EnPro Industries(NPO) - 2020 Q3 - Quarterly Report

FORM 10-Q Filing Information Details the filing of EnPro Industries, Inc.'s Form 10-Q, its stock exchange listing, and outstanding common stock information - EnPro Industries, Inc. filed its Quarterly Report on Form 10-Q for the period ended September 30, 2020, with the SEC. The company's common stock is traded on the New York Stock Exchange under the symbol NPO[1][2][3] Registrant Status | Status | Indicator | | :---------------------- | :-------- | | Large accelerated filer | ☒ | | Accelerated filer | ☐ | | Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | | Emerging growth company | ☐ | - As of October 30, 2020, there were 20,536,015 shares of common stock outstanding, excluding 182,511 shares held by a subsidiary[4] PART I. FINANCIAL INFORMATION Presents the unaudited consolidated financial statements, including operations, cash flows, balance sheets, and detailed notes Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including the statements of operations, cash flows, and balance sheets, along with detailed notes explaining the company's accounting policies, significant transactions, and financial position for the periods ended September 30, 2020 and 2019 Consolidated Statements of Operations (Unaudited) Summarizes the company's unaudited consolidated revenues, expenses, and net income/loss for the specified periods Consolidated Statements of Operations (Unaudited) - Key Figures (in millions, except per share amounts) | Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :------------------------------------------------- | :------ | :------ | :------ | :------ | | Net sales | $268.3 | $299.0 | $798.0 | $919.2 | | Gross profit | $94.5 | $97.7 | $272.3 | $305.7 | | Operating income (loss) | $(7.5) | $19.1 | $14.8 | $66.4 | | Income (loss) from continuing operations | $(21.3) | $(8.4) | $(14.3) | $16.0 | | Net income (loss) attributable to EnPro Industries, Inc. | $(19.7) | $(1.5) | $192.5 | $35.5 | | Basic EPS from continuing operations | $(1.05) | $(0.41) | $(0.72) | $0.77 | | Basic Net EPS | $(0.96) | $(0.08) | $9.37 | $1.71 | | Diluted EPS from continuing operations | $(1.05) | $(0.41) | $(0.72) | $0.77 | | Diluted Net EPS | $(0.96) | $(0.08) | $9.37 | $1.71 | - Net sales decreased by 10.3% in Q3 2020 compared to Q3 2019, and by 13.2% for the nine months ended September 30, 2020, compared to the same period in 2019[7] - The company reported a net loss of $19.7 million in Q3 2020, a significant increase from the $1.5 million net loss in Q3 2019. However, for the nine months ended September 30, 2020, net income attributable to EnPro Industries, Inc. was $192.5 million, up from $35.5 million in the prior year, largely due to income from discontinued operations[7] Consolidated Statements of Cash Flows (Unaudited) Details the cash inflows and outflows from operating, investing, and financing activities for the specified periods Consolidated Statements of Cash Flows (Unaudited) - Key Figures (in millions) | Activity Type | 9M 2020 | 9M 2019 | | :------------------------------------------------- | :------ | :------ | | Net cash provided by operating activities of continuing operations | $48.4 | $91.1 | | Net cash provided by (used in) investing activities of continuing operations | $439.5 | $(324.0) | | Net cash provided by (used in) financing activities of continuing operations | $(160.0) | $166.1 | | Net cash provided by (used in) discontinued operations | $(6.2) | $50.9 | | Net increase (decrease) in cash and cash equivalents | $319.8 | $(17.5) | | Cash and cash equivalents at end of period | $441.0 | $112.1 | - Investing activities provided significant cash in 9M 2020 ($439.5 million) primarily due to proceeds from the sale of businesses, a reversal from cash used in 9M 2019 ($324.0 million)[9] - Cash and cash equivalents at the end of September 30, 2020, increased substantially to $441.0 million from $112.1 million at September 30, 2019[9] Consolidated Balance Sheets (Unaudited) Presents the company's assets, liabilities, and shareholders' equity at the end of the specified reporting periods Consolidated Balance Sheets (Unaudited) - Key Figures (in millions) | Asset/Liability | Sep 30, 2020 | Dec 31, 2019 | | :-------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $441.0 | $121.2 | | Total current assets | $816.5 | $749.5 | | Total assets | $2,024.0 | $2,035.1 | | Total current liabilities | $243.1 | $313.6 | | Long-term debt | $489.3 | $625.2 | | Total liabilities | $927.6 | $1,120.2 | | Total shareholders' equity | $1,065.9 | $886.9 | - Cash and cash equivalents significantly increased to $441.0 million at September 30, 2020, from $121.2 million at December 31, 2019[11] - Total liabilities decreased from $1,120.2 million at December 31, 2019, to $927.6 million at September 30, 2020, primarily due to a reduction in long-term debt[11] Notes to Consolidated Financial Statements (Unaudited) Provides detailed explanations and disclosures