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Text: We are holding our call virtually and are dialed in from different locations.
So we ask for your understanding, should we encounter any technical issues as we coordinate our responses during Q&A.
These statements involve a number of risks and uncertainties, including impacts from the COVID-19 pandemic, and related governmental responses and their impact on the general economy, as well as other risks and uncertainties that are described in our filings with the SEC, including our most recent Form 10-K and 10-Q.
Also, during the call, we will reference a number of non-GAAP financial measures.
The impact of the foreign exchange rate changes subsequent to the end of the fourth quarter, impacts from further spread of COVID-19, and environmental, and litigation charges.
I also want to remind you that as a result of the sale of Fairbanks Morse in January 2020, the former Power Systems segment is accounted for as discontinued operations in our financial statements, for both the current-year and prior-year periods.
Also, as of this fourth quarter's financial results, the company is updating its reported adjusted earnings per share to exclude the after-tax effect of acquisition-related intangible amortization.
Our new reporting segments are: Sealing Technologies, Advanced Surface Technologies, and Engineered Materials.
Current and prior-year quarters and full-year financial metrics have been recast to reflect the new segment structure.
Historical data for the new reporting structure is available at the investor relations section of EnPro's company website.
We are pleased to announce that EnPro is planning to host a virtual Investor Day on Thursday, May 27.
Marvin Riley, president, and chief executive officer; Milt Childress, executive vice president, and chief financial officer; and other members of EnPro's executive management team will provide an overview and update of the company's long-term vision, growth strategy, business segments, and operational and financial objectives.
Registration information for this virtual event will be forthcoming, and we hope you will mark your calendars for what we believe will be an informative and exciting meeting on the direction of our company.
I hope you and your families continue to remain safe and healthy.
As vaccines become available, we're hopeful that the severe impacts of the global COVID-19 pandemic will begin to subside.
Our organization continues to remain vigilant about enhancing safety protocols, updating operating processes, and adapting to new ways of working.
Together, we are exemplifying EnPro's core values of safety, excellence, and respect for all people while continuing to excel at delivering quality products and services to our customers.
We have remained steadfast in our commitment to these core values and to all of our team members, which have been demonstrated through our public stance against discrimination in social and justice.
Human capital management, including diversity and inclusion, has enabled EnPro to achieve success.
Developing our working-together-from-anywhere initiatives to enable our global workforce to collaborate in new ways, increasing the number of females and minorities on our senior leadership team to 35%, creating and filling a diversity, and inclusion leadership position to further strengthen our commitment to equality for everyone, and developing a platform for small groups to talk openly about biases, belief systems, and the importance of valuing different perspectives.
Moving on to our fourth-quarter highlights.
I'd like to discuss three key themes reflected in our results.
First, I am pleased to report better-than-expected fourth-quarter results.
Despite the continued challenges created by the pandemic and further lockdowns across much of Europe, our fourth-quarter adjusted EBITDA margin expanded 230 basis points to 17.4% with adjusted EBITDA of $48.1 million, an increase of 11% year over year.
The strong performance was the result of actions taken to reshape our portfolio, including the acquisition of Alluxa and several strategic divestitures, as well as our quick and decisive cost mitigation initiatives in response to COVID.
Second, we maintain a disciplined approach to capital allocation and a strong balance sheet as we drive long-term shareholder returns.
With approximately $230 million of cash on the balance sheet at the end of the quarter, an untapped revolver, and our relentless focus on cash generation, we're well positioned to consider additional bolt-on acquisition opportunities.
And third, we have made significant progress over the last 18 months, stabilizing our financial results and evolving our portfolio toward more profitable businesses in higher-growth markets to improve cash flow return on investment.
With the successful acquisitions of LeanTeq and The Aseptic Group during 2019 and the most recent acquisition of Alluxa, we have a solid foundation for our organic and inorganic strategies to drive profitable growth.
Turning to Slide 5.
As we look back over the year, we have adjusted successfully to pandemic conditions and are now in the final stage of our COVID pandemic response plan.
As a consequence of the pandemic, we fundamentally changed several aspects of our business.
We developed a number of enhanced safety practices during the pandemic that we will continue to use even after the pandemic has subsided.
We have established appropriate inventories of PPE, and a full loop system to test, trace and monitor employee health.
We hold the safety of our team members to the highest standards, while they continue to deliver the exceptional level of service that EnPro customers expect.
We are committed to maintaining the advantages of our working-together-from-anywhere initiative for salaried employees where it makes sense on a permanent basis.
Our IT team has put new tools and cyber protocols in place to allow us to enhance connectivity, engage collaboratively, and work productively across our businesses and geographies.
Our reimagined way of working has provided a new lens through which to think about how we can take advantage of the unique talents of colleagues across our global organization.
The new way of working has allowed us to experiment, and as a result, has provided us with insight on how we might connect in a more meaningful way with our customers.
Our supply chain team remains a notable strength as we have had no significant supply chain disruptions during the pandemic.
We fortified our supply base in 2020 by establishing strategic secondary sources for critical raw material.
We work with reliable suppliers in multiple geographic regions to mitigate a broad spectrum of risk and promote supply continuity.
Our transportation agreements with multiple ocean, over the road, and small parcel carriers allow for flexibility in how we optimize inbound and outbound movement of goods.
Our nimble response to the COVID pandemic and robust cost mitigation initiatives, together with our portfolio reshaping actions, enabled our company to achieve flat year-over-year adjusted EBITDA despite a nearly 11% decline in sales during 2020.
This represents an adjusted EBITDA margin expansion of 170 basis points for the full year, a tremendous feat for the EnPro team amid 2020 macroeconomic challenges.
Our strategy has remained clear and consistent.
We're focused on four areas.
First, reshaping our portfolio to accelerate growth in niche, high-margin material science-related businesses with strong cash flow.
Second, maintaining our high aftermarket exposure, and increasing our exposure to faster growth businesses.
Third, leveraging the EnPro Capability Center to increase margins and cash flow return on investment.
And fourth, maximizing long-term shareholder returns through a commitment to disciplined capital allocation.
Through the Capability Center, we leverage continuous improvement methods across the company to improve productivity, efficiency, pricing, and sales force effectiveness to drive increased margins and increased cash flow.
Since its inception, the Capability Center has utilized industry best practices and a collaborative approach to problem-solving to drive improvement throughout our businesses.
The Capability Center methods and tools are fully integrated in our company, serving both existing and newly acquired businesses, and reaching from the C-suite all the way to the shop floor.
We look forward to talking more about the Capability Center at our upcoming Investor Day.
We continued our actions to reshape our portfolio during the fourth quarter by closing the acquisition of Alluxa in late October, completing the sale of STEMCO's Air Springs business in November, and completing the sale of GGB's Bushing Block business at the beginning of December.
The Air Springs and Bushing Block divestiture will allow us to refocus their respective businesses on higher-margin product lines.
Specifically, the sale of STEMCO's Air Springs business marks the completion of our efforts to reduce our heavy-duty truck market exposure.
Our remaining STEMCO heavy-duty truck business will now be focused on high-margin wheel, and sealing systems, and suspension components.
With these actions, we anticipate our heavy-duty truck business annual sales will range from $125 million to $175 million, reducing the percentage of our total sales in trucking from the mid-20s to the mid-teens.
The resegmentation aligns our technical and operational expertise, improves performance management decision-making, and enhances transparency for investors.
Our new segments are.
First, Sealing Technologies, which is comprised of Garlock, STEMCO, and the Technetics sealing businesses.
These businesses are focused on safeguarding critical environment.
Second, Advanced Surface Technologies, which is composed of Alluxa.
And our semiconductor business, including LeanTeq.
These businesses are focused on advancing precision, services, and solutions.
And third, Engineered Materials, which is composed of GGB and CPI.
These businesses are focused on enabling high-performance polymer applications.
Let me now highlight the success of our recent acquisitions.
The three acquisitions made within the last one and a half years are great examples of investments we're making to execute our profitable growth strategy.
The Aseptic Group acquisition closed in July 2019, followed by LeanTeq, which closed in September of that year.
And Alluxa, which closed in October 2020.
These acquisitions expand our reach into the attractive semiconductor aftermarket, pharmaceutical, biopharmaceutical, and life sciences industry.
All these companies have strong competitive positions in high-growth markets, excellent margins, robust cash flow, and serve markets with secular trends supporting long-term growth.
These acquisitions also align with our capabilities and growth strategy due to their technical expertise, niche market leadership, mission-critical applications, and recurring revenue model.
The Aseptic Group, which designs, manufactures and distributes, aseptic fluid transfer products to support manufacturing of next-generation biopharmaceuticals by the world's largest pharma companies, has performed well since joining EnPro and has been integrated into the Sealing Technologies segment.
During this integration, our growth initiatives focused on geographic and product range expansion.
By leveraging our resources in the Capability Center, we moved quickly to bring in talent increase warehouse capacity, and implement new supply chain policies to improve response time to our customers.
This resulted in a 30% increase in backlog mainly driven by an increased order flow from heightened demand for clean room services.
LeanTeq, which provides cleaning services for critical components, used in leading-edge semiconductor equipment, has been a very successful acquisition.
Over the past year, the business has maintained its high-profit margins while increasing revenue approximately 40% driven by continued demand for advanced node semiconductor chip.
To manage the tremendous growth we're experiencing, we are opening new capacity in a different facility in Taiwan that is specifically designed to increase our capabilities in five- and three-nanometer applications.
We're also in the midst of increasing capacity utilization within LeanTeq's Milpitas, California facility to support next-generation wafer fab equipment development.
And finally, Alluxa, which provides precision optical filters and thin-film coatings for the industrial technology, life sciences, and semiconductor markets.
While we are still in the early stages of integrating this business, its potential contribution is every bit as promising as LeanTeq's.
Our integration approach is very balanced, focusing on utilizing the EnPro Capability Center while being careful not to disrupt day-to-day business.
Even in the early innings, the Capability Center has already identified ways to reduce logistics costs and is currently working to enhance the quality system at Alluxa.
Our goal is to allow the experienced management teams at these successful businesses, the latitude to continue to run their operations effectively and efficiently while providing them with EnPro resources in the form of capital, talent, functional, and organizational support.
With Alluxa, we anticipate a strong first quarter, given their order intake momentum and backlog heading into the year, which gives us great confidence in the initial stages of the acquisition.
We have been very pleased with the overall performance of these acquisitions to date.
And as we enter 2021, we're focused on capturing the full benefits of these acquisitions to drive further value creation for shareholders.
In the fourth quarter, sales of $276 million decreased 3.7% year over year, reflecting weakness in oil and gas, general industrial, and aerospace markets.
This was offset in part by positive momentum in the semiconductor, food, and pharma, automotive, power generation, and heavy-duty truck markets as well as the contribution from the acquisition of Alluxa.
While demand increased in the heavy-duty truck market, revenues declined as a result of portfolio-reshaping actions.
Excluding the impact of foreign exchange translation, and sales from acquired and divested businesses, sales for the quarter declined 1.6% compared to the fourth quarter of 2019.
As Marvin indicated, our fourth-quarter performance was significantly better than our expectations at the time of last quarter's conference call.
On a sequential basis, sales in the fourth quarter increased 2.9% over the third quarter in markets where we saw the greatest sequential sales improvement included general industrial, automotive, power generation, and food and pharma.
Sequential sales also benefited from the Alluxa acquisition.
Gross profit margin of 37.5% increased 330 basis points versus the prior-year period driven by the benefit of divesting low-margin businesses as well as initiatives supported by the EnPro Capability Center, including supply chain and other companywide cost reduction programs.
The year-over-year improvement in gross profit margin was achieved despite a $3 million amortization of acquisition-related inventory write-up in the fourth quarter of 2020.
Adjusted EBITDA of $48.1 million increased 11.1% over the prior-year period as a result of strategic acquisitions and previously announced cost reductions taken across the company in response to COVID.
Adjusted EBITDA margin of 17.4% increased approximately 230 basis points compared to the fourth quarter of 2019.
Corporate expenses for the quarter were $10.6 million, a decline of 2.8% compared to the prior-year period.
Adjusted income from continuing operations attributable to EnPro Industries was $25.4 million, an increase of 27% compared to the fourth quarter of 2019.
Adjusted diluted earnings per share of $1.24 increased 27.8% compared to the prior-year period.
We believe presenting adjusted earnings per share in this manner better reflects core operating results and offers a more meaningful measure for comparison against prior periods.
Amortization of acquisition-related intangible assets in the fourth quarter was $10.9 million compared to $11.1 million in the prior-year period.
We have also updated our estimated normalized tax rate used in determining adjusted net income, and adjusted earnings per share to 30% from the previously used normalized rate of 33%.
In the fourth quarter, we recognized environmental charges of $22 million, which led to our GAAP net loss in the fourth quarter.
These charges were principally for reserve increases associated with estimated remediation costs for two legacy environmental matters where we do not have sufficient information to estimate certain remediation costs until the fourth quarter.
The responsibility for these matters was contributed to EnPro at the time of the 2002 spinoff from Goodrich Corporation.
One of these matters involves the eight uranium mines in Arizona operated by a corporate predecessor in the 1950s that have been closed for decades.
