Q3 2020 EnPro Industries Inc Earnings Call
Hello, and welcome to be Enpro Industries, Q3, 2020 earnings conference call. At this time all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your telephone keypad as a reminder, this.
The conference is being recorded so my pleasure to introduce Jerry Johnson Senior Vice President for corporate development and strategy. Please go ahead Sir.
Thank you good morning, and welcome to Enpro quarterly.
Earnings Conference call.
I'll remind you that our call is also being webcast at Enpro industries Dot Com, where you can find the presentation that accompanies the call.
With me today are Marvin Reilly, our CEO and Milt Childress our CFO.
We're holding our call Berkeley, and our Dallas in from different locations. So we will ask for you.
Your understanding should we encounter any technical issues as we coordinate our responses during Q1 day.
Before we begin our discussion for a reminder, that we will be making statements on this call that are not historical facts that are considered forward looking in nature. These statements involve a number of risks and uncertainties, including the impact from cobot from the COVID-19, pandemic and related governmental responses and their impact on the German economy is.
Wallace other risk and uncertainties that are described in our filings with the FCC, including our most recent form 10-K and form 10-Q, we do not undertake to update any of these forward looking statements also during the call will reference a number of non-GAAP financial measures tables reconciling these measures to comparable.
GAAP measures arc food in the appendix to the presentation materials.
I also want to remind you that.
As a result of the sale Fairbanks Morse in January 2020, the form of power systems segment is accounted for as discontinued operations in our financial statements for both current year and prior year periods unless.
Unless otherwise noted all our comments today refer to continuing operations and now I'll turn the call over to Mark.
Thanks, Gerry and good morning, everyone. Thank you for joining us today I hope that you and your families remain safe and healthy during this time.
Before I begin today's call I'd like to welcome the newest member of our management team. Jerry Johnson recently joined Enpro as senior Vice President of corporate development strategy and Investor Relations, Gary brings tremendous knowledge and experience from his prior roles in merchant banking private equity and management consulting.
I'm delighted he has joined our team and I'm confident his deep expertise will be a significant contributor to enpro success as we continue to execute our strategic priorities.
As we continue to navigate the COVID-19 pandemic I'm extremely proud of how our team has risen to the challenge of practicing enhanced safety protocols and incorporating new ways of working throughout the organization.
And while keeping our core values of safety excellence and respect for all people at the forefront of their actions and excelling in delivering quality products and solutions to our customers.
As I mentioned on our call last quarter, and first stands against racism and discrimination of any type.
Which are a violation of our core values and what we stand for as a company over the last year, we have taken several concrete actions to increase diversity and inclusion that enpro and we'll continue to do so we stand together in solidarity in response to systemic racism and social injustice and are committed to being.
Part of an enduring solution in creating real sustainable change starting right here at home.
I'd like to start by discussing three key themes reflected in our third quarter results first I'm pleased to report better than expected third quarter top and bottom line performance. Despite the challenges created by the pandemic, our third quarter adjusted EBITDA margin expanded 140 basis.
Thanks to 15.7% with adjusted EBITDA of $42.1 million.
Modest decline of 1.4% year over year. This strong performance was the result of actions taken over the past year to reshape our portfolio as well as quick and decisive cost mitigation initiatives in response to cope with.
Second we've made significant progress in our portfolio evolution towards more profitable businesses in higher growth markets that generate higher cash flow return on investment, resulting in improved stability of financial results over time.
The acquisition of a Loxa completed last week marks another milestone in this journey extending our presence in high growth high margin material science businesses with technology based competitive advantages.
And third we will maintain a disciplined capital allocation approach and strong balance sheet as we drive long term shareholder returns with approximately $204 million of cash on the balance sheet. Following the Alexey acquisition, a largely untapped revolver, a relentless focus on cash generation and strong performing businesses.
As we are well positioned to consider.
Additional bolt on acquisition opportunities that may arise.
Turning to slide five and an update on our four phased approach to navigating the COVID-19 pandemic.
Phase one focused on health and safety safety is centered on business stability in progression phase three emphasize cost and process improvement and sales for physicians and pro to capture growth as our markets recover.