supporting the unaudited consolidated financial statements 1. Overview, Basis of Presentation and Recently Issued Authoritative Accounting Guidance This note provides an overview of EnPro Industries, Inc., its business segments, and the basis for preparing the unaudited interim financial statements. It also details recent accounting changes, including the adoption of new standards for credit losses (CECL) and goodwill impairment testing, and discusses the impact of COVID-19 on accounting estimates - EnPro Industries, Inc. is a leader in engineered industrial products, applying material science expertise across sealing products, heavy-duty truck wheel-end component systems, self-lubricating bearings, precision engineered components, and cleaning/refurbishment services for semiconductor equipment[13] - The company adopted a new accounting standard for credit losses (CECL) in January 2020, resulting in a $0.1 million increase to the allowance for credit losses and a corresponding decrease to retained earnings[20][22] - An interim goodwill impairment test was performed in Q2 2020 due to a segment reclassification and COVID-19 impacts, concluding that goodwill was not impaired. However, the fair value of the Technetics Group reporting unit exceeded its carrying value by only an estimated 5%[16][17] 2. Discontinued Operations This note details the sale of the Fairbanks Morse division (Power Systems segment) in January 2020 for $450.0 million, resulting in a pre-tax gain of $274.3 million. The financial results of Fairbanks Morse are reported as discontinued operations for all periods presented - The Fairbanks Morse division was sold on January 21, 2020, for $450.0 million, generating a pre-tax gain of $274.3 million[25][26] Income from Discontinued Operations, Net of Taxes (in millions) | Period | 2020 | 2019 | | :------------------------------------ | :--- | :--- | | Quarter Ended September 30, | $1.9 | $6.9 | | Nine Months Ended September 30, | $207.3 | $19.5 | - Tax expense on the sale of discontinued operations for the nine months ended September 30, 2020, was $65.9 million, with a $1.9 million decrease in Q3 2020 due to increased FDII tax benefit and decreased GILTI tax expense[27] 3. Acquisitions and Divestitures This note outlines the company's acquisition and divestiture activities, including the 2019 acquisitions of LeanTeq and The Aseptic Group, and several divestitures in 2020 such as Motor Wheel/Crewson brake brands, Air Springs business, and Lunar air disc brake business, as part of its portfolio reshaping strategy - Acquired LeanTeq (semiconductor equipment refurbishment) in September 2019 and The Aseptic Group (aseptic fluid transfer products) in July 2019, both integrated into the Sealing Products segment[29][30][31] - Divested Motor Wheel® brake drum and Crewson® brake adjuster brands in September 2020 for $8.9 million, resulting in a $3.7 million reversal of restructuring charges and a $3.6 million loss on sale[36][37] - Entered into definitive agreements to sell the Air Springs business for $32.0 million cash and a $7.5 million promissory note (expected Q4 2020 close) and the Dieuze, France bushing block business (classified as held for sale)[38][39][40] - Sold the U.S. assets of the Lunar® air disc brake business in Q3 2020 for $0.3 million, with the Shanghai manufacturing facility expected to close in Q4 2020[42] 4. Restructuring and Impairment This note details the restructuring and impairment charges incurred in 2020, primarily related to the exit of the STEMCO Brake Products business, the sale of various business units, and impairment of indefinite-lived trademarks, reflecting the company's portfolio reshaping efforts and market challenges Restructuring and Impairment Charges (in millions) | Period | Total Charges | | :------------------------------------ | :------------ | | Quarter Ended September 30, 2020 | $21.1 | | Nine Months Ended September 30, 2020 | $40.0 | | Quarter Ended September 30, 2019 | $1.4 | | Nine Months Ended September 30, 2019 | $3.7 | - Recorded a $16.1 million impairment of indefinite-lived trademarks in Q3 2020 due to sales declines in businesses utilizing these trademarks within the Sealing Products segment[46] - An impairment charge of $6.2 million was recorded for the bushing block business at the Dieuze facility, consisting of $1.8 million non-cash long-lived asset impairments and $4.4 million cash payments to the buyer[47] - The exit from Motor Wheel® brake drum and Crewson® brake adjuster brands resulted in $11.1 million in Q2 2020 restructuring and impairment charges, partially reversed by a $3.7 million expense reversal upon sale in Q3 2020[48] 5. Income Taxes This note explains the company's modified interim income tax provision methodology for Q3 2020 due to income volatility, resulting in a higher effective tax rate compared to the prior year. It also highlights the factors influencing the effective tax rates for both the quarter and nine-month