The second matter involves the cleanup underneath the plant at the Water Valley, Mississippi site, owned by a third party, which is incremental to the remediation work at other areas at Water Valley ongoing for some time.
We booked reserves to reflect our baseline estimate of the remediation costs for these sites based on information on potential remediation plans that developed in the quarter.
government associated with the uranium mine remediation, which is included in other noncurrent assets.
We now have established baseline reserves for all sites where we had known environmental remediation obligations.
Adjustments to these reserves may be required in the future as remediation plans further develop or to reflect changes in estimated costs to implement these plans.
We are not aware of any need to make any such adjustments at this time.
Cash outlays for all environmental matters were $33.8 million in 2020.
For 2021, we expect environmental cash payments to decline to approximately $13 million.
Beyond 2021, we anticipate annual cash payments for the next four to five years to decline to low single digits, reflecting the significant progress we have made over the past two years in addressing and resolving our most significant legacy environmental liabilities.
Let's take a look at segment performance.
Sealing Technologies, which includes Garlock, STEMCO, and the Technetics sealing business, had sales of $154.7 million in the fourth quarter.
The year-over-year decline of 11.3% was due to softer demand in general industrial and aerospace markets, offset in part by stronger performance in food and pharma and heavy-duty truck markets.
The sales decline was impacted meaningfully by the divestiture of STEMCO's Air Springs manufacturing business in late November and the sale of STEMCO's motorwheel and cruising businesses during the third quarter.
Excluding the impact of foreign exchange translation and sales from acquired and divested businesses, sales decreased 2.9% versus the prior-year period.
On a sequential basis, sales in the fourth quarter decreased 2%.
And excluding portfolio-reshaping activities, sales growth would have been in the high single digits.
For the fourth quarter, adjusted segment EBITDA increased 5.4% to $34.9 million despite the decline in sales.
And adjusted segment EBITDA margin expanded 360 basis points to 22.6%.
Improved margin was driven primarily by production in operational cost reduction initiatives and by portfolio reshaping in the segment.
Excluding the impact of foreign exchange translation, acquisitions and divestitures, adjusted segment EBITDA increased 10.6% compared to the prior-year period.
Turning now to Advanced Surface Technologies, which includes Alluxa and our semiconductor business.
Fourth-quarter sales of $49.9 million increased 27.3% driven primarily by the acquisition of Alluxa and continued strength in the balance of the segment.
LeanTeq is showing strength as the five-nanometer platform is ramping quickly, and we are responding to demand with agility by expanding our capacity in Taiwan and the U.S. And in addition, demand for Alluxa's products remains robust with strong performance across its end markets and solid order intake and backlog heading into 2021.
Excluding the impact of foreign exchange translation and sales from acquired businesses, sales increased 10.7% versus the prior-year period.
On a sequential basis, fourth-quarter sales increased by approximately 12% from the third quarter driven by the acquisition of Alluxa at the end of October.
For the fourth quarter, adjusted segment EBITDA increased 57.1% to $15.4 million, and adjusted segment EBITDA margin expanded 590 basis points to 30.9% driven primarily by the Alluxa acquisition and growth in the balance of the segment.
Excluding the impact of acquisitions, divestitures, and foreign exchange translation, adjusted segment EBITDA increased 10.2% compared to the prior-year period.
In Engineered Materials, which consists of GGB and CPI, fourth-quarter sales of $73.6 million decreased 2.5% compared to the prior year, primarily due to weakness in oil and gas, general industrial, and petrochemical markets, partially offset by strength in the automotive and power generation markets.
Excluding the impact of foreign exchange translation, sales for the quarter decreased 5.6%.
Sequentially, sales increased approximately 9% as we saw demand rebound in automotive and general industrial markets.
For the fourth quarter, adjusted segment EBITDA decreased 2.6% and adjusted segment EBITDA margin of 15.5% was flat versus the prior-year period.
This was driven primarily by sales declines partially offset by cost reduction initiatives that included decreases in head count and discretionary spending.
Excluding the impact of foreign exchange translation, adjusted segment EBITDA decreased 7.7% compared to the prior-year period.
Now let's turn to our financial position.
Our balance sheet remains strong.
We ended the quarter with cash of $230 million and had full availability of our $400 million revolver, plus $11 million in outstanding letters of credit.
At the end of December, our net debt to adjusted EBITDA ratio was approximately 1.6 times.
