Enpro Inc.

Hello and welcome to the MPro 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 conference is being recorded. It's now 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 InPro's quarterly earnings conference call. I'll remind you that our call is also being webcast at InProIndustries.com, where you can find the presentation that accompanies the call. With me today are Marvin Riley, our CEO, and Milt Childress, our CFO. We are holding our call virtually and are dialed in from different locations, so we will ask or your understanding should we encounter any technical issues as we coordinate our responses during Q&A. Before we begin our discussion, a friendly reminder that we'll be making statements on this call that are not historical facts and that are considered forward-looking in nature. These statements involve a number of risks and uncertainties, including the 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 Form 10-Q. We do not undertake to update any of these forward-looking statements. Also, during the call, we will reference a number of non-GAAP financial measures. Tables reconciling these measures to comparable GAAP measures are included in the appendix to the presentation materials. I also want to remind you that As a result of the sale of Fairbanks-Morris in January 2020, the former power systems segment is accounted for its discontinued operations in our financial statements for both current year and prior year periods. Unless otherwise noted, all our comments today will refer to continuing operations. And now I'll turn the call over to Margaret.

Thanks Jerry, 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, who recently joined EnPro as Senior Vice President of Corporate Development, Strategy, and Investor Relations. Jerry 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 NPRO's 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, ENPRO 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 at EnPro and will 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 EnPro. 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 points. Thank you for joining us. 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 Eluxa 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 Aluxa acquisition, a largely untapped revolver, a relentless focus on cash generation and strong performing businesses were 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, Phase 2 centered on business stability and progression, Phase 3 emphasized cost and process improvement, and Phase 4 positions Enpro 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 moved swiftly to redesign how our manufacturing teams conduct their work, and have fully implemented baseline COVID testing across the Americas and are in the process of implementing digital contact tracing technology in the U.S. and Europe. This is in addition to our existing manual contact tracing, temperature checks and ample PPE at all of our facilities. We've applied the tools, processes and technology to protect our employees' safety while they continue to deliver the high level of service that Enpro 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 and has supported operations seamlessly during this time. We have built inventory of PPE and established a full loop system to test, trace, and monitor any COVID infections in our employee base. As a standard practice, we continue to closely monitor supplier viability as well as 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. Our IT 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 have 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 talents and provide job opportunities across the global organization. We have created 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 have 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-based 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, we are 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 higher 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 NPRO operating system to increase margins in 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 sale of Fairbanks-Morse, which constituted the former power assistance segment. After careful review, we determined Fairbanks-Morse was no longer a fit, given the strategy I just described. In our ceiling product 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 break sheet business and ceased operations of three underperforming product lines. In September of this year, we closed the sale of the motor wheel and cruising 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 completion of the airsprings 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, wheel-end 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 sales in trucking from the mid-20s to the mid-teens. Now, our ceiling segment as a whole has significantly reduced cyclicality and increased exposure to resilient, technology-oriented aftermarket businesses with a predominant focus on materials science technology leading to increased adjusted EBITDA margins and cash flow return on investment. Moving to our engineered product segment, In June, we announced plans to exit operations at GGB's Bushing Block manufacturing facility headquartered in Deuce, France, to refocus the business on higher margin product lines. We've been successful in obtaining 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. Leantech which closed in late September and the Aseptic 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 acquisitions align 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 COVID with solid order intake and backlog. More specifically, both lean tech and aseptic groups year-over-year revenue growth remains strong despite market challenges. We've been very pleased with the overall performance and are currently executing capacity expansion plans to support lean tech's current demand growth. We look forward to continued contributions from both lean tech and aseptic as demand remains strong. So now I'm excited to share further details on our previously announced acquisition of Aluxa, which closed Monday of last week. Aluxa is a technology company that provides specialty optical filters, complementing our growing material science capabilities. Aluxa offers a unique and compelling customer value proposition enabled by its technology platform. The acquisition is consistent with the strategy I communicated earlier and is aligned to our stated M&A criteria. Aluxa's financial profile is compelling with an attractive revenue and margin profile including 18 quarters of consecutive revenue growth. We expect Aluxa's track record of double-digit annual revenue growth to continue under our leadership. Using the EnPro operating system, We believe we can accelerate Aluxa's growth as we leverage our capability 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 