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EnPro Industries (NYSE:NPO)
Q3 2020 Earnings Call
Nov 03, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Hello, and welcome to the EnPro Industries Q3 2020 earnings conference call. [Operator instructions] 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.

Jerry Johnson -- Senior Vice President for Corporate Development and Strategy

Thank you. Good morning, and welcome to EnPro's quarterly earnings conference call. I'll remind you that our call is also being webcast at enproindustries.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 for 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 COVID -- 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 Morse in January 2020, the former power systems segment is accounted for as discontinued operations in our financial statements for both current year and prior year periods. Unless otherwise noted, all our comments today refer to continuing operations.

And now, I'll turn the call over to Marvin.

Marvin Riley -- Chief Executive Officer

Thanks, Jerry, and good morning, everyone. Thank you for joining us today. I hope that you and your families remain safe and be 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 our 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'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 this organization, and while keeping our core values of safety, excellence and respect for all people at the forefront of their actions and excelling and 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 we -- 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 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 EnPro. I'd like to start by discussing three key themes reflected in the 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 to 15.7%, with adjusted EBITDA of $42.1 million, a modest decline of 1.4% year over year. The 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 COVID. Second, we've made significant progress in our portfolio evolution toward more profitable businesses in higher-growth markets that generate higher cash flow return on investment, resulting in our improved stability of financial results over time. The acquisition of Alluxa 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 this 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 Alluxa acquisition, a largely untapped revolver, a relentless focus on cash generation and strong performing businesses, we're well positioned to really consider additional bolt-on acquisition opportunities that may arise. Turning to Slide 5 and an update on our four-phased approach to navigating the COVID-19 pandemic. Phase 1 focused on health and safety.

Phase 2 centered on business stability and progression. Phase 3 emphasized cost and process improvement. And phase four 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 w've 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 have applied the tools, processes and technology to be able 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've 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. And we have seen many benefits to working this way, including increased connections and productivity across our businesses and geographies as well as the greater ability to use our colleagues' unique talent 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 also 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 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, we are focused on continuing to execute our profitable growth strategy.

Now let me spend a few moments to discuss our strategy and actions taken over the last year to reposition our portfolio toward 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, 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 our 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.

So, 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 Systems segment. After careful review, we determined Fairbanks Morse was no longer a fit, given the strategy I just described. In our Sealing Products segment, we conducted an extensive review during 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 brake shoe business and ceased operations of some three underperforming product lines. In September of this year, we closed the sale of the Motor Wheel and Crewson 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 Air Springs divestiture, and we will have completed the heavy-duty truck portfolio reshaping work in line with our previously communicated year-end 2020 time frame. 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 sealing segment as a whole has significantly reduced the 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's bushing block manufacturing facility headquartered in Dieuze, 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: LeanTeq, which closed in late September; and The Aseptic Group, which closed in early July. And 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 our resilience in the wake of COVID, with solid order intake and backlog. More specifically, both LeanTeq and Aseptic Group's year-over-year 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 LeanTeq's current demand growth. We look forward to continued contributions from both LeanTeq and Aseptic as demand remains strong.

So now I'm excited to share further details on our previously announced acquisition of Alluxa, which have closed Monday of last week. Alluxa is a technology company that provides specialty optical filters, complementing our growing material science capabilities. Alluxa offers a unique and compelling customer value proposition, enabled by its technology platform, processes and technical know-how, including the proprietary advanced SIRRUS 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. Alluxa's financial profile is compelling, with a very attractive revenue and margin profile, including 18 quarters of consecutive revenue growth. We expect Alluxa's track record of double-digit annual revenue growth to continue under our leadership. Using the EnPro Operating System, we believe we can accelerate Alluxa'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 Alluxa. Going deeper on Alluxa's end markets and growth rates. And within the broader $13 billion optical coating market, Alluxa participates in a $1.7 billion addressable niche market that is focused on ultra high-precision coatings. We estimate that Alluxa's niche will grow at a compounded annual growth rate of approximately 10% through 2024, and we expect Alluxa's growth rate to exceed that of the market.

Alluxa exclusively provides filters for the most challenging applications in our industry and does not participate in the market for high-volume, more commoditized filters. Alluxa 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 market. To share some specific examples of Alluxa's applications within the end markets, Alluxa provides filters for LiDAR in 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 utilize EnPro's existing market strength to help accelerate Alluxa's growth in these markets.

We're thrilled to welcome the founder of Alluxa, Mike Scobey, who will continue to lead the business with his highly talented team. So, 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 that are in line 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 we 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.

Milt Childress -- Chief Financial Officer

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 third quarter.

We experienced growth in our legacy semiconductor business in addition to the contribution from LeanTeq, 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 have 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 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 decremental year-over-year adjusted EBITDA margins were approximately 35% this quarter, excluding the impact of acquisitions, divestitures and the 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 $0.67 decreased 8.2%.

Excluding amortization of intangibles, our adjusted diluted earnings per share have also decreased 1.5% versus the prior year period. I'd also like to note that in the third quarter, we recognized other operating and nonoperating charges aggregating $46 million. The primary components of which relate to settlements of two long-pending litigation matters, noncash impairments of trademarks in Sealing Products and the impairment of assets of our bushing block business in Dieuze, France. Regarding the litigation matters.

In recent weeks, we have been successful in resolving claims by the State of Mississippi related to the 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 our GGB's nonstrategic and unprofitable bushing block business in Dieuze, 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 Dieuze, which the buyer plans to retain. