannot be estimated for several matters.
- Restructuring and impairment costs fell to $6.2 million from $46.7 million in 2020. The 2021 actions included targeted workforce reductions affecting 58 positions.
- The filing notes a $2.0 million pretax error related to the 2020 Air Springs disposal, with an estimated $1.5 million net-income overstatement in 2020. Management concluded the error was not material to prior financial statements and recorded an out-of-period adjustment in the first quarter of 2021.
- The acquisition accounting for NxEdge remained preliminary at filing, particularly for certain tangible and intangible assets and related tax effects. Changes to these estimates could affect goodwill, amortization and future results.
- PricewaterhouseCoopers LLP issued unqualified opinions on the financial statements and internal control over financial reporting. NxEdge was excluded from the internal-control assessment because it was acquired during 2021; it represented approximately 5.6% of consolidated assets and 0.7% of consolidated revenue.
Important facts for investors to verify
- Reconcile reported earnings and EPS to adjusted results, particularly the $135.2 million of pretax business-sale gains and other nonrecurring items.
- Evaluate post-acquisition NxEdge performance, integration progress, purchase-price-allocation changes and the effect of approximately $413.0 million of acquired intangible assets on amortization.
- Assess leverage, mandatory repayments and refinancing needs, including the $150.0 million 364-day facility and substantial 2026 maturities.
- Monitor semiconductor customer concentration, cyclical demand, backlog quality and the sustainability of the 2021 demand increase.
- Review environmental, asbestos and other legacy liabilities against the $46.6 million recorded environmental reserve and the company’s stated inability to estimate potential additional losses for several matters.
- Test the sensitivity of Alluxa goodwill and other acquired intangible assets to weaker forecasts, higher interest rates and discount-rate changes.