Aluxa. Going deeper on Aluxa's end markets and growth rate. Within the broader $13 billion optical coating market, Aluxa participates in a $1.7 billion addressable niche market that is focused on ultra-high precision coatings. We estimate that Aluxa's niche will grow at a compounded annual growth rate of approximately Thank you for joining us. Alexa serves a broad array of high growth end markets with primary exposure to industrial technology and life sciences as well as smaller positions in niche semiconductor and aerospace and defense markets. To share some specific examples of Eluxa's applications within these end markets, Eluxa provides filters for LIDAR and autonomous vehicles, filters for PCR testing for COVID, DNA sequencing, extreme ultraviolet lithography and semiconductor, and also flow cytometry. Further, we've identified pockets of nascent growth where we can utilize EnPro's existing market strength to help accelerate Eluxa's growth in these markets. We're thrilled to welcome the founder of Aluxa, Mike Scobie, who will continue to lead the business with his highly talented team, and we look forward to working together to create value for our customers and shareholders. Collectively, the actions we have 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 align with our strategies through a disciplined set of strategic and financial filters. We have a seasoned 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 through our approach. And now, I'll turn the call over to Milt 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 announced 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 LeanTech. 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, company-wide 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 COVID 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 defermental year-over-year adjusted EBITDA margins were approximately 35% this quarter, excluding the impact of acquisitions, divestitures, and foreign exchange translation, which remains 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 in an improved economic environment. Adjusted 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 of two long-pending litigation matters, non-cash impairments of trademarks and sealing products, and the impairment of assets of our bushing block business in Dues, France. Regarding the litigation matters, in recent weeks, we have been successful in resolving claims by the state of Mississippi related to environmental contamination at the site of a legacy business divested in 1996, and product claims by a 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 GGB's non-strategic and unprofitable bushing block business in Dues, France. We recognized an impairment charge of $6.2 million in the third quarter and expect the sale to close before year end. Achieving a sale of this business is a great result by our team and for the employees in Dues, which the buyer plans to retain. Exiting the bushing block business through either a sale or shutdown was one of our 2020 portfolio shaping objectives. Turning to segment performance, ceiling product sales of $202 million declined 8.1% amid soft demand in heavy-duty truck and aerospace and flat performance in general industrial and food and pharma markets, somewhat offset by strength in semiconductor. The lean tech acquisition which closed in September 2019 was a benefit, while the strategic trimming of our heavy-duty product portfolio over the last 12 months 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 lean tech and more favorable mix and heavy duty trucking owing in part to the strategic exits in this business 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 in-market weakness, including in the general industrial, oil and gas, automotive, and petrochemical markets. The lower sales volumes resulted in a third-quarter segment adjusted EBITDA decline of 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 of our $400 million revolver. and more. 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 Alexa acquisition through a combination of $237 million of cash and rollover equity from Alexa executives, equating to 7% of Alexa. When taking this transaction, our divestitures and our exits since the fourth quarter of last year into account, our pro bono 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 with the gain on the sale of Fairbanks-Morse and payments made related to settlements of 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 markets and privately negotiated transactions. While we are prioritizing investments in 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 I want to 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, on a 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 Alexa acquisition, the reshaping of the heavy-duty truck business, and the pending sale of GDB's bushing block business as if 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 reduced cyclicality as we look ahead. Now I'd like to spend a few moments providing you with our latest thinking about the year. As Marvin and 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 as a result of our portfolio shaping work and better than expected top line 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, 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 of a 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 Alexa business, nor uncertainty surrounding how the resurging COVID-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 Marvin for closing comments.

Thank you, Mel. I am proud of the meaningful strides we have made in improving the quality and resilience of our portfolio. In a short period, we have acquired several businesses that align with our long-term material science vision and exited or divested those that were no longer a strategic fit. With these actions, we are well on our way to transforming EnPro 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 COVID-19 pandemic. We're well positioned as our markets recover. We continue to focus on driving operational excellence by leveraging the Enpro operating system to reduce cost, improve productivity, and achieve quality control across all our businesses. We're emerging from this challenging environment, a stronger company with many opportunities on the horizon. Enpro's 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 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 and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from Jeff Hammond from KeyBank. Your line is now live.

Hey, good morning, guys. Morning, Jeff. Morning, Jeff. Good morning.

Yeah, so just on a lux, I wanted to get a better sense of

I think it looks like the historical growth is faster than the forward growth and just want 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 Alexa would be helpful.