periods - For Q3 2020, the company modified its interim income tax provision methodology to use the actual effective tax rate for the period due to volatility in jurisdictional income[51] Effective Tax Rates | Period | 2020 | 2019 | | :------------------------------------ | :----- | :----- | | Quarter Ended September 30, | 25.4% | 8.9% | | Nine Months Ended September 30, | (17.9)% | 40.0% | - The Q3 2020 effective tax rate of 25.4% was primarily influenced by lower overall pre-tax income, a geographical mix of income, recognition of a $4.5 million deferred tax liability for the Air Springs business, and a $4.9 million tax benefit from final Tax Cuts and Jobs Act regulations[52] 6. Earnings Per Share This note provides the basic and diluted earnings per share calculations for continuing and discontinued operations, highlighting the net loss per share for the quarter and the significant contribution from discontinued operations to the nine-month net income Basic and Diluted Earnings (Loss) Per Share (in millions, except per share amounts) | Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :------------------------------------------------- | :------ | :------ | :------ | :------ | | Basic EPS - Continuing operations | $(1.05) | $(0.41) | $(0.72) | $0.77 | | Basic EPS - Discontinued operations | $0.09 | $0.33 | $10.09 | $0.94 | | Basic Net EPS | $(0.96) | $(0.08) | $9.37 | $1.71 | | Diluted EPS - Continuing operations | $(1.05) | $(0.41) | $(0.72) | $0.77 | | Diluted EPS - Discontinued operations | $0.09 | $0.33 | $10.09 | $0.94 | | Diluted Net EPS | $(0.96) | $(0.08) | $9.37 | $1.71 | - For Q3 2020, the company reported a net loss per share of $(0.96), compared to $(0.08) in Q3 2019. For the nine months ended September 30, 2020, net income per share was $9.37, significantly higher than $1.71 in the prior year, largely driven by discontinued operations[55] 7. Inventories This note provides a breakdown of inventory components and highlights the use of the LIFO method for valuing certain inventories, with interim calculations based on management estimates Inventories (in millions) | Category | Sep 30, 2020 | Dec 31, 2019 | | :------------------------ | :----------- | :----------- | | Finished products | $56.6 | $80.6 | | Work in process | $23.1 | $23.7 | | Raw materials and supplies | $48.7 | $56.1 | | Total inventories | $124.8 | $157.1 | - Total inventories decreased from $157.1 million at December 31, 2019, to $124.8 million at September 30, 2020[56] - The company uses the Last-In, First-Out (LIFO) method for valuing certain inventories, with interim calculations based on management's estimates[56] 8. Goodwill and Other Intangible Assets This note details the changes in goodwill by segment and the composition of identifiable intangible assets. It also reports significant impairments of indefinite-lived trademarks during the nine months ended September 30, 2020 Goodwill by Reportable Segment (in millions) | Segment | Dec 31, 2019 | Sep 30, 2020 | | :------------------ | :----------- | :----------- | | Sealing Products | $468.6 | $470.3 | | Engineered Products | $16.7 | $16.6 | | Total | $485.3 | $486.9 | Identifiable Intangible Assets (in millions) | Category | Gross Carrying Amount (Sep 30, 2020) | Accumulated Amortization (Sep 30, 2020) | | :------------------ | :----------------------------------- | :-------------------------------------- | | Customer relationships | $455.8 | $168.2 | | Existing technology | $98.8 | $38.3 | | Trademarks (amortized) | $37.5 | $24.7 | | Other (amortized) | $33.4 | $24.8 | | Trademarks (indefinite-lived) | $53.0 | — | - Impairments of indefinite-lived trademarks totaled $18.2 million for the nine months ended September 30, 2020[59] 9. Accrued Expenses This note provides a detailed breakdown of accrued expenses, showing an increase in total accrued expenses from December 31, 2019, to September 30, 2020, primarily driven by legal settlement and other accrued liabilities Accrued Expenses (in millions) | Category | Sep 30, 2020 | Dec 31, 2019 | | :-------------------------------- | :----------- | :----------- | | Salaries, wages and employee benefits | $45.9 | $43.7 | | Interest | $9.7 | $5.1 | | Environmental | $26.1 | $25.2 | | Income taxes | $9.7 | $13.5 | | Taxes other than income taxes | $9.7 | $9.1 | | Operating lease liabilities | $8.9 | $9.3 | | Legal settlement | $7.8 | $0.4 | | Other | $36.3 | $31.0 | | Total | $154.1 | $137.3 | - Accrued expenses increased by $16.8 million from $137.3 million at December 31, 2019, to $154.1 million at September 30, 2020, largely due to a significant increase in legal settlement accruals[60] 10. Long-Term Debt This note details the company's long-term debt structure, including its $400.0 million Revolving Credit Facility and $150.0 million Term Loan Facility, as well as $350.0 million in 5.75% Senior Notes due 2026. It outlines interest rates, amortization schedules, prepayment requirements, and compliance with financial covenants - The company has a $400.0 million Revolving Credit Facility and a $150.0 million Term Loan Facility, both senior secured and maturing in five years[61] - As of September 30, 2020, borrowing availability under the Revolving Credit Facility was $388.6 million, with $147.1 million outstanding on the Term Loan Facility[67] - The company issued $350.0 million aggregate principal amount of 5.75% Senior Notes due 2026, which are unsecured and unsubordinated obligations[68][69] - The company was in compliance with all covenants of the Credit Agreement as of September 30, 2020[66] 11. Pensions and Postretirement Benefits This note presents the components of net periodic benefit cost for the company's U.S. and foreign defined benefit pension and other postretirement plans, showing a decrease in net periodic benefit cost for pension benefits in 2020 compared to 2019 Net Periodic Benefit Cost (in millions) | Component | Q3 2020 (Pension) | Q3 2019 (Pension) | 9M 2020 (Pension) | 9M 2019 (Pension) | | :-------------------------- | :------------------ | :------------------ | :------------------ | :------------------ | | Service cost | $1.2 | $1.1 | $3.4 | $3.4 | | Interest cost | $2.5 | $3.1 | $7.9 | $9.2 | | Expected return on plan assets | $(4.8) | $(4.0) | $(14.3) | $(12.0) | | Amortization of net loss (gain) | $1.4 | $1.7 | $4.0 | $5.0 | | Net periodic benefit cost | $0.3 | $1.9 | $1.3 | $5.7 | - Net periodic benefit cost for pension benefits decreased from $1.9 million in Q3 2019 to $0.3 million in Q3 2020, and from $5.7 million in 9M 2019 to $1.3 million in 9M 2020[73] - The company expects to make approximately $4.0 million in contributions to its U.S. defined benefit pension plans in Q4 2020[73] 12. Shareholders' Equity This note details the changes in shareholders' equity for the first three quarters of 2020 and 2019, including net income/loss, other comprehensive income, dividends paid, share repurchases, and incentive plan activities. It also covers the company's dividend policy and share repurchase program Changes in Shareholders' Equity (in millions) | Item | Dec 31, 2019 | Sep 30, 2020 | | :------------------------------------ | :----------- | :----------- | | Total Shareholders' Equity | $886.9 | $1,065.9 | | Retained Earnings | $632.2 | $808.5 | | Accumulated Other Comprehensive Loss | $(36.4) | $(30.1) | - Total shareholders' equity increased from $886.9 million at December 31, 2019, to $1,065.9 million at September 30, 2020[75] - The company paid total dividends of $16.2 million during the nine months ended September 30, 2020, and repurchased 0.1 million shares for $5.3 million[77][79] - In October 2020, the board authorized a new share repurchase program of up to $50 million through October 2022[79] 13. Business Segment Information This note provides detailed financial information for the company's two reportable segments: Sealing Products and Engineered Products. It includes segment sales, profit, and revenue breakdown by end market, highlighting varied demand changes due to the COVID-19 pandemic - The company operates in two reportable segments: Sealing Products and Engineered Products, managed separately based on economic similarity, product nature, production processes, customers, and distribution methods[85] Segment Sales (in millions) | Segment | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :------------------ | :------ | :------ | :------ | :------ | | Sealing Products | $201.8 | $219.5 | $601.4 | $668.0 | | Engineered Products | $67.7 | $81.1 | $201.4 | $255.8 | | Net sales | $268.3 | $299.0 | $798.0 | $919.2 | Segment Profit (in millions) | Segment | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :------------------ | :------ | :------ | :------ | :------ | | Sealing Products | $33.0 | $17.8 | $69.5 | $66.2 | | Engineered Products | $(3.5) | $10.6 | $(0.2) | $28.7 | | Total segment profit | $29.5 | $28.4 | $69.3 | $94.9 | - Semiconductor and food and pharmaceutical markets showed growth, while heavy-duty truck, general industrial, automotive, aerospace, oil and gas, and petrochemical markets experienced weakness[177] 14. Derivatives and Hedging This note describes the company's use of cross-currency swap agreements to manage foreign currency risk, effectively converting USD-denominated Senior Notes interest payments to Euro-denominated debt. These swaps are designated as net investment hedges - The company uses cross-currency swap agreements to manage foreign currency risk, converting interest payments on USD-denominated Senior Notes to fixed-rate Euro-denominated debt[95][96] - The swaps are designated as qualifying hedging instruments and accounted for as a net investment hedge, with fair value adjustments recorded in accumulated other comprehensive loss[98] - As of September 30, 2020, the combined fair value of the swaps was a $9.6 million asset[98] 15. Fair Value Measurements This note provides a summary of assets and liabilities measured at fair value on a recurring