EnPro Industries(NPO) - 2022 Q2 - Quarterly Report

FORM 10-Q This is a Quarterly Report (Form 10-Q) for EnPro Industries, Inc. for the period ended June 30, 2022 - The report is a Quarterly Report (Form 10-Q) for the period ended June 30, 2022, filed by EnPro Industries, Inc. (Commission File Number 001-31225)[2] - As of July 28, 2022, there were 20,801,544 shares of common stock outstanding[4] Title of each class | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | | :------------------ | :---------------- | :---------------------------------------- | | Common stock, $0.01 par value | NPO | New York Stock Exchange | PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company reported increased net sales, operating income, and net income for both the second quarter and six months ended June 30, 2022, compared to the prior year, with improved cash flow from operations and significant debt repayments Consolidated Statements of Operations (Unaudited) This section presents the unaudited consolidated statements of operations, detailing net sales, gross profit, operating income, and net income for the second quarter and six months ended June 30, 2022 and 2021 Consolidated Statements of Operations (Unaudited) - Key Metrics (in millions, except per share amounts) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--------------------------------------- | :------ | :------ | :------ | :------ | | Net sales | $333.3 | $298.6 | $662.0 | $577.9 | | Gross profit | $130.5 | $117.0 | $245.1 | $226.4 | | Operating income | $49.7 | $31.9 | $77.1 | $59.1 | | Net income attributable to EnPro Industries, Inc. | $33.1 | $29.3 | $49.3 | $47.3 | | Basic earnings per share | $1.59 | $1.42 | $2.37 | $2.30 | | Diluted earnings per share | $1.59 | $1.41 | $2.36 | $2.28 | Consolidated Statements of Cash Flows (Unaudited) This section provides the unaudited consolidated statements of cash flows, outlining cash generated from operating activities, used in investing activities, and used in financing activities for the six months ended June 30, 2022 and 2021 Consolidated Statements of Cash Flows (Unaudited) - Key Metrics (in millions) | Metric | H1 2022 | H1 2021 | | :-------------------------------- | :------ | :------ | | Net cash provided by operating activities | $67.1 | $58.5 | | Net cash used in investing activities | $(5.5) | $(12.0) | | Net cash used in financing activities | $(154.4) | $(14.8) | | Net increase (decrease) in cash and cash equivalents | $(116.0) | $32.4 | | Cash and cash equivalents at end of period | $222.1 | $261.9 | Consolidated Balance Sheets (Unaudited) This section presents the unaudited consolidated balance sheets, detailing assets, liabilities, and shareholders' equity as of June 30, 2022, and December 31, 2021 Consolidated Balance Sheets (Unaudited) - Key Metrics (in millions) | Metric | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $222.1 | $338.1 | | Total current assets | $629.0 | $713.0 | | Total assets | $2,814.7 | $2,969.8 | | Total current liabilities | $330.1 | $379.1 | | Long-term debt | $876.7 | $963.9 | | Total liabilities | $1,491.6 | $1,653.1 | | Total shareholders' equity | $1,275.0 | $1,266.6 | Notes to Consolidated Financial Statements (Unaudited) This section provides detailed notes to the unaudited consolidated financial statements, offering additional context and breakdowns for various financial accounts and transactions 1. Overview and Basis of Presentation This note describes EnPro Industries, Inc.'s strategic focus on industrial technology businesses and the results of an interim goodwill impairment test for the Alluxa reporting unit - EnPro Industries, Inc. is strategically focused on industrial technology-related businesses with leading technologies, compelling margins, strong cash flow, and high levels of recurring revenue, serving markets with favorable secular tailwinds like semiconductor and life sciences[16] - An interim goodwill impairment test for the Alluxa reporting unit (Advanced Surface Technologies segment) as of June 30, 2022, indicated its fair value exceeded its carrying value by an estimated 21%[20] 2. Acquisition This note details the acquisition of TCFII NxEdge LLC and presents pro forma condensed consolidated financial results - On December 17, 2021, EnPro Holdings, Inc. acquired TCFII NxEdge LLC (NxEdge), a leading supplier in the semiconductor supply chain, integrating it into the Advanced Surface Technologies segment[22] Pro Forma Condensed Consolidated Financial Results (in millions) | Metric | Quarters Ended June 30, 2022 | Quarters Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------ | :--------------------------- | :--------------------------- | :----------------------------- | :----------------------------- | | Pro forma net sales | $333.3 | $343.8 | $662.0 | $666.0 | | Pro forma net income | $34.5 | $35.7 | $59.3 | $57.8 | 3. Income Taxes This note outlines the effective tax rates for the periods presented and explains the primary drivers behind the changes Effective Tax Rates | Period | 2022 | 2021 | | :----------------------- | :----- | :----- | | Quarters Ended June 30 | 16.0% | 2.6% | | Six Months Ended June 30 | 18.2% | 11.2% | - The increase in effective tax rates for 2022 periods was primarily driven by a legal entity conversion in Taiwan, an intercompany sale of assets, and foreign currency effects on dividends, partially offset by higher tax rates in most foreign jurisdictions[27][28] 4. Earnings Per Share This note provides a breakdown of basic and diluted earnings per share attributable to EnPro Industries, Inc. Earnings Per Share Attributable to EnPro Industries, Inc. (in millions, except per share amounts) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--------------------------------------- | :------ | :------ | :------ | :------ | | Net income attributable to EnPro Industries, Inc. | $33.1 | $29.3 | $49.3 | $47.3 | | Basic earnings per share | $1.59 | $1.42 | $2.37 | $2.30 | | Diluted earnings per share | $1.59 | $1.41 | $2.36 | $2.28 | 5. Inventories This note details the composition of total inventories and the valuation method used by the company Total Inventories (in millions) | Category | June 30, 2022 | December 31, 2021 | | :-------------------------- | :------------ | :---------------- | | Finished products | $56.8 | $60.0 | | Work in process | $41.8 | $35.6 | | Raw materials and supplies | $66.2 | $79.7 | | Reserve to reduce certain inventories to LIFO basis | $(4.8) | $(7.3) | | Total inventories | $160.0 | $168.0 | - The company uses the last-in, first-out (LIFO) method for valuing certain inventories, with interim calculations based on management's estimates[31] 6. Goodwill and Other Intangible Assets This note provides a breakdown of goodwill by reportable segment and details identifiable intangible assets, including their gross carrying amount and accumulated amortization Goodwill by Reportable Segment (in millions) | Segment | Goodwill as of December 31, 2021 | Acquisition of business | Foreign currency translation | Goodwill as of June 30, 2022 | | :-------------------------- | :------------------------------- | :---------------------- | :--------------------------- | :--------------------------- | | Sealing Technologies | $279.4 | — | $(3.6) | $275.8 | | Advanced Surface Technologies | $668.7 | $1.6 | $(7.7) | $662.6 | | Engineered Materials | $5.1 | — | — | $5.1 | | Total | $953.2 | $1.6 | $(11.3) | $943.5 | Identifiable Intangible Assets as of June 30, 2022 (in millions) | Category | Gross Carrying Amount | Accumulated Amortization | | :-------------------------- | :-------------------- | :----------------------- | | Customer relationships | $522.6 | $177.6 | | Existing technology | $479.8 | $66.9 | | Trademarks (amortized) | $69.8 | $26.9 | | Other (amortized) | $41.1 | $27.1 | | Trademarks (indefinite-lived) | $46.4 | — | | Total | $1,159.7 | $298.5 | - Amortization expense for the six months ended June 30, 2022, was $39.4 million, up from $22.6 million in the prior year[33] 7. Accrued Expenses This note presents a breakdown of accrued expenses, including salaries, wages, employee benefits, environmental costs, and income taxes Accrued Expenses (in millions) | Category | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :---------------- | | Salaries, wages and employee benefits | $44.5 | $60.5 | | Environmental | $17.1 | $11.3 | | Income taxes | $13.5 | $10.6 | | Total | $124.3 | $135.2 | 8. Long-Term Debt This note describes the company's credit facilities, outstanding debt balances, and compliance with debt covenants - On December 17, 2021, the company entered into a Third Amended and Restated Credit Agreement, providing credit facilities totaling $1,007.5 million, including a $400.0 million Revolving Credit Facility[36] - As of June 30, 2022, borrowing availability under the Revolving Credit Facility was $294.2 million, with $95.0 million outstanding; outstanding principal balances for Term Loan A-1, Term Loan A-2, and 364-Day Facility were $139.7 million, $311.1 million, and $100.0 million, respectively[41] - The company has $350.0 million aggregate principal amount of 5.75% Senior Notes due 2026, which are unsecured, unsubordinated obligations[42][43] - The company was in compliance with all covenants of the Amended Credit Agreement and the indenture governing the Senior Notes as of June 30, 2022[40][159] 9. Pensions This note details the net periodic benefit cost for pension plans and information regarding contributions Net Periodic Benefit Cost (Benefit) for Pension Plans (in millions) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :-------------------------- | :------ | :------ | :------ | :------ | | Service cost | $0.3 | $0.4 | $0.7 | $0.8 | | Interest cost | $2.5 | $2.2 | $4.9 | $4.5 | | Expected return on plan assets | $(3.3) | $(4.6) | $(6.6) | $(9.1) | | Amortization of prior service cost | — | $0.1 | — | $0.1 | | Amortization of net loss | $0.2 | $0.2 | $0.3 | $0.3 | | Net periodic benefit cost (benefit) | $(0.3) | $(1.7) | $(0.7) | $(3.4) | - No contributions were made to U.S. defined benefit pension plans in the first six months of 2022, and none are anticipated for the full year[47] 10. Shareholders' Equity This note provides a detailed breakdown of shareholders' equity, including common stock, retained earnings, accumulated other comprehensive income, and information on dividends and share repurchases Shareholders' Equity (in millions) | Metric | June 30, 2022 | December 31, 2021 | | :-------------------------- | :------------ | :---------------- | | Common stock | $0.2 | $0.2 | | Additional paid-in capital | $301.0 | $303.6 | | Retained earnings | $987.0 | $949.4 | | Accumulated other comprehensive income (loss) | $(12.0) | $14.6 | | Common stock held in treasury | $(1.2) | $(1.2) | | Total shareholders' equity | $1,275.0 | $1,266.6 | - Total dividend payments of $11.7 million were made during the six months ended June 30, 2022, and a dividend of $0.28 per share was declared in July 2022[49][50] - The board authorized a $50.0 million share repurchase program through October 2022, but no repurchases have been made under this authorization[50][159] - In February 2022, 0.1 million stock options were issued to key executives with an exercise price of $106.54 per share and a fair value of $39.07 per share at grant date[51][54] 11. Business Segment Information This note provides detailed financial information broken down by the company's three business segments: Sealing Technologies, Advanced Surface Technologies, and Engineered Materials Sales by Segment This section presents the net sales generated by each of the company's business segments for the second quarter and six months ended June 30, 2022 and 2021 Sales by Segment (in millions) | Segment | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :-------------------------- | :------ | :------ | :------ | :------ | | Sealing Technologies | $155.9 | $162.5 | $309.5 | $309.0 | | Advanced Surface Technologies | $121.5 | $59.2 | $238.2 | $113.9 | | Engineered Materials | $56.5 | $80.0 | $115.5 | $160.4 | | Intersegment sales | $(0.6) | $(3.1) | $(1.2) | $(5.4) | | Total sales | $333.3 | $298.6 | $662.0 | $577.9 | Adjusted Segment EBITDA This section provides the Adjusted Segment EBITDA for each business segment for the second quarter and six months ended June 30, 2022 and 2021 Adjusted Segment EBITDA (in millions) | Segment | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :-------------------------- | :------ | :------ | :------ | :------ | | Sealing Technologies | $42.5 | $42.4 | $76.0 | $76.4 | | Advanced Surface Technologies | $37.8 | $15.6 | $72.7 | $32.9 | | Engineered Materials | $9.5 | $13.0 | $18.7 | $25.6 | | Total Adjusted Segment EBITDA | $89.8 | $71.0 | $167.4 | $134.9 | Segment Assets This section presents the total assets attributable to each business segment and corporate as of June 30, 2022, and December 31, 2021 Segment Assets (in millions) | Segment | June 30, 2022 | December 31, 2021 | | :-------------------------- | :------------ | :---------------- | | Sealing Technologies | $696.0 | $697.5 | | Advanced Surface Technologies | $1,624.4 | $1,686.5 | | Engineered Materials | $166.4 | $160.3 | | Corporate | $327.9 | $425.5 | | Total assets | $2,814.7 | $2,969.8 | Backlog This section provides information on the company's consolidated backlog and the expected timing for satisfying these performance obligations - As of June 30, 2022, the consolidated backlog (remaining performance obligations) was $429.4 million, with approximately 94% expected to be satisfied within one year[62] Revenue by End Market This section details the total third-party sales categorized by major end market for each business segment for the six months ended June 30, 2022 Total Third-Party Sales by Major End Market (Six Months Ended June 30, 2022, in millions) | End Market | Sealing Technologies | Advanced Surface Technologies | Engineered Materials | Total | | :------------------------------ | :------------------- | :---------------------------- | :------------------- | :------ | | Semiconductors | $2.5 | $216.3 | — | $218.8 | | General industrial | $83.5 | $14.4 | $59.3 | $157.2 | | Medium-duty/heavy-duty truck | $88.2 | — | $4.6 | $92.8 | | Chemical and material processing | $40.0 | — | — | $40.0 | | Food and pharmaceutical | $37.5 | — | — | $37.5 | | Automotive | $1.1 | $0.8 | $30.2 | $32.1 | | Aerospace | $18.8 | $3.1 | $7.1 | $29.0 | | Power generation | $22.9 | $0.1 | $1.6 | $24.6 | | Oil and gas | $10.6 | $1.7 | $12.0 | $24.3 | | Other | $4.0 | $1.7 | — | $5.7 | | Total third-party sales | $309.1 | $238.1 | $114.8 | $662.0 | 12. Derivatives and Hedging This note explains the company's use of cross-currency swap agreements to manage foreign currency risk and details the notional amounts and fair values of these instruments - The company uses cross-currency swap agreements to manage foreign currency risk, effectively converting interest payments on USD-denominated Senior Notes to Euro-denominated debt[67][68] - Two swap agreements are in place: one with a notional amount of $200.0 million maturing September 15, 2022, and another with a notional amount of $100.0 million maturing October 15, 2026[67][68] - As of June 30, 2022, the fair value of these swaps was $21.9 million and $9.5 million, respectively, recorded within other current assets and other (non-current) assets[70] 13. Fair Value Measurements This note provides a table of fair value measurements for various financial instruments, categorized by their fair value hierarchy level Fair Value Measurements (in millions) | Category | June 30, 2022 | December 31, 2021 | Fair Value Hierarchy Level | | :-------------------------- | :------------ | :---------------- | :------------------------- | | Foreign currency derivatives (Assets) | $31.4 | $8.7 | Level 2 | | Deferred compensation assets | $11.3 | $10.9 | Level 1 | | Deferred compensation liabilities | $11.6 | $11.4 | Level 1 | | Long-term debt (Carrying Value) | $891.2 | $976.6 | Level 2 | | Long-term debt (Fair Value) | $885.5 | $998.3 | Level 2 | 14. Accumulated Other Comprehensive Income (Loss) This note presents a breakdown of accumulated other comprehensive income (loss), including unrealized translation adjustments and pension and other postretirement plans Accumulated Other Comprehensive Income (Loss) (in millions) | Period | Unrealized Translation Adjustments | Pension and Other Postretirement Plans | Total | | :----------------------- | :------------------------------- | :----------------------------------- | :------ | | Beginning balance (Dec 31, 2021) | $46.7 | $(32.1) | $14.6 | | Net current-period other comprehensive income (loss) attributable to EnPro Industries, Inc. (H1 2022) | $(26.8) | $0.2 | $(26.6) | | Ending balance (June 30, 2022) | $19.9 | $(31.9) | $(12.0) | 15. Commitments and Contingencies This note outlines the company's various commitments and contingencies, including general litigation, environmental liabilities, and product warranties General This section provides a general overview of the company's involvement in litigation and legal proceedings - The company is involved in various litigation and legal proceedings arising in the ordinary course of business, believing the outcomes will not have a material adverse effect on its financial condition, results of operations, and cash flows[76] Environmental This section details the company's involvement in environmental remediation activities and the associated liabilities - The company is involved in remediation activities or investigations at 19 sites, with 12 sites having future costs expected to exceed $100,000[78] - As of June 30, 2022, the company had established liabilities aggregating $45.2 million for estimated future environmental expenditures, recorded on an undiscounted basis[79] Lower Passaic River Study Area This section describes EnPro Holdings' status as a potentially responsible party for the Lower Passaic River Study Area Superfund Site and the associated remediation costs and reserves - EnPro Holdings is a potentially responsible party (PRP) for the Lower Passaic River Study Area Superfund Site in New Jersey[81] - The EPA's final Record of Decision for the lower eight miles of the river estimated a maximum remediation cost of $1.38 billion[82] - The company's reserve for this site was $6.6 million as of June 30, 2022[85] Arizona Uranium Mines This section outlines EnPro Holdings' status as a potentially responsible party for uranium mines in Arizona, including the associated reserve and government reimbursement - EnPro Holdings is a PRP for eight uranium mines in Arizona, with a reserve of $13.3 million as of June 30, 2022, reflecting the low end of the reasonably likely liability[86][88] - The U.S. government will reimburse the company for 35% of necessary response costs, with $3.4 million in future contributions expected[89] Crucible Steel Corporation a/k/a Crucible, Inc. This section addresses EnPro Holdings' ongoing obligations and potential contingent environmental liabilities stemming from its prior ownership of Crucible Steel Corporation - EnPro Holdings has ongoing obligations (e.g., workers' compensation, retiree medical) and potential additional contingent environmental liabilities related to its prior ownership of Crucible Steel Corporation[92] Warranties This section provides a table detailing the product warranty liability, including the balance at the beginning and end of the year, net charges, and settlements Product Warranty Liability (in millions) | Metric | 2022 | 2021 | | :-------------------------- | :--- | :--- | | Balance at beginning of year | $4.9 | $6.7 | | Net charges to expense | $0.7 | $1.0 | | Settlements made | $(0.5) | $(1.5) | | Balance at end of period | $5.1 | $6.2 | Asbestos Insurance Receivables This section discusses the asbestos receivable balance, related expenses, and anticipated future collections - The asbestos receivable balance was lowered in Q2 2022, resulting in a $2.8 million expense, with the receivable balance at $2.4 million at June 30, 2022[97] - EnPro Holdings has collected almost $22 million in settlements for non-GST asbestos claims related to the Pre-GST Coverage Block and anticipates further possible collections[96] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights strong sales growth driven by organic expansion and the NxEdge acquisition, particularly in the Advanced Surface Technologies segment, despite inflationary pressures and supply chain challenges, while managing market risks through hedging and debt repayments Forward-Looking Information This section discusses the inherent risks associated with forward-looking statements, including global economic conditions, geopolitical events, raw material prices, and market growth - Forward-looking statements are subject to risks including impacts from the COVID-19 pandemic, geopolitical activity (e.g., Ukraine, Taiwan), prices and availability of raw materials, and the ability to achieve anticipated growth in semiconductor, life sciences, and other technology-enabled markets[100][106] Non-GAAP Financial Information This section explains the company's use of non-GAAP financial measures to evaluate operating performance and their utility for investors - The company utilizes non-GAAP financial measures such as adjusted net income, adjusted diluted EPS, and adjusted EBITDA to evaluate operating performance and provide a useful tool for investors, with reconciliations to comparable GAAP measures provided[103] Overview This section provides an overview of EnPro's business, its strategic focus on industrial technology, and its three primary operating segments - EnPro designs, develops, manufactures, services, and markets proprietary engineered industrial products, with a strategic focus on industrial technology-related businesses characterized by leading technologies, compelling margins, strong cash flow, and high recurring revenue[104] - The business is managed through three segments: Sealing Technologies, Advanced Surface Technologies, and Engineered Materials[105] COVID-19 Impacts This section discusses the ongoing impacts of the COVID-19 pandemic on global economic conditions, customer demand, and supply chain challenges - The COVID-19 pandemic continues to impact global economic conditions, leading to negative implications on customer demand and upstream supply chain challenges for raw materials (e.g., certain metals and rubber-related chemicals)[110][111] - All primary manufacturing facilities are currently open, and businesses have developed continuity and contingency plans to adjust production levels to demand[111] Highlights This section summarizes key financial highlights for the second quarter and six months ended June 30, 2022, including sales, net income, and adjusted EBITDA Financial Highlights (in millions, except per share data) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--------------------------------------- | :------ | :------ | :------ | :------ | | Net sales | $333.3 | $298.6 | $662.0 | $577.9 | | Net income attributable to EnPro Industries, Inc. | $33.1 | $29.3 | $49.3 | $47.3 | | Diluted earnings per share attributable to EnPro Industries, Inc. | $1.59 | $1.41 | $2.36 | $2.28 | | Adjusted net income attributable to EnPro Industries, Inc. | $48.2 | $32.4 | $86.5 | $60.7 | | Adjusted diluted earnings per share attributable to EnPro Industries, Inc. | $2.32 | $1.56 | $4.15 | $2.92 | | Adjusted EBITDA | $82.0 | $57.2 | $150.0 | $109.3 | - Strong sales in 2022 were driven by organic growth across all three segments and the NxEdge acquisition, despite inflationary cost pressures and supply chain challenges[112] - Increased adjusted EBITDA was primarily due to the NxEdge acquisition, pricing initiatives, and operating leverage on organic sales growth, partially offset by inflationary raw material and labor costs[113] Results of Operations This section provides a detailed analysis of the company's financial performance, comparing the second quarter and six months ended June 30, 2022, to the corresponding periods in 2021 Second Quarter of 2022 Compared to the Second Quarter of 2021 This section analyzes the changes in sales, segment performance, corporate expenses, and net income for the second quarter of 2022 compared to the same period in 2021 Sales Percent Change (Q2 2022 vs. Q2 2021) | Segment | Acquisitions and Divestitures | Foreign Currency | Organic | Total | | :-------------------------- | :---------------------------- | :--------------- | :------ | :------ | | EnPro Industries, Inc. | 5.1% | (3.0)% | 9.5% | 11.6% | | Sealing Technologies | (7.1)% | (3.3)% | 6.3% | (4.1)% | | Advanced Surface Technologies | 87.5% | (1.4)% | 19.1% | 105.2% | | Engineered Materials | (33.2)% | (3.8)% | 7.6% | (29.4)% | - Advanced Surface Technologies sales increased 105.2% to $121.5 million, driven by the NxEdge acquisition and strong semiconductor market demand; Adjusted Segment EBITDA for this segment increased 142.3% to $37.8 million, with margins rising to 31.1%[122][123] - Corporate expenses decreased by $3.3 million, primarily due to decreased incentive compensation expense[126] - Net income attributable to EnPro Industries, Inc. was $33.1 million ($1.59 diluted EPS), up from $29.3 million ($1.41 diluted EPS) in Q2 2021[129] Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021 This section analyzes the changes in sales, segment performance, interest expense, and net income for the six months ended June 30, 2022, compared to the same period in 2021 Sales Percent Change (H1 2022 vs. H1 2021) | Segment | Acquisitions and Divestitures | Foreign Currency | Organic | Total | | :-------------------------- | :---------------------------- | :--------------- | :------ | :------ | | EnPro Industries, Inc. | 5.5% | (2.3)% | 11.4% | 14.6% | | Sealing Technologies | (7.1)% | (2.6)% | 9.9% | 0.2% | | Advanced Surface Technologies | 90.2% | (0.5)% | 19.4% | 109.1% | | Engineered Materials | (32.0)% | (3.0)% | 7.0% | (28.0)% | - Advanced Surface Technologies sales increased 109.1% to $238.2 million, driven by the NxEdge acquisition and strong semiconductor market demand; Adjusted Segment EBITDA for this segment increased 121.0% to $72.7 million, with margins rising to 30.5%[132][133] - Interest expense, net, increased $7.0 million, primarily due to increased outstanding debt incurred to fund the NxEdge acquisition[137] - Net income attributable to EnPro Industries, Inc. was $49.3 million ($2.36 diluted EPS), up from $47.3 million ($2.28 diluted EPS) in H1 2021[140] Liquidity and Capital Resources This section discusses the company's cash flows, capital resources, and strategies for managing liquidity and debt Cash Flows This section analyzes the cash flows from operating, investing, and financing activities for the six months ended June 30, 2022 and 2021, including details on debt repayments and repatriations - Operating activities provided $67.1 million of cash in H1 2022, an increase from $58.5 million in H1 2021, driven by increased net income and insurance receipts[144] - Investing activities used $5.5 million of cash in H1 2022, a decrease from $12.0 million used in H1 2021, due to net working capital adjustments from recent acquisitions/divestitures and lower capital expenditures[145] - Financing activities used $154.4 million of cash in H1 2022, primarily due to $135.9 million in net debt repayments and $11.7 million in dividends paid[146] - The company repatriated $118.7 million in H1 2022 to pay down U.S.