Okay. So what I'd like to do, Jeff, you know, since I You know, assume we'll have a lot of questions on ALUXAs. I might take a little bit more time just to talk a little bit more about ALUXA in general. You know, as I said in the prepared remarks, the TAM is roughly $13 billion, the SAM is $1.7 billion, drawing at roughly, you know, 9% a year. You know, as we think about Decatur going forward in our planning, we've thought about mid-teens. Granted, the underlying markets that it participates in from an application perspective, they are growing a little bit faster than that. But for planning purposes, you know, we want to be thoughtful and we want to be conservative as we think about things. So if you think about Aluxa and where they participate today in life sciences, it has really nice growth characteristics in cytometry, endoscopy, things of that nature. where it participates in semiconductor and lithography. It's got really nice growth characteristics. High teens, in some cases, we have growth characteristics that may be in the 20s. We feel like we will perform exceptionally well, but we want to be thoughtful and conservative in our approach as we look at Aluxa. I can spend a little bit more time there on sort of why and fit and some of those things, but I'll wait to hear some of your more specific questions. As it relates to financials and as it relates to its run rate revenue, 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'll 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.

Jeff, this is Milt. It's one of the reasons that we provided the pro forma look. to give you a better idea with all the moves that we've made on a TTM basis, what the profile of the company looks like. Once again, it's TTM, it's not looking forward, but it does give an idea of overall sales, EBITDA margins as we look ahead.

And just to be clear on that, Milt, the 95 million of sales that come out net and the EBITDA adjustment, That includes what? The air springs, the GGB, bushing block, the motor wheel, and then the Alexa coming in. Is there anything else in that?

That's pretty much it. Those are the big pieces.

Okay, great. And then just on the revenue guide, good to see you guys coming closer to the better end. Can you just frame how much is coming out in the fourth quarter for motor wheel and air springs? as we kind of firm up our models?

Well, I think the best way to think about it, Jeff, is with the three quarters that we have completed, and if you look at our guidance, it'll give you an overall pretty good result. I mean, a pretty good idea of what we're expecting for the fourth quarter. You can circle that pretty tightly. That is going to reflect the revenues that come out. It is going to reflect the impact of dues, the impact of air springs, the impact of motor wheel and cruisin. 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 airsprings divestiture, as you know. And so since the timing of that remains uncertain at this point, there could be some upside depending on when we end up closing airsprings because it currently is operating in 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 end markets or businesses surprised you the most?

Well, I mean, automotive, as you might, you know, see with us as well as other companies, you know, really on a sequential basis rebounded, you know, quite nicely. and same thing with heavy-duty truck. You know, 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, of course, and then, you know, heavy-duty truck came back nicely, as I said before, and semiconductor as well.

Okay, great. Thanks, guys. Appreciate it.

Thank you. Our next question today is coming from Ian Zappino 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 to higher growth areas. So what's the priority or how does the capital returns fit into your list of priorities versus going out and and dig deeper into other areas. Thanks.

Yeah, I'll start, Milton, and then you can chime in. I'll 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 immediately use it, but it's important for us to have all the tools available to us given what 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, though, we're thinking about, you know, obviously organic growth in some of the areas where we've 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, you know, obviously the same goes for the aseptic business. We want to continue to support the growth of that business as well. and we're bringing Alexa online. They'll obviously want support to continue their expansion plans. Then obviously on the inorganic side, if we're able to find another Alexa, another lean tech or another aseptic, we would definitely want to take advantage of those opportunities. Those are rare businesses that have unique characteristics growing really fast with really high margins. We wouldn't want to pass up an opportunity like that if it fits and matches our capabilities. 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, Mel.

I think you've covered it well. It's just the distinction between having the authorization in place versus using it. As Marvin has described, we're Carly focused on supporting the growth of our company.

Okay, great. And then also, you know, as you look at divestitures, I mean, are there more to come? What's sort of the criteria for divestments? And how do you think about maybe losing scale as you divest out of 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 spend a lot of time. So thank you for that. So as we think about ENPRO, let me just kind of start big picture as we think about ENPRO. We want to make sure that all the businesses that we own have a material science capability. We have IP, we have technology, we have know-how, et cetera, et cetera, all around material science. So that's first and foremost as we think about a criteria. Then we think about the margin performance of the business. What can the business deliver? And what we've said is the minimum threshold is 20%. Obviously, we're in the middle of a pandemic. 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 we can get there based on the capabilities that we have in our capability center and the know-how that's built in our operating system. And so then we're looking at cash flow return on investment. We want businesses that throw off a fair amount of cash. We have our own formula we use here. for cash flow return on investment. We've set a minimum threshold there as well of 20%. We want to make sure that the businesses that we have in the portfolio meet those characteristics. Those characteristics we consider to be pretty strict. 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 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 think about you know, that end market having an underlying growth in the, you know, five to seven percent range and you'd like to be north of that if possible. So hopefully that gives you a sense of how we're thinking about it. We don't, you know, 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, you know, our employees are our primary concern here. We want to be thoughtful and respectful. We also don't want to hurt our chances in the market if we decide to make a move.

