Enpro Reports Second Quarter 2023 Results

Second Quarter 2023 Highlights

(All results reflect comparisons to prior-year period, from continuing operations, unless otherwise noted)

(*Non-GAAP measure. See the attached schedules for adjustments and reconciliations of historical measures to GAAP numbers)

• Sales of $276.9 million essentially flat; organic sales up 0.4%
• Strong sales and earnings performance in Sealing Technologies roughly offset weakness expected in Advanced Surface Technologies
• GAAP loss from continuing operations attributable to EnPro Industries, Inc. of $18.6 million compared to $26.1 million of income last year, reflecting a pre-tax goodwill impairment charge of $60.8 million related to Alluxa
• Adjusted EBITDA* down 11.9% to $64.9 million; adjusted EBITDA margin* down 320 bps to 23.4%; higher share-price-related incentive compensation expense and a currency-related benefit on foreign cash last year combined for a $9 million negative impact year-over-year
• GAAP diluted loss per share from continuing operations attributable to EnPro Industries, Inc. of $0.89, compared to diluted earnings per share of $1.25 last year
• Adjusted diluted earnings per share* from continuing operations attributable to EnPro Industries, Inc. down 10.7% to $1.83 versus $2.05 last year; higher share-price-driven incentive compensation expense and last year's currency-related benefit combined for a pre-tax $9 million negative impact year-over-year
• Full-year revenue expected to be relatively flat year-over-year; adjusted EBITDA* expected to be in the range of $248 million to $256 million, reflecting share-price-driven incentive compensation expense recognized in the second quarter
• Increase adjusted diluted earnings per share* guidance to $6.70 to $7.10, reflecting lower net interest expense versus prior guidance

EnPro Industries, Inc. (NYSE: NPO) today announced its financial results for the three and six months ended June 30, 2023.

“Our Sealing Technologies segment achieved another quarter of record performance while our AST segment declined, as expected, due to weakness in the semiconductor market. The year-over-year increase in Sealing roughly offset the decline in the AST segment, demonstrating the balance inherent in our best-in-class portfolio of businesses,” said Eric Vaillancourt, President and Chief Executive Officer. “Our positioning, investments and strong execution capabilities across the company support the many attractive opportunities we see for long-term growth and value creation."

Mr. Vaillancourt continued, “Strong cash generation enabled us to further reduce our net leverage to 1.5x. Our balance sheet provides us with the flexibility to invest in compelling organic growth and productivity opportunities, while prudently considering acquisitions that meet our strategic and financial criteria. As a result of our recent reshaping, we are more resilient, and well-positioned to outperform through economic cycles."

Financial Highlights

(Dollars in millions except per share data)

Second Quarter 2023 Consolidated Results

Sales of $276.9 million decreased 0.1% compared to the second quarter of 2022. Excluding the impacts of divested businesses and foreign exchange translation, sales grew 0.4% year-over-year. Organic revenue grew as a result of volume increases in the aerospace, nuclear energy, and commercial vehicle markets, as well as the contribution from pricing actions, offset the slowdown in semiconductor markets.

Corporate expenses of $15.0 million in the second quarter of 2023 increased from $9.4 million in the second quarter of 2022 due to an increase of $7 million in incentive compensation expense related to cash-based plans tied to share price performance. In the second quarter of 2023, the Enpro share price increased by 28.5%, compared to a decline of 16.2% in the second quarter of 2022.

Loss from continuing operations attributable to EnPro Industries, Inc. was $18.6 million, compared to earnings of $26.1 million in the prior-year period. Diluted loss per share attributable to EnPro Industries, Inc. was $0.89, compared to income of $1.25 in the prior-year period. The year-over-year change was driven primarily by a pre-tax goodwill impairment charge of $60.8 million described below, the pre-tax $7 million year-over-year difference in incentive compensation expense resulting from share price changes and a pre-tax $2 million currency-related benefit in the prior year related to foreign cash.

Adjusted net income from continuing operations attributable to EnPro Industries, Inc. of $38.2 million decreased 10.5% compared to the second quarter of 2022 and adjusted diluted earnings per share from continuing operations decreased 10.7% to $1.83, compared to $2.05 in the prior-year period. Higher share-price-related incentive compensation expense and last year’s currency-related benefit combined for a pre-tax $9 million negative impact year-over-year, or $0.32 per share after-tax.

Adjusted EBITDA* of $64.9 million decreased 11.9% compared to the prior-year period driven primarily by the year-over-year impact of share-price-driven incentive compensation expense and the prior-year currency benefit related to foreign cash balances. Strong year-over-year earnings growth in the Sealing Technologies segment was offset by weakness in the Advanced Surface Technologies (or “AST”) segment.