During the fourth quarter, we financed the Alluxa acquisition through a combination of $238 million of cash, and rollover equity from Alluxa executives equating to 7% of the acquisition price.
When taking this transaction into account as well as divestitures and exits since December 31, 2019, our pro forma net debt to adjusted EBITDA leverage ratio would be comparable to the year-end reported level.
Other than nominal amortization of our term loan, we have no debt coming due until 2024, subject to applicable reinvestment requirements related to the Fairbanks Morse and other divestitures.
We have largely met these requirements as a result of the Alluxa acquisition.
And in January, we obtained an amendment to waive that requirement under our credit facility.
For our senior notes, we have until April 25 to satisfy any remaining outstanding reinvestment requirements, which can be satisfied, if needed, by paying down a portion of the term loan under the credit facility.
2020 free cash flow of $39.3 million was down from $109.2 million in the prior year, primarily driven by higher 2020 payments related to environmental settlements and a third-quarter legal settlement, both of which we discussed on our third-quarter earnings call as well as significantly higher year-over-year tax payments, resulting largely from the gain on the sale of Fairbanks Morse.
Excluding environmental and legal settlements as well as tax payments in both years, free cash flow increased 12% from the prior year.
During the fourth quarter, we paid a $0.26 per share quarterly dividend, totaling $5.5 million.
Last week, our board of directors approved a 4% increase in the quarterly dividend from $0.26 per share to $0.27 per share.
We continue to prioritize investments in organic and inorganic growth and have not made any repurchases under the two-year share repurchase authorization announced last quarter.
Under this authorization, we may repurchase up to $50 million in shares, providing us with the flexibility to return capital to shareholders, subject to balance sheet and growth investment considerations.
Now I want to provide a high-level look at the impact of our portfolio reshaping on sales, adjusted EBITDA, and adjusted EBITDA margins.
Slide 14 provides results for 2020 as if acquisitions and divestitures completed in 2020 have closed effective January 1, 2020.
As shown on the slide, on a full-year basis, our 2020 pro forma sales are $983 million or 8.5% lower than reported sales.
2020 pro forma adjusted EBITDA is $167.5 million or relatively flat with reported adjusted EBITDA, resulting in a net adjusted EBITDA margin increase of approximately 130 basis points to 17%.
This information shows the trailing effect of portfolio changes, and we expect our strategic actions to enhance sales growth and margin improvement in the years ahead.
Moving now to 2021 guidance.
Taking into consideration all the factors that we know at this moment, including the ongoing global economic recovery from the COVID pandemic.
We expect 2021 adjusted EBITDA to be in the range of $178 million to $188 million on sales growth of 6% to 10% over 2020 pro forma sales of $983 million.
We expect adjusted diluted earnings per share from continuing operations to be in the range of $4.32 to $4.66.
We currently anticipate slightly less than half of our full-year adjusted EBITDA and adjusted earnings per share guidance to be realized in the first half of 2021, with acceleration as the first half progresses.
I'm extremely proud of the progress we've made during 2020 in transforming EnPro into a leading industrial technology company using material signs to push boundaries in semiconductor, life sciences, and other technology-enabled sectors.
Our strategic achievements during 2020 has built a solid foundation for profitable growth in 2021 and beyond.
Our teams have adapted remarkably well during the COVID-19 pandemic, and we are now positioned to capture growth as our markets recover.
Our current order trends are strong, surpassing what we saw in January 2019.
We're encouraged by what we're seeing and hearing from our customers, particularly in the semiconductor, heavy-duty truck, and automotive markets.
We're expecting year-over-year improvement in most of the markets in geographies we serve.
We continue to focus on driving operational excellence by leveraging the EnPro Capability Center to reduce cost, improve productivity and maintain high-quality control across all our businesses, including those recently acquired.
EnPro's success will be determined by our inherent commitment to our profitable growth strategy, our experienced leadership team, our increasingly diverse and dedicated workforce our strong financial position, and our focus on driving long-term shareholder value.
GBB provided metal polymer bushing and the suspension components for a drill spindle attached to a robotic arm that drills and breaks rock to collect samples for analysis.
Technetics provided edge welded metal bellows that are a part of the sample collection system and function as vacuum and ducting for the system to support the goal of returning the cleanest sample possible from Mars.
We are happy and proud to be suppliers to such a historic mission.

user
q4 adjusted earnings per share $1.24.
q4 sales fell 3.7 percent to $276 million.
sees fy 2021 adjusted earnings per share $4.32 to $4.66 from continuing operations.

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