All right. Thank you very much to the caller.

Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Justin Berkner from G Research. Your line is now live.

Good morning, Marvin. Good morning, Mel. Good morning, Jerry.

Morning. How are you? Hey, good morning.

I have a couple cleanup questions and then some sort of bigger picture questions. On the cleanup questions, the close of the air spring sale, the guidance sort of what does that assume like a mid-quarter close at present or end of year close?

Yeah, it assumes a mid Q4 close. to the extent that we go beyond that, it could affect on the margin. It's not going to be material to the overall view that we have of the year. But that's the assumption that we've made, Justin.

Okay, understood. And then on the legal side, 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 to verify that's the case. And then Are the remaining legal liabilities after these two settlements de minimis?

Yeah, if you look at what affected the quarter, the big areas, there were four primary areas that led to the provision in the third quarter. One was the dues exit that we talked about, and probably two-thirds, roughly two-thirds of that number will end up being cash. at some future point, fourth quarter. Maybe some of it drips into the first quarter of next year. The second item was the impairments. And that's just the impairments of indefinite live trade names and just a function of what's happening in the market on the top line because bad valuation is all tied to sales. The third was the Borg-Warner settlement. that we mentioned, and then the fourth was the Water Valley legal settlement. So those were the two settlements. That concludes all of the open items where we've had active, I would say active negotiations and discussions. We have very, most of our other environmental, I think we have roughly 20 environmental matters going on. Most of those were the legacy businesses. And 18 of the 20 are in steady state maintenance mode where we're just pursuing annual ongoing cleanup per a remediation plan where the cost of that is fairly nominal. And then that leaves two outstanding matters. Once again, this detail has been in our K and our Q. but it's two areas that we can't, we're not far enough along in determining what the exposure might be but the bottom line is we've made significant progress and I mean significant progress over the last couple of years in getting most of these major legacy matters behind us and I really want to 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.

Just two clarification questions there. The 21 million in 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, two-thirds of that number being cash, just maybe that came at me a bit fast.

I'm sorry, could you repeat the second part of the question?

Oh, you said there were four matters in the quarter and then the first one I didn't catch at all and you said two-thirds of that number is cash. What was that?

Oh, that was the dues exit, the bushing block exit in dues France.

Oh, okay.

Yeah. 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 GGB supplied to BorgWarner.

Okay. Got it. I won't dwell too much longer there. Maybe big picture on Aluxa. Thank you for the detail on the bridge with respect to revenue and EBITDA. As you look at Aluxa, you mentioned it's in markets that are growing mid-teens, but then you said some of its markets are growing high-teens or low-20s. Were you trying to suggest that the life sciences and semiconductor Thank you very much.

you know, how we see some of these micro verticals that Alexa plays in. So, you know, what we're communicating obviously is that, you know, the CAGR we're thinking about is mid-teens, but I wanted to make sure that we communicated they're obviously playing in markets that are growing, you know, even faster than that. And it is possible that it will outperform, but we want to be thoughtful and constructive as we think about, you know, the acquisitions we bring on board, right? So if you look at where they play in semiconductor, which is specifically in lithography. You know, our work says that, you know, that may grow about 15%. And if we look at some of the other micro verticals that we're in, that they're in like flow cytometry and endoscopy, you know, those areas are gonna grow, you know, 20 plus percent, you know, as we go forward. In the industrial tech space, the industrial sensors are growing 15% or so, LIDAR 20% or so. 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 beat the mid-teens that we have built into our model. That's what I wanted to communicate.

Okay, that's very helpful. Appreciate that clarity. Finally, on the margins and election, I realize you're not clarifying what they are for us, but is the general profile for how you intend to bring this business into the fold, one of sort of keeping the margins constant while you grow the top line, or 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 obviously, you know, if the business plateaued, but we're talking, you know, a substantially larger business at that point before we start seeing any degradation in the margins. But our thinking is, to maintain the margin, focus on these micro verticals, 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 taking my questions.

Thank you.

Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over to Jerry for any further or closing comments.

I 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.