basis, categorizing them by fair value hierarchy levels. It also discusses the impairment analysis for long-lived assets and indefinite-lived trademarks Assets and Liabilities Measured at Fair Value (in millions) | Item | Sep 30, 2020 | Dec 31, 2019 | | :------------------------ | :----------- | :----------- | | Assets: Time deposits | $36.1 | $22.9 | | Assets: Foreign currency derivatives | $9.6 | $12.3 | | Assets: Deferred compensation assets | $6.8 | $10.9 | | Liabilities: Deferred compensation liabilities | $7.0 | $11.3 | | Liabilities: Foreign currency derivatives | — | $0.6 | - Long-term debt had a carrying value of $493.2 million and a fair value of $518.8 million at September 30, 2020[101] - An impairment loss of $16.1 million was recognized during Q3 2020 for indefinite-lived trademarks, and $4.2 million in Q2 2020 for trademarks and existing technology intangible assets[104] 16. Accumulated Other Comprehensive Loss This note details the changes in accumulated other comprehensive loss by component, including unrealized translation adjustments and pension/postretirement plan adjustments, for the quarter and nine months ended September 30, 2020 and 2019 Changes in Accumulated Other Comprehensive Loss (in millions) | Component | Sep 30, 2020 (Ending Balance) | Sep 30, 2019 (Ending Balance) | | :------------------------------------ | :---------------------------- | :---------------------------- | | Unrealized Translation Adjustments | $13.7 | $(4.9) | | Pension and Other Postretirement Plans | $(43.8) | $(42.7) | | Total | $(30.1) | $(47.6) | - Net current-period other comprehensive income attributable to EnPro Industries, Inc. was $6.1 million for Q3 2020 and $6.3 million for 9M 2020[105][107] - Reclassifications out of accumulated other comprehensive loss related to pension and other postretirement plan adjustments were $1.0 million (net of tax) for Q3 2020 and $2.4 million (net of tax) for 9M 2020[107] 17. Commitments and Contingencies This note details various legal and environmental commitments and contingencies, including significant environmental remediation liabilities (Lower Passaic River, uranium mines, Water Valley Mississippi), historical obligations related to Crucible Steel, product warranty liabilities, and a legal settlement with BorgWarner. It also covers ongoing asbestos insurance matters - Accrued environmental liabilities totaled $31.4 million at September 30, 2020, down from $36.0 million at December 31, 2019[112] - The company has an accrual of $2.6 million at September 30, 2020, for environmental remediation costs related to the Lower Passaic River Study Area, with potential for significantly greater future costs[117] - A settlement agreement with the State of Mississippi regarding groundwater contamination in Water Valley required a $14 million payment, increasing the accrual for this matter to $17.7 million at September 30, 2020[124][125] - A legal proceeding with BorgWarner was settled for 6.6 million EUR, increasing the accrual for this matter to 6.6 million EUR at September 30, 2020[133][134] - The company anticipates collecting approximately $4.2 million in insurance receivables for GST asbestos claims and up to $10 million for non-GST asbestos claims[137][138] 18. Subsequent Event This note discloses the agreement to acquire Alluxa, Inc., a specialized optical filters and thin-film coatings company, for $237 million in cash, which closed on October 26, 2020. The acquisition includes rollover equity from Alluxa executives with specific put and call rights - On September 28, 2020, the company agreed to acquire Alluxa, Inc., a California-based industrial technology company specializing in optical filters and thin-film coatings[141] - The cash purchase price for Alluxa was $237 million, funded with available cash and rollover equity from Alluxa executives, and the acquisition closed on October 26, 2020[143] - The rollover equity from Alluxa executives gives them approximately a 7% ownership share in the acquisition subsidiary, with specific put and call rights exercisable in 2024, 2025, and 2026[144] PART II. OTHER INFORMATION Provides management's discussion and analysis of financial condition, results of operations, market risks, and internal controls Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, cash flows, and operating results for the periods presented, including an overview of business segments, the impact of COVID-19, and a detailed comparison of financial performance for the third quarter and nine months ended September 30, 2020 and 2019. It also includes discussions on liquidity, capital resources, critical accounting policies, contingencies, and non-GAAP financial measure reconciliations Forward-Looking Information Highlights the inherent uncertainties and risks associated with forward-looking statements in the report - The report contains forward-looking statements subject to risks and uncertainties, including impacts from the COVID-19 pandemic, general