At the onset of the pandemic, we took quick and decisive action, including applying the processes and protocols across our network that were developed at our Asian facilities. We then move swiftly to redesign our manufacturing teams conducted work and have fully implemented baseline cobot testing across the Americas and or in the press.
Since implementing digital contact tracing technology in the U.S. in Europe.
This is in addition to our existing manual contact tracing temperature checks and ample PB at all of our facilities, we've applied the tools processes and technology to protect our employee safety well they continue to deliver the high level of service that and for customers expect.
Delving deeper into the fourth and final phase of our COVID-19 response playbook, let me discuss our supply chain and working together from anywhere initiatives our supply chain team remains a notable strength and we have had no significant supply chain disruptions our supply chain organization is built around resilience.
It has supported operations seamlessly during this time, we have built inventory of PB and established a full loop system to test trace and monitor any cobot infections in our employee base as a standard practice, we continue to closely monitor supplier viability as well.
<unk> operational and financial risk.
Our working together from anywhere initiative demonstrates our team's ability to respond with agility and adapt successfully enabling us to continue working smoothly in the new environment.
All righty team supports the tools necessary to work remotely which limits employee risk as the office setting generally has one of the highest people densities in all of our facilities.
We've seen many benefits to working this way, including increased connections and productivity across our businesses and geographies as well as a greater ability to use our colleagues unique talent and provide job opportunities across the global organization.
Great a customized plans to optimize our working environment, while evaluating a reduction in office space across our footprint remaining focused on providing the appropriate workforce density.
Air quality and social distancing to protect the health of each of our team members.
Given the success and seamless integration of the working together from anywhere initiative, we've communicated to our employees that we will continue to work this way through the end of 2021.
As market conditions recover we expect our businesses to be better positioned to deliver results owing to the structural improvements made to our cost base productivity and supply chain as well as the benefits of the portfolio transformation work, we have completed over the past year, while demand continues to remain soft across several core markets where.
Focused on continuing to execute our profitable growth strategy.
Now, let me spend a few moments discussing our strategy and actions taken over the last year to reposition our portfolio towards a more durable business in high growth markets that generate higher margins and cash flow.
Our strategy is focused on three areas first reshaping our portfolio to accelerate growth through the addition of niche high margin material science related businesses with leading technologies and strong cash flow in markets with favorable tailwinds.
Second increasing our aftermarket exposure and driving greater recurring revenues and third leveraging the enpro operating system to increase margins and cash flow return on investment.
As we implement our enduring strategy, we're committed to disciplined capital allocation with the goal of maximizing long term shareholder returns. Let me briefly summarize the main actions we've taken to reshape our portfolio over the last year and how they have benefited our overall business.
First I'll cover divestitures.
And business exits by segment.
In January we completed the 450 million dollar sales at Fairbanks, Morse, which constituted the former power systems segment. After careful review, we determined Fairbanks Morse was no longer fit.
Given the strategy I just described.
In our sealing products segment.
We conducted an extensive review during the second half of 2019 to identify businesses and product lines that are no longer aligned with our long term strategy. As a result, we have exited or divested several product lines in our heavy duty truck business. During the second half of 2019, we divested our bread she business.
As an ceased operations of three underperforming product lines in September of this year, we closed the sale of the motor wheel and krewson businesses.
Finally in early August we announced a definitive agreement to sell our air Springs business, which is expected to close in the fourth quarter upon.
Upon completion of the Air Springs divestiture, we will have completed the heavy duty truck portfolio reshaping work in line with our previously communicated year end 2020 timeframe going forward, our stemco heavy duty truck business will be focused on our high margin wieland sealing systems and suspension components with these actions, we anticipate our heavy duty truck.
He has annual sales of range from $125 million to $175 million, reducing the percentage of our sales in trucking from the mid twentys to the mid teens.
No our sealing segment as a whole has significantly reduced cyclicality and increased exposure to resilient technology oriented aftermarket businesses with a predominant focus on material science technology, leading to increased adjusted EBITDA margins and cash flow return on investment.
Moving to our engineered products segment in June we announced plans to exit operations at GGB Bushing block manufacturing facility headquartered induce France to refocus the business on higher margin product lines. We've been successful at attaining an agreement for the sale of this business, which is expected to close by the end of the fourth quarter.
Next I'll cover our recent acquisitions.