-based indebtedness and targets an additional $100 million repatriation by December 31, 2022[142] Capital Resources This section details the company's capital resources, including its senior secured credit facilities, senior notes, and share repurchase program Senior Secured Credit Facilities This section describes the company's Amended Credit Agreement, outlining the aggregate principal credit facilities, revolving credit facility, and outstanding term loan balances - The Amended Credit Agreement provides for initial aggregate principal credit facilities of $1,007.5 million, including a $400.0 million Revolving Credit Facility[148] - Borrowing availability under the Revolving Credit Facility was $294.2 million at June 30, 2022, after considering outstanding letters of credit and borrowings[154] - Outstanding principal balances at June 30, 2022, were $139.7 million for Term Loan A-1, $311.1 million for Term Loan A-2, and $100.0 million for the 364-Day Facility[154] Senior Notes This section provides details on the company's 5.75% Senior Notes due 2026, including their aggregate principal amount and status as unsecured obligations - The company has $350.0 million aggregate principal amount of 5.75% Senior Notes due 2026, which are unsecured, unsubordinated obligations[155][156] Share Repurchase Program This section outlines the board-authorized share repurchase program and reports on the absence of repurchases under this authorization - The board authorized up to $50.0 million for share repurchases through October 2022; no repurchases have been made under this authorization[159] Critical Accounting Estimates This section refers to the company's annual report for a discussion of critical accounting estimates - Discussion of critical accounting estimates is incorporated by reference from the company's annual report on Form 10-K for the fiscal year ended December 31, 2021[160] Contingencies This section directs readers to the notes to the consolidated financial statements for a description of the company's contingencies - A description of the company's contingencies is included in Note 15 to the Consolidated Financial Statements in this report[160] Supplemental Guarantor Financial Information This section provides information on the guarantees for the Senior Notes and summarized financial data for the parent and guarantor subsidiaries - The Senior Notes are fully and unconditionally guaranteed on an unsecured, unsubordinated, joint and several basis by the company's wholly owned direct and indirect domestic subsidiaries (Guarantor Subsidiaries)[161][162] - The Senior Notes are structurally subordinated to the indebtedness and other liabilities of the Non-Guarantor Subsidiaries[169] Summarized Results of Operations (Parent and Guarantor Subsidiaries, Six Months Ended June 30, 2022, in millions) | Metric | Amount | | :--------------------------------------- | :----- | | Net sales | $449.0 | | Gross profit | $138.5 | | Net loss attributable to EnPro Industries, Inc. | $(6.7) | | Comprehensive income attributable to EnPro Industries, Inc. | $12.8 | Summarized Balance Sheet (Parent and Guarantor Subsidiaries, June 30, 2022, in millions) | Category | Amount | | :-------------------------- | :----- | | Current assets | $298.4 | | Non-current assets | $1,663.9 | | Total assets | $1,962.3 | | Current liabilities | $261.4 | | Non-current liabilities | $1,093.0 | | Total liabilities | $1,354.4 | | Redeemable non-controlling interests | $48.1 | | Shareholders' equity | $559.8 | | Total liabilities and equity | $1,962.3 | Reconciliations of Non-GAAP Financial Measures to the Comparable GAAP Measures This section provides detailed reconciliations of non-GAAP financial measures, such as adjusted net income, adjusted diluted EPS, and adjusted EBITDA, to their most directly comparable GAAP measures Reconciliation of Net Income to Adjusted Net Income and Adjusted Diluted EPS (Six Months Ended June 30, in millions, except per share data) | Metric | 2022 | 2021 | | :--------------------------------------- | :------ | :------ | | Net income attributable to EnPro Industries, Inc. | $49.3 | $47.3 | | Diluted EPS | $2.36 | $2.28 | | Adjusted net income attributable to EnPro Industries, Inc. | $86.5 | $60.7 | | Adjusted diluted EPS | $4.15 | $2.92 | Reconciliation of Net Income to Adjusted EBITDA (Six Months Ended June 30, in millions) | Metric | 2022 | 2021 | | :--------------------------------------- | :------ | :------ | | Net income attributable to EnPro Industries, Inc. | $49.3 | $47.3 | | Interest expense, net | $14.6 | $7.6 | | Income tax expense | $11.0 | $6.0 | | Depreciation and amortization expense | $56.0 | $37.5 | | Restructuring and impairment expense | $2.3 | $4.5 | | Environmental reserve adjustments | $(0.3) | — | | Asbestos receivable adjustment | $2.8 | — | | Costs associated with previously disposed businesses | $0.7 | $0.4 | | Net loss on sale of businesses | $0.1 | $2.0 | | Acquisition and divestiture expenses | $2.8 | $0.7 | | Pension income (non-service cost) | $(1.3) | $(4.2) | | Non-controlling interest compensation allocation | $0.5 | $2.9 | | Amortization of the fair value adjustment to acquisition date inventory | $11.3 | $4.8 | | Other | — | $(0.2) | | Adjusted EBITDA | $150.0 | $109.3 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign currency and interest rate risks, which are managed through derivative instruments like cross-currency swaps, while commodity price fluctuations for raw materials are a risk mitigated by pricing strategies and lean initiatives Foreign Currency Risk This section describes the company's exposure to foreign currency risks and the derivative instruments used to manage these exposures - The company is exposed to foreign currency risks from foreign subsidiary balances, intercompany loans, and transactions denominated in foreign currencies[181] - Foreign currency risk is managed through foreign currency forward contracts and option contracts (notional amount of $5.0 million at June 30, 2022) and cross-currency swap agreements (total notional amount of $300.0 million)[181][182][183] Commodity Risk This section discusses the company's exposure to price fluctuations in commodity raw materials and energy costs, along with its mitigation strategies - The company is exposed to price fluctuations in commodity raw materials (e.g., steel, engineered plastics, copper, polymers) and energy costs, which can be exacerbated by COVID-19 impacts and geopolitical variables[185] - Mitigation strategies include passing price increases to customers and utilizing lean initiatives; the company does not hedge commodity risk with market-sensitive instruments[185] Item 4. Controls and Procedures The CEO and CFO affirmed the effectiveness of the company's disclosure controls and procedures as of June 30, 2022, and reported no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[187] - No change in internal control over financial reporting occurred during the quarter ended June 30, 2022, that materially affected, or is reasonably likely to materially affect, internal control over financial reporting[188] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal and environmental proceedings, including significant matters related to the Lower Passaic River Study Area and Arizona Uranium Mines, for which specific liabilities have been accrued - A description of environmental and other legal matters is included in Note 15 to the Consolidated Financial Statements[190] - The company believes that the outcome of other litigation and legal proceedings arising in the ordinary course of business will not have a material adverse effect on its financial condition, results of operations, and cash flows[190] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased under the company's publicly announced share repurchase program during the second quarter of 2022, though a small number of shares were transferred to a rabbi trust for deferred compensation purposes - No repurchases were made under the $50.0 million share repurchase authorization during the second quarter of 2022[192] - In June 2022, 424 shares were transferred to a rabbi trust for the Deferred Compensation Plan for Non-Employee Directors, valued at a weighted average price of $83.10 per share[193] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, XBRL taxonomy documents, and agreements related to recent acquisitions and divestitures - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer, XBRL Taxonomy Extension documents, and agreements related to the acquisition of TCFII NxEdge LLC and divestitures of Compressor Products International and the polymer components business unit[197] SIGNATURES The report was officially signed by the company's Executive Vice President, General Counsel and Secretary, and Senior Vice President, Chief Accounting Officer and Controller on August 2, 2022 - The report was signed by Robert S. McLean, Executive Vice President, General Counsel and Secretary, and Steven R. Bower, Senior Vice President, Chief Accounting Officer and Controller, on August 2, 2022[199][200]