economic conditions, raw material prices, currency exchange rates, and contingent liabilities[147][148] - Shareholders are cautioned not to place undue reliance on these statements, which speak only as of the report date, and the company does not undertake to publicly revise them[149][150] Non-GAAP Financial Information Explains the use and limitations of non-GAAP financial measures for evaluating company performance - The company uses non-GAAP financial measures such as adjusted net income, adjusted diluted EPS, adjusted EBITDA, and segment adjusted EBITDA to evaluate operating performance and provide useful information to investors[151] - These non-GAAP measures are not prepared in conformity with GAAP and may not be comparable to similarly titled measures used by other companies[151] Overview and Outlook This section provides an overview of EnPro's business segments, recent strategic actions including segment reclassification, acquisitions, and divestitures, and discusses the significant impact of the COVID-19 pandemic on market demand and operations. It also outlines the company's response measures and financial outlook - EnPro manages its business through two segments: Sealing Products and Engineered Products, with 47 primary manufacturing facilities in 13 countries[152][153] - The company completed the acquisition of Alluxa, Inc. for $237 million in October 2020 and divested several businesses, including Motor Wheel® brake drum and Crewson® brake adjuster brands, and the Fairbanks Morse division[160][161][163][171] - COVID-19 has negatively impacted demand in heavy-duty truck, general industrial, automotive, aerospace, oil and gas, and petrochemical markets, while semiconductor and food and pharmaceutical markets showed growth[173][177] - The company implemented aggressive cost management, discretionary spending reductions, capital expenditure prioritization, and headcount optimization in response to COVID-19[179] Financial Highlights (in millions, except per share data) | Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :------------------------------------------------- | :------ | :------ | :------ | :------ | | Net sales | $268.3 | $299.0 | $798.0 | $919.2 | | Segment profit | $29.5 | $28.4 | $69.3 | $94.9 | | Net income (loss) attributable to EnPro Industries, Inc. | $(19.7) | $(1.5) | $192.5 | $35.5 | | Adjusted EBITDA | $42.1 | $42.7 | $120.2 | $126.1 | Results of Operations This section provides a detailed comparative analysis of the company's operating results for the third quarter and nine months ended September 30, 2020, versus 2019, focusing on sales, segment profit, corporate expenses, interest, other expenses, and income taxes, highlighting the impact of acquisitions, divestitures, and market conditions Sales Performance (YoY % Change) | Segment | Q3 2020 vs Q3 2019 | 9M 2020 vs 9M 2019 | | :---------------------- | :----------------- | :----------------- | | EnPro Industries, Inc. | (10.3)% | (13.2)% | | Sealing Products | (8.1)% | (10.0)% | | Engineered Products | (16.5)% | (21.3)% | - Sealing Products segment profit increased by 85.4% in Q3 2020 to $33.0 million, driven by reduced restructuring/impairment costs, lower acquisition-related costs, SG&A savings, and manufacturing efficiencies, despite a sales decline[186] - Engineered Products segment reported a loss of $3.5 million in Q3 2020, down from a $10.6 million profit in Q3 2019, primarily due to reduced sales and increased restructuring/impairment costs[188] - Other expense, net, increased significantly in Q3 2020 by $16.7 million, mainly due to $16.1 million in indefinite-lived trademark impairments, a $7.4 million legal settlement, and a $6.3 million increase in environmental reserve adjustments[191] Liquidity and Capital Resources This section discusses the company's cash position, funding sources, and capital structure, including details on its Senior Secured Credit Facilities and Senior Notes. It highlights the impact of divestitures on deleveraging and the company's commitment to maintaining strong liquidity and a flexible M&A strategy - Cash and cash equivalents totaled $441.0 million at September 30, 2020, with $184.7 million held outside the U.S[206] - Operating activities provided $48.4 million in cash for 9M 2020, a decrease from $91.1 million in 9M 2019, while investing activities provided $439.5 million, largely from the Fairbanks Morse sale[208][209] - Financing activities used $160.0 million in 9M 2020, primarily for debt repayments, share repurchases, and dividends[210] - The company has a $400.0 million Revolving Credit Facility and a $150.0 million Term Loan Facility, with $388.6 million available under the Revolving Credit Facility at September 30, 2020[211][218] - The company has $350.0 million in 5.75% Senior Notes due 2026 and was in compliance with all debt covenants as of September 30, 2020[219][220][217] Critical Accounting Policies and Estimates Refers readers to the annual report for a comprehensive discussion of key accounting policies and estimates - For a discussion of critical accounting policies and estimates, readers are referred to the company's annual report on Form 10-K for the fiscal year ended December 31, 2019[226] Contingencies This section reiterates the company's various legal and environmental commitments and contingencies, including environmental remediation liabilities, historical obligations related to Crucible Steel, product warranty liabilities, and the BorgWarner legal settlement, as well as ongoing asbestos insurance matters - The company is involved in various environmental remediation activities at 20 sites, with accrued liabilities totaling $31.4 million at September 30, 2020[229][231] - A $14 million settlement was reached with the State of Mississippi regarding groundwater contamination in Water Valley, increasing the accrual for this matter to $17.7 million[244][245] - The product warranty liability at September 30, 2020, was $8.0 million, down from $10.1 million at the beginning of the year[249] - A legal claim by BorgWarner against GGB France was settled for 6.6 million EUR, leading to an increased accrual for this matter[253][254] - The company continues to manage asbestos litigation through a claims resolution trust and expects to collect insurance recoveries for both GST and non-GST asbestos claims[255][256][257][258] Supplemental Guarantor Financial Information This section provides summarized consolidating financial information for EnPro Industries, Inc. (Parent), its Guarantor Subsidiaries, and Non-Guarantor Subsidiaries, detailing their financial performance and position in relation to the Senior Notes guarantees. It clarifies the structural subordination of the Senior Notes to the liabilities of Non-Guarantor Subsidiaries - The Senior Notes are fully and unconditionally guaranteed by all wholly-owned direct and indirect domestic subsidiaries (Guarantor Subsidiaries)[261] - Fairbanks Morse and EnPro Learning Systems, LLC ceased to be guarantors upon their sale in 2020 and are included as Non-Guarantor Subsidiaries for the nine months ended September 30, 2020[264][265] Summarized Consolidating Results of Operations (9M 2020, in millions) | Item | Parent and Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | | :------------------------------------------------- | :-------------------------------- | :------------------------- | :----------- | :----------- | | Net sales | $479.2 | $406.1 | $(87.3) | $798.0 | | Net income | $192.5 | $21.8 | $(21.8) | $192.5 | - The Senior Notes are structurally subordinated to the indebtedness and other liabilities of the Non-Guarantor Subsidiaries[271] Reconciliations of Non-GAAP Financial Measures to the Comparable GAAP Measures This section provides detailed reconciliations of non-GAAP financial measures, including adjusted income from continuing operations, adjusted segment EBITDA, and adjusted EBITDA, to their most directly comparable GAAP measures. These adjustments aim to provide a clearer view of ongoing operational performance by excluding certain selected items - Adjustments to GAAP measures include restructuring and impairment costs, environmental reserve adjustments, net loss on sale of businesses, acquisition and divestiture expenses, pension expense (non-service cost), non-controlling interest compensation allocation, impairment of indefinite-lived trademarks, and legal settlements[276][278][279][282] Adjusted Income from Continuing Operations Attributable to EnPro Industries, Inc. (in millions, except per share data) | Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :------------------------------------------------- | :------ | :------ | :------ | :------ | | Adjusted income from continuing operations attributable to EnPro Industries, Inc. | $13.8 | $15.2 | $37.9 | $44.0 | | Adjusted diluted EPS from continuing operations | $0.67 | $0.73 | $1.84 | $2.11 | Adjusted Segment EBITDA (in millions) | Segment | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :------------------ | :------ | :------ | :------ | :------ | | Sealing Products | $45.4 | $37.0 | $127.8 | $112.0 | | Engineered Products | $7.9 | $14.8 | $21.1 | $42.0 | | Total segment adjusted EBITDA | $53.3 | $51.8 | $148.9 | $154.0 | Adjusted EBITDA (in millions) | Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :------------------ | :------ | :------ | :------ | :------ | | EBITDA | $(7.6) | $10.7 | $50.8 | $87.1 | | Adjusted EBITDA | $42.1 | $42.7 | $120.2 | $126.1 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, specifically foreign currency exchange rates and commodity prices, and its strategies for managing these risks through derivative financial instruments and operational efficiencies - The company is exposed to foreign currency risks from foreign subsidiary balances, intercompany loans, and foreign currency transactions, which it manages through normal operating activities and foreign currency forward/option contracts[284] - Cross-currency