We made two strategic acquisitions in 2019, lean Tech, which closed in late September and a septic group, which closed in early July.
These acquisitions expanded our reach into the attractive semiconductor aftermarket and pharmaceutical and biopharmaceutical industries respectively.
Both companies have strong competitive positions in high growth markets excellent margins robust cash flow and strong secular trends supporting long term growth. These.
These acquisitions aligned with our growth strategy due to their technical expertise niche market leadership mission critical applications and recurring revenue models. Both businesses are showing resilience in the wake of coated with solid order intake and backlog more specifically both linked and accepted groups Europe.
Your revenue growth remained strong despite market challenges we've been very pleased with the overall performance and are currently executing capacity expansion plans to support lean techs current demand growth. We look forward to continued contributions from both linked and accepted as demand remains strong.
So now I'm excited to share further details on our previously announced acquisition of Alexza, which closed Monday of last week.
Loxa is a technology company that provides specialty optical filters complementing our growing material science capabilities a.
Loxa offers a unique and compelling customer value proposition enable bytes technology platform processes, and technical know, how including the proprietary advanced Cirrus automated plasma deposition software.
The addition, strengthens and extends our existing thin film technical expertise and intellectual property portfolio and more specifically provides a platform for entry into specialty photonics and optics.
The acquisition is consistent with the strategy I communicated earlier and is aligned to our stated M&A criteria.
Alex its financial profile is compelling with an attractive revenue and margin profile, including 18 quarters of consecutive revenue growth. We expect a lux his track record of double digit annual revenue growth to continue under our leadership using.
Using the end for operating system, we believe we can accelerate lots as growth as we leverage our capabilities center, specifically in the areas of data science and commercial excellence.
We will also be leveraging our industry relationships global footprint and extensive capital resources to support Alexza.
Going deeper on a lux as end markets and growth rates.
Within the broader 13 billion dollar optical coating market loxa participates in a $1.7 billion addressable niche market that is focused on ultra high precision coatings. We estimate the luxe is niche will grow at a compound annual growth rate of approximately.
Some at least 10% through 2024, and we expect a lux is growth rate to exceed that of the market.
Loxa exclusively provides filters for the most challenging applications in the industry and does not participate in the market for high volume more commoditized filters a.
Loxa serves a broad array of high growth end markets with primary exposure to industrial technology and life Sciences, as well as smaller position in niche semiconductor and aerospace and defense markets.
To share some specific examples of Alex's applications within these end markets Alexey provides filters for light are in autonomous vehicles filters for PCR testing for coded DNA sequencing extreme ultraviolet lithography in semiconductor and also flow cytometry further we've.
Identified pockets of nascent growth, where we can utilize enpros existing market strength to help accelerate lux is growth in these markets.
We're thrilled to welcome the founder of a Loxa Mike's going to be he will continue to lead the business with its highly talented team and we look forward to working together to create value for our customers and shareholders.
Collectively the actions, we've taken to proactively manage our portfolio and acquire complementary businesses increases our exposure to more resilient, leading edge advanced technology and material science based niche markets that are poised for growth with semiconductor as our largest end market.
We will continue to identify.
Inorganic growth opportunities aligned with our strategies through a disciplined set of strategic and financial filters. We have a season M&A team overseeing this effort, including the addition of Jerry beyond sourcing and acquiring we have the right talent in place to integrate and optimize acquired businesses and expect to continue to create value.
Yes through our approach.
And now I'll turn the call over to Mel for additional discussion on our third quarter results.
Thank you Marvin and good morning, everyone.
In the third quarter sales were $268 million, a decrease of 10.3% year over year, reflecting weakness across many of our end markets.
However, this performance was better than what we expected when we announce second quarter results.
On a sequential basis sales increased 8.6% in the third quarter, we experienced growth in our legacy semiconductor business. In addition to the contribution from Greentech, which was acquired at the end of the third quarter of last year.
Excluding the impact of foreign exchange translation and sales from acquired and divested businesses.
Organic sales for the quarter declined 12.4% year over year.
Gross profit margin was 35.2% an increase of 250 basis points versus the prior year period.
Driven by the benefit of acquisitions supply chain initiatives companywide cost reduction programs and improved operating performance, including reduction in warranty expense offset in part by the impact of the sales decline.