Second Quarter 2023 Segment Highlights

(All results reflect comparisons to prior-year period unless otherwise noted)

Sealing Technologies - Safeguarding environments with critical applications in diverse end markets

Garlock, STEMCO, and Technetics Group

• Sales increased 13.3% versus the prior-year period driven by strong demand in the aerospace, nuclear and commercial vehicle markets, along with the positive impact of pricing initiatives. Excluding results of the business divested in the fourth quarter of 2022 and foreign exchange translation, sales increased 13.9% versus the prior-year period.
• Adjusted segment EBITDA of $56.2 million was up 27.4% year-over-year, with adjusted EBITDA margins expanding approximately 350 basis points, as strong volume and price increases offset higher operating costs. Excluding the impacts of the divestiture and foreign exchange translation, adjusted segment EBITDA increased 28.7% compared to the prior-year period.

Advanced Surface Technologies - Leading edge precision manufacturing, coatings, cleaning and refurbishment solutions and innovative optical filter products — NxEdge, Technetics Semi, LeanTeq, and Alluxa

• Sales decreased 17.4% versus the prior-year period driven primarily by the current slowdown in semiconductor capital equipment spending and to a lesser degree by weaker optical filter sales. Excluding foreign exchange translation, sales decreased 17.0% year-over-year.
• Adjusted segment EBITDA decreased 36.2% versus the prior-year period and segment EBITDA margins declined 710 basis points, driven primarily by the decline in volume, unfavorable mix, investments in long-term growth opportunities, and higher labor costs. Excluding the impact of foreign exchange translation, adjusted segment EBITDA decreased 35.7% compared to the prior-year period.

Balance Sheet, Cash Flow and Capital Allocation

The company generated $78.5 million of cash flow from operating activities of continuing operations during the six months ended June 30, 2023 and $66.6 million of free cash flow, net of $11.9 million in capital expenditures. This compares to $63.0 million of cash flow from operating activities of continuing operations, or $56.1 million of free cash flow, net of $6.9 million in capital expenditures. During the second quarter, the company paid a regular quarterly dividend of $0.29 per share, with dividend payments totaling $12.2 million for the six months ended June 30, 2023.

Enpro ended the second quarter with total debt of $783.2 million and cash of $374.9 million and $35.8 million of short-term liquid investments. Outstanding letters of credit totaled $10.0 million. On July 26, 2023, Enpro repaid its $133.7 million Term Loan A-1, including accrued interest, with available cash.

Goodwill Impairment Analysis

At the end of the second quarter, Enpro determined the book value of the Alluxa reporting unit, which is included in the Advanced Surface Technologies segment, exceeded its fair-value as of June 30, 2023 and, as a result, the $60.8 million of goodwill allocated to Alluxa since December 31, 2022 was impaired. After this full non-cash impairment charge, the Consolidated Balance Sheet as of June 30, 2023 reflects no goodwill related to Alluxa.

Quarterly Dividend

Enpro declared a regular quarterly dividend of $0.29 per share on August 2, 2023. The dividend is payable September 13, 2023 to shareholders of record as of the close of business on August 30, 2023.

2023 Guidance

Enpro now expects 2023 revenue to be flat compared to 2022, versus the previous forecast of flat to low-single digit growth. Adjusted EBITDA is now expected in the range of $248 million to $256 million, from $248 million to $260 million previously, reflecting the share-price-driven incentive compensation expense recognized in the second quarter.

Adjusted diluted earnings per share guidance is increased and expected to be in the range of $6.70 to $7.10 per share, versus $6.45 to $7.05 previously, primarily reflecting lower net interest expense resulting from debt repayment and higher interest income on cash balances.

Conference Call, Webcast Information, and Presentations

Enpro will hold a conference call today, August 8, at 8:30 a.m. Eastern Time to discuss second quarter 2023 financial results. Investors who wish to participate in the call should dial 1-877-407-0832 approximately 10 minutes before the call begins and provide conference access code 13725738. A live audio webcast of the call and accompanying slide presentation will be accessible from the company’s website, https://www.enproindustries.com. To access the earnings presentation, log on to the webcast by clicking the link on the company’s home page.

Primary Segment Operating Performance Measure

The primary metric used by management to allocate resources and assess segment performance is adjusted segment EBITDA, which is segment revenue reduced by operating expenses and other costs identifiable with the segment, excluding acquisition and divestiture expenses, restructuring costs, impairment charges, non-controlling interest compensation, amortization of the fair value adjustment to acquisition date inventory, and depreciation and amortization. Expenses not directly attributable to the segments, corporate expenses, net interest expense, gains/losses related to the sale of assets, and income taxes are not included in the computation of adjusted segment EBITDA. Under U.S. generally accepted accounting principles (“GAAP”), the primary metric used by management to allocate resources and assess segment performance is required to be disclosed in financial statement footnotes, and accordingly such metric as presented for each segment is not deemed to be a non-GAAP measure under applicable regulations of the Securities and Exchange Commission.

Non-GAAP Financial Information

This press release contains financial measures that have not been prepared in conformity with GAAP. They include adjusted net income attributable to EnPro Industries, Inc., adjusted diluted earnings per share attributable to EnPro Industries, Inc., adjusted EBITDA, adjusted EBITDA margin, total adjusted segment EBITDA and free cash flow. Tables showing the reconciliation of these historical non-GAAP financial measures to the comparable GAAP measures are attached to the release. Adjusted EBITDA and adjusted diluted earnings per share anticipated for full year 2023 are calculated in a manner consistent with the historical presentation of these measures in the attached tables. Because of the forward-looking nature of these estimates, it is impractical to present quantitative reconciliations of such measures to comparable GAAP measures, and accordingly no such GAAP measures are being presented.

Management believes these non-GAAP metrics are commonly used financial measures for investors to evaluate the company’s operating performance and, when read in conjunction with the company’s consolidated financial statements, present a useful tool to evaluate the company’s ongoing operations and performance from period to period. In addition, these are some of the factors the company uses in internal evaluations of the overall performance of its businesses. Management acknowledges that there are many items that impact a company’s reported results and the adjustments reflected in these non-GAAP measures are not intended to present all items that may have impacted these results. In addition, these non-GAAP measures are not necessarily comparable to similarly titled measures used by other companies.

Forward-Looking Statements and Guidance

Statements in this press release that express a belief, expectation or intention, including the 2023 guidance and other statements that are not historical fact, are forward-looking statements under the Private Securities Litigation Reform Act of 1995. They involve a number of risks and uncertainties that may cause actual events and results to differ materially from such forward-looking statements. These risks and uncertainties include, but are not limited to: economic conditions in the markets served by our businesses and the businesses of our customers, some of which are cyclical and experience periodic downturns; the impact of geopolitical activity on those markets, including instabilities associated with the armed conflict in Ukraine and any conflict or threat of conflict that may affect Taiwan; uncertainties with respect to the imposition of government embargoes, tariffs and trade protection measures, such as “anti-dumping” duties applicable to classes of products, and import or export licensing requirements, as well as the imposition of trade sanctions against a class of products imported from or sold and exported to, or the loss of “normal trade relations” status with, countries in which we conduct business, could significantly increase our cost of products or otherwise reduce our sales and harm our business; uncertainties with respect to prices and availability of raw materials, including as a result of instabilities from geopolitical conflicts; uncertainties with respect to our ability to achieve anticipated growth within the semiconductor, life sciences, and other technology-enabled markets, including uncertainties with respect to receipt of CHIPS Act support; the impact of fluctuations in relevant foreign currency exchange rates or unanticipated increases in applicable interest rates; unanticipated delays or problems in introducing new products; the impact of any labor disputes; announcements by competitors of new products, services or technological innovations; changes in our pricing policies or the pricing policies of our competitors; risks related to the reliance of our Advanced Surface Technologies segment on a small number of significant customers; uncertainties with respect to our ability to identify and complete business acquisitions consistent with our strategy and to successfully integrate any businesses that we acquire; and uncertainties with respect to the amount of any payments required to satisfy contingent liabilities, including those related to discontinued operations, other divested businesses and discontinued operations of our predecessors, including liabilities for certain products, environmental matters, employee benefit and statutory severance obligations and other matters. Enpro’s filings with the Securities and Exchange Commission, including its most recent Form 10-K and Form 10-Q reports, describe these and other risks and uncertainties in more detail. Enpro does not undertake to update any forward-looking statements made in this press release to reflect any change in management's expectations or any change in the assumptions or circumstances on which such statements are based.

Full-year guidance is subject to the risks and uncertainties discussed above and specifically excludes changes in the number of shares outstanding, impacts from future and pending acquisitions, dispositions and related transaction costs, restructuring costs, incremental impacts of tariffs and trade tensions on market demand and costs subsequent to June 30, 2023, and the impact of foreign exchange rate changes subsequent to that date.

About Enpro

Enpro is a leading industrial technology company focused on critical applications across many end-markets, including semiconductor, photonics, industrial process, aerospace, food and pharma and life sciences. Enpro is listed on the New York Stock Exchange under the symbol “NPO”. For more information about Enpro, visit the company’s website at http://www.enproindustries.com.

APPENDICES

Consolidated Financial Information and Reconciliations

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