swap agreements with notional amounts of $200.0 million and $100.0 million are used to hedge foreign currency risk related to Senior Notes interest payments[285][286] - The company is exposed to commodity price fluctuations for raw materials like steel, engineered plastics, copper, and polymers, and mitigates this risk by passing increases to customers and utilizing lean initiatives[288] Item 4. Controls and Procedures This section reports that the company's disclosure controls and procedures were not effective as of September 30, 2020, due to an un-remediated material weakness in internal control over financial reporting related to income tax accounting. It also outlines the remediation plan underway - The company's disclosure controls and procedures were not effective as of September 30, 2020, due to an un-remediated material weakness in internal control over financial reporting[292] - The material weakness relates to the design and maintenance of controls over accounting for income taxes, specifically the review and validation of foreign subsidiary tax information and input data for federal tax calculations and credits[294] - Remediation efforts include enhancing quarterly tax package requirements, implementing additional data validation steps, expanding key control reviews, formalizing confirmation of special taxes/credits, and adding new manager-level tax positions[295] - While progress has been made, full remediation requires successful finalization and execution of annual tax internal controls for the year ending December 31, 2020[296] Item 1. Legal Proceedings This section refers to Note 17 of the Consolidated Financial Statements for a detailed description of environmental and other legal matters, stating that the outcome of other ordinary course litigation is not expected to have a material adverse effect on the company's financial condition - A detailed description of environmental and other legal matters is included in Note 17 to the Consolidated Financial Statements[301] - The company is involved in other litigation and legal proceedings arising in the ordinary course of business, but believes their outcome will not have a material adverse effect on its financial condition, results of operations, and cash flows[301] Item 1A. Risk Factors This section highlights the adverse impact of the COVID-19 pandemic on the company's business and results of operations, emphasizing uncertainties regarding its duration, severity, and economic repercussions, as well as potential disruptions to operations and supply chains - The COVID-19 pandemic has adversely affected the company's business and financial results for the three and nine months ended September 30, 2020, and is expected to continue impacting results into 2021 and possibly beyond[302] - Uncertainties regarding the severity and duration of COVID-19, governmental restrictions, and economic recovery could lead to decreased demand for products/services and potential asset impairment charges[302] - Operations have been affected by employee protection measures, and while most are deemed 'essential,' future government orders or health concerns could halt operations[303] - Approximately 48% of 2019 revenues were generated outside the United States, making the company susceptible to ongoing COVID-19 impacts in international markets[304] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the company's share repurchase activities and transfers of common stock to a rabbi trust for deferred compensation during the third quarter of 2020, noting the remaining authorization under the share repurchase program Share Purchases in Q3 2020 | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------------- | :----------------------------- | :--------------------------- | | July 1 - July 31, 2020 | — | — | | August 1 - August 31, 2020 | — | — | | September 1 - September 30, 2020 | 907 | $56.54 | | Total | 907 | $56.54 | - As of September 30, 2020, $29,674,397 remained available under the $50.0 million share repurchase authorization from October 2018[306] - In September 2020, 907 shares were transferred to a rabbi trust for the Deferred Compensation Plan for Non-Employee Directors, valued at a weighted average price of $56.54 per share[307] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q report, including agreements related to acquisitions, certifications, and Inline XBRL taxonomy documents - The exhibit index includes the Securities Purchase Agreement for LeanTeq, the Merger Agreement for Alluxa, CEO and CFO certifications, and Inline XBRL taxonomy extension documents[310] SIGNATURES This section contains the official signatures of authorized representatives, confirming the due filing of the report on behalf of EnPro Industries, Inc - The report was signed on November 3, 2020, by Robert S. McLean, Executive Vice President, General Counsel and Secretary, and Steven R. Bower, Senior Vice President, Chief Accounting Officer and Controller[313][314]