Adjusted EBITDA was $42.1 million a decline of only 1.4% as the continued impact of coated was nearly offset by the addition of strategic acquisitions divestitures of underperforming businesses and cost reductions across the company.
Adjusted EBITDA margin of 15.7% increased approximately 140 basis points.
Our decremental year over year adjusted EBITDA margins were approximately 35% this quarter, excluding the impact of acquisitions divestitures and foreign exchange translation, which remain significantly below our weighted average contribution margin.
This result was achieved largely through our cost management actions, which as we discussed last quarter are expected to result in full year 2020 savings of approximately $30 million about half of which we expect to be permanent and an improved economic environment.
Adjusted diluted EPS diluted earnings per share of 67 cents decreased 8.2%.
Excluding amortization of intangibles, our adjusted diluted earnings per share decreased 1.5% versus the prior year period.
I'd also like to note that in the third quarter, we recognize other operating and non operating charges aggregating $46 million.
The primary components of which relate to settlements are too long pending litigation matters noncash.
Non cash impairments are trademarks in sealing products and the impairment of assets about bushing block business induced France.
Regarding the litigation matters in recent weeks, we had been successful in resolving claims by the state of Mississippi related to environmental contamination at the side of a legacy business the best isn't 1996.
And product claims by customer related to bearings that GGB last supplied in 2008.
With these settlements, including those previously communicated we have significantly reduced our legacy contingent liabilities.
During the past month, we were also successful in obtaining an agreement for the sale of Tgps non strategic and unprofitable bushing block business induced France.
We recognized an impairment charge of $6.2 million in the third quarter and expect the sales to close before year end.
Achieving a sale of this business is a great result, our chain and for the employees induce which the buyer plans to retain.
Exiting the bush in black business through either a sale or shut down was one of our 2020 portfolio shaping objectives.
Turning to segment performance sales.
Italy product sales of $202 million declined 8.1% amid soft demand in heavy duty truck in aerospace and flat performance in general industrial and pharma markets somewhat offset by strength in semiconductor.
The Linktech acquisition, which closed in September 2019 was a benefit.
While the strategic trending of our heavy duty truck product portfolio over the last 12 much served as an offset.
Excluding the impact of foreign exchange translation and sales from acquired and divested businesses sales decreased 10.3%.
Despite the sales decline segment, adjusted EBITDA increased 22.7% to $45.4 million and segment adjusted EBITDA margin expanded 560 basis points to 22.5%.
Contributions from Lane Tech and more favorable mix and heavy duty trucking owing in part to the strategic exits in this business and.
And cost management actions drove the strong results.
Excluding the impact of acquisitions divestitures and foreign exchange translation segment, adjusted EBITDA margin contracted 50 basis points to 19.2% compared to last year.
Sales in engineered products of $68 million decreased 16.5%, primarily due to broad based end market weakness, including in the general industrial oil and gas automotive and petrochemical markets.
The lower sales volumes resulted in third quarter segment, adjusted EBITDA declined, 46.6% and an adjusted EBITDA margin decline of 650 basis points to 11.7%.
On a sequential basis, we saw significant improvement from the 8.4% adjusted EBITDA margin reported last quarter.
Now, let's turn to our financial position.
Our balance sheet remains strong we ended the quarter with cash of $441 million and had full availability about $400 million revolver less the $11 million and outstanding letters of credit.
At the end of September our net debt to adjusted EBITDA ratio was approximately 0.3 times.
Subsequent to the end of the third quarter, we financed the Allysa acquisition through a combination of $237 million of cash and rollover equity from the Loxa executives equating to 7% of Alexa.
When taking this transaction out divestitures and our exits since the fourth quarter of last year into account.
Our pro forma net debt to adjusted EBITDA leverage ratio would be well within our long term target leverage range of 1.5 to 2.0 times.
We have no debt coming due until 2024 subject to applicable reinvestment requirements related to the Fairbanks Morse and other divestitures.
Which we have largely met as a result of the Alexa acquisition.
Year to date free cash flow of $36.6 million was down from $76 million in the prior year period, driven by taxes paid in conjunction but the gain on the sale of Fairbanks Morse and payments made related to settlements the environmental matters.
Excluding these two items year to date cash flow would have been greater than that of the prior year.
During the third quarter, we paid a 26 cents per share quarterly dividend totaling $5.4 million.
We announced this morning that the board of directors approved a new two year share repurchase authorization under which we may repurchase up to $50 million in shares in both open market or privately negotiated transactions.
While we are prioritizing investments and organic and inorganic growth. Currently this authorization provides us with the flexibility to return capital to shareholders based on balance sheet and growth investment considerations.
Now, let me provide a high level look at the impact of our portfolio reshaping on sales adjusted EBITDA and adjusted EBITDA margins.
As shown on slide 13 ill last 12 month basis.
Our pro forma net adjusted EBITDA margin would increase approximately 175 basis points on a revenue decline of $95 million.
This analysis shows the impact of the Loxa acquisition reshaping of the heavy duty truck business and the pending sale of GGB bushy black business as it all of these transactions occurred at the end of the third quarter of last year.
Note that this pro forma information is based on last 12 months results and we expect these strategic actions to lead to higher sales and earnings growth, increasing margins and reduce cyclicality as we look ahead.
Now I'd like to spend a few minutes a few moments, providing you with our latest thinking about the year.
As long as I noted earlier, our third quarter operating earnings were stronger than we expected a quarter ago, driven primarily by results in our semiconductor business.
Improvements in heavy duty trucking is result of our portfolio shaping work.
And better than expected topline results.
For the fourth quarter, we anticipate year over year demand to be solid for both semiconductor and food and pharma.
With continued softness in heavy duty truck general industrial oil and gas petrochemical and aerospace.
For the full year as a result of market dynamics portfolio, reshaping actions and seasonal and customer specific demand patterns.
We expect a year over year sales decline of a little over 15% and adjusted EBITDA margins of approximately 15%.
This compares to our prior scenario planning ranges are they are 15% to 25% decline in sales and adjusted EBITDA margins of 13% to 14%.
Note that these expectations do not include contributions from the acquired Elecsys business.
Nor uncertainties surrounding how the resurging co the 19 crisis might impact demand and revenue.
However, they do include the impact of completed and announced divestitures.
Now I'll turn the call back to Martin for closing comments.
Thank you Mel.
I'm proud of the meaningful strides we've made in improving the quality and resilience of our portfolio.
In a short period, we've acquired several businesses that align with our long term materials science vision and.
And exited or divested, though there were no longer a strategic fit.
With these actions we are well on our way to transforming and grow into a leading technology company using material signs to push the boundaries of semiconductor life Sciences and other technology enabled sectors.
We continue to drive.
To capture above market growth expand margins and increase cash flow return on investment to maximize shareholder value.
Our teams have adapted well to the new ways of working as we navigate the Cobi 19 pandemic, we're well positioned as our markets recover we continue to focus on driving operational excellence by leveraging the emperor operating system to reduce costs improve productivity and quality control across all our businesses.
We're emerging from this challenging environment stronger company with many opportunities on the horizon.
And pro success will be fueled by our commitment to our strategy our cycle tested leadership team, our increasingly diverse and dedicated workforce, our strong financial position and our focus on driving long term shareholder value. Thank.
Thank you again for joining us on the call today, let's open the line for questions.
Thank you, we'll now be conducting a question answer session. If you like to be placed in the question queue. Please press star one on your telephone keypad a confirmation total indicate your line is it a question queue.
The press star two if you'd like to get questions from the queue.
For participants using speaker equipment maybe.
Maybe necessary to pick up your handset before pressing star one.
Please while we pull for questions.
Our first question today is coming from Jeff Hammond from Keybanc. Your line is live.
Hey, good morning, guys.
Good morning, Jeff Jeff.
Yeah. So I'm just a little luck. So I wanted to get a better sense of I think it looks like the historical growth is faster than the forward growth and just wanted to understand that a little bit better and then.
I don't know if you can frame you know kind of the 2020 revenue run rate as a starting point and you know kind of any profitability metrics around a lot. So it would be helpful.
Okay.
So what I would I'd like to do Jeff since I.
I assume we'll have a lot of questions on the luxe is I might it might take a little bit more time, just to talk a little bit more about a loxa in general.
I said in the prepared remarks, the the Tam is roughly $13 billion. Sam is 1.7 billion growing at roughly 9% a year.
As we think about the CAGR going forward in our planning we thought about mid teens.
Granted the underlying markets that it participates and from an application perspective, they are growing a little bit faster than that but for planning purposes, we want to be thoughtful and we want to be conservative as we think about things. So if you think about a lot and where they participate today in life Sciences.
It has really nice.
Growth characteristics in cytometry, endoscopy things of that nature, where it participates semiconductor in lithography. It's got really nice growth characteristics, you know high teens in some cases.
We have growth characteristics that may be in Twentys, and we feel like we will perform exceptionally well.
But we want to be thoughtful and conservative in our approach as we look at as we look at Loxa. So I can spend a little bit more time, there on on sort of why that some of those things, but I'll wait to hear some of your more specific question as it relates to financials and you know as it relates to EPS.
Run rate revenue, where we're trying to be.
Careful.
Not to communicate too much as it relates to its financial profile or its margin profile strictly for competitive reasons I mean, what I will tell you is it's a great business. It's an exceptional business in terms of its growth exceptional in terms of its margins.
And I mean exceptional.
And so.
We want to be thoughtful about not giving away too much of that from a competitive perspective.
Okay. No I appreciate that this is this is yeah. Jeff. This is mill Thats one of the reasons that we provided the pro forma look.
To give a give you a better idea of with all the moves that we've made on that TTM basis, what the profile of the company looks like once again, its TTM shot looking forward, but.
But it does get an idea Bob overall sales EBITDA margin should be as we look ahead.
And just to be clear on that melt the 95 million or sales that come out net.
And the EBITDA adjustment that that includes what the air Springs, the GGB Bushing block the motor wheel, and then Oh Loxa coming in is there anything else in that.
That's that's pretty much it those are the big pieces yeah. Okay. Okay, great and then just on the revenue guide I'm. Good to see you guys come in closer to the to the better end.
Can you just frame what comes how much is coming out in the fourth quarter for motor wheel in the Air Springs, as we kind of firm up our models.
Well I think the I think the best way to think about it Jeff is with a three quarters that we have.
Oh completed and if you look at our guidance it'll give you a overall pretty good result on a pretty good idea of what we're expecting for the fourth quarter. So that you can circle that pretty tightly.
And.
That is going to reflect the revenues that come out.
It is going to reflect the.
The but did you do impact produced the impact.
Air Springs, They are you know impact.
The impact of motor will increase and what it does not.
Reflect the guidance that we gave what it does not reflect is the contribution from Alexa.
So we do expect some upside in the fourth quarter for that reason.
We also have not yet closed the air Springs divestiture as you know and.
So since the timing of that remains.
Oh I'm certain at this point.
There could be there could be some upside depending on where we end up closing air Springs, because it currently is operating on a profitable fashion.
Okay, and then just last one if you look at the sequential revenue improvement and you know maybe versus your internal models, what what end markets are businesses surprised you the most.
Well I mean automotive as you might you know.
C with us in as well as other companies you know really on a sequential basis rebounded quite.
Quite nicely.
Same thing with heavy duty truck, obviously still down year over year, but heavy duty truck rebounded nicely. We saw a nice sequential improvement in oil and gas and of course semiconductors. So you know the big standout was automotive.
It kind of came roaring back for us.
Course in heavy duty truck came back nicely as I said before in semiconductor as well.
Okay, great. Thanks, guys appreciate it.
Thank you. Our next question today is coming from is it for you know from Oppenheimer. Your line is now live.
Hi, great. Thank you.
I guess the question would be on the buyback so you announced the buyback, but it also seems like you're trying to shift the portfolio higher growth areas. So what's the priority or how does the capital returns into your list.
Priorities versus going out and.
Deeper into other areas. Thanks.
Yeah I'll start melting then you can you can chime in I start first with the authorization. We thought it was very important for us to have an authorization not that we intend to pull the trigger and and immediately use it but its important for us to have all the tools available to us given what Mike.
Might happen. So we start with that right. We want to make sure that we have every tool available to us as we think about prioritization that we're thinking about obviously organic growth and some of the areas, where we have already made investments. If you look at our lean Tech investment, which we did last year, it's growing nicely we've got some capacity expansion.
Plans that are underway in that business, we want to continue to support the growth of that business and obvious.
Obviously, the same goes for the aseptic business, we want to continue to support the growth that business as well and you know, we're bringing a loxa online bill obviously want support to continue their expansion plans and obviously on the inorganic side.
We're able to find another alexza.
Another link Jack or another a sceptic, we would we would we would definitely want to take advantage of those opportunities. Those are rare businesses that have unique characteristics growing you know really fast with really high margins, we wouldn't want to pass up an opportunity like that if it if it fits and matches our capabilities and so that's how we think.
About it and.
That's how we would likely go forward in our planning I don't know if you want to add anything there.
I think you've covered it well it just the distinction.
And between having the authorization in place versus using it as Marvin has described were currently focused on supporting the growth of our our company.
Okay, Great and then also as you look at divestitures I mean are there more to come what sort of the criteria.
Ford did that humans and how do you think about maybe losing scale as you did.
The fact that a certain areas, but then you're still in certain areas.
Yeah, that's a really really good question I really appreciate you asking that question. It's one where we we spend a lot of time. So so thank you for that so as we think about Enpro. Let me just kind of start big picture as we think about it.
We want to make sure that all the businesses that we own have a material science.
Capability.
Right. We have IP, we have technology, we have know how et cetera et cetera, all around material side. So that's first and foremost as we think about a criteria.
When we think about the margin performance of the business right what can the business deliver and what we've said is the minimum threshold is 20% obvious.
Obviously, we're in the middle of a pandemic some.
Some businesses are experiencing declines we want to be thoughtful about.
The kind of work that's required to bring those businesses back, but we also have good analytical capability to give us a sense of whether or not you know.
We can get there.
Based on the capabilities that we have in our in our capability center and the know how that that's built in our operating system right and so then we're looking at cash flow return on investment right. We want businesses that throw off a fair amount of cash we have our our own formula we use here for cash flow return on invested.
And with that we set a minimum threshold there as well of 20%.
Right and we want to make sure that the businesses that we have in the portfolio.
Meet those characteristics and that's yeah, those those characteristics, we consider to be pretty strict and we.
We want to be reasonable we want to make sure we make the best effort to get all of our businesses there.
But we also need to be disciplined in terms of what we're trying to create we know that you know the cash flywheel, we're trying to generate only works at a certain level. So the businesses need to perform at that level. So that we can continue the growth that we have in mind.
And obviously.
As we think about adding.
We want to add in areas that have good momentum as well, which is why we we think about.
That end market, having an underlying growth in the 5% to 7% range, it's like to be north of that so.
Hopefully that gives you a sense of how we're thinking about it we don't.
As a policy, we don't intend to specifically say.
This particular business or that particular business is one that we're looking at just because our employees are our primary concern here, we want to be thoughtful and respectful. We also don't want to hurt our chances in market if we decide to make.
All right. Thank you very much for the color.
Yes.
Thank you as a reminder, that star one three placed in the question queue. Our next question is coming from Justin Bergner from GE Research. Your line is not a lot.
Oh, good morning, Marvin good morning milk good morning Gerry.
Good morning, Hi, how are you hey, good morning.
I have a couple of cleanup questions and then some sort of bigger picture questions on the cleanup questions.
The close of the Air Springs sale.
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The guy and sort of what does that assume like a mid quarter close it presents a president or or end of year close.
Yeah. It is it assumes a mid Q4 close.
So you know to the extent that we go beyond that they could affect on the margin, it's not going to be material.
To the overall.
We have a three year, but that's that's the assumption that we made testing.
Okay understood and then on the legal side is I mean, this is 21 million in cash I assume that's going to be going out the door to fund these legal settlements.
Just just to verify that's the case and then the remaining legal liabilities. After these two settlements de Minimis.
Yeah, if you look at what affected the quarter the big.
The big areas are there were four primary areas that led to the provision in the third quarter.
One was the you know the dues exit we've talked about.
And probably two thirds roughly two thirds of that number will end up being cash you know at some future point.
Fourth quarter, maybe maybe maybe some of it you know.
Drips into the first quarter of next year.
The second item wish the impairments.
And that's just impairments of indefinite.
Trade names and just a function of what's happening in the market on the top line <unk> and valuations all tied to sales.
Oh, the third was the board Warner.
A settlement that we mentioned and a and then the fourth was the water valley legal settlements. So those are the two settlements.
That concludes.
While all of the open.
Items, where we had active I would say active negotiations and discussions.
We have a very.
Most most of our other environmental I think we have roughly.
20.
Environmental matters going on most of those with the legacy businesses and 18 of the 20 are in steady state maintenance mode, where we're just pursuing.
Annual ongoing clean up per eye remediation plan, where the cost of that is a fairly nominal.
And then that leaves two outstanding matters. Once again this detail is that it has been in our K and our Q, but it's a two areas that we can't we're not far enough along and determining what the exposure might be but the bottom line as we've made significant progress.
That I made significant progress over the last couple of years and getting most of these major legacy matters behind us.
And I really want to give.
Give a lot of credit to our legal and environmental teams that have worked diligently on bringing a number of these matters to a close.
Okay. Just two clarification questions. There the 21 million legal that is going to be cash and that is not against the environmental reserve.
Charges. This is a separate sort of legal bucket and then you mentioned the first issue, which I didn't catch what two thirds of that number being cash just maybe that came at me a bit fast.
[noise], Oh, I'm, sorry could you repeat the second part of the question. You said there were four matters in the quarter and then the first one you I didn't catch it all and you said two thirds of that number is cash what was that.
Oh that that was the dues exit the bushing block exit Andy's French.
Okay.
Yep.
So and then to answer your question. If you looked at the two legal settlements one is an environmental settlement.
The water Valley is an environmental settlement the other was.
The supply of bearings, you know more than a decade ago that TG be supplied to borgwarner.
Okay got it I wont dwell too much younger there then maybe big picture on a loxa.
Thank you for the you know detail on the bridge.
With respect to revenue and EBITDA as you look at Alexey you mentioned, it's sort of it's in markets that are growing mid teens, but then you said so.
Some of its markets are growing high teens or low twentys.
Were you trying to suggest that sort of the life Sciences and semiconductor end markets as a whole are growing high teens.
He is as high as low twentys.
And then that would make the industrial technology portion growing you know more of a low double digit or were you just highlighting certain sub end markets in life Sciences, and semiconductor with that comment.
Yeah, So I might get a little more specific here than than we're accustomed to but it's easier for me to give you the thinking behind you know how we see some of these micro verticals that.
The Loxa plays and so you know what we what we're communicating obviously is that near the CAGR were thinking about is mid teens, but I wanted to make sure that we communicated there obviously playing in markets that are growing.
Even faster than that and it is possible that it will outperform but we want to be thoughtful and destructive as we think about the acquisitions. We bring on board right. So if you look at where they play and semiconductor which is specifically in lithography.
Our work says that you know that that may grow about 15%.
And if we look at some of the other micro verticals that were in that they're in like a flow cytometry and endoscopy.
Those areas are going to grow 20 plus percent.
You know as we go forward.
And India Industrial Tech space.
Industrial sensors are growing you know, 15% or so light, our 20% or so you know it all depends on how the business grows going forward, where we can gain more share going forward, but based on.
That mix of growth in the micro verticals. It is possible that we might be the mid teens that we have built into our model, but that's what I wanted to communicate.
Okay. That's very helpful. I appreciate that clarity the finally on the margins in election, I realize you're not you know clarifying what they are for us, but as a general profile for how you intend to do.
During this business into the fold one is sort of keeping the margins constant while you grow the topline are you expecting any meaningful improvement or perhaps deterioration of the margins from their current high level over the next couple of years.
No ideally we want to keep the margin profile.
That's how we're thinking about it I mean, if we if we obviously as the business plateaued, but we're talking a substantially larger bids that point, where we start seeing any degradation in the margin, but our thinking is to maintain the margin focused on these micro verticals try.
I try not to attack.
Any verticals that would require margin compression. So that we can maintain the rich profile that we purchased.
Great. Thanks for my taking my questions I.
Thank you.
Thank you Weve reached end of our question and answer session I like to turn the floor back over to Jerry for any further or closing comments.
Yes, just wanted to say thank you Kevin and thank you all for joining US this morning and have a good day.
Thank you that does conclude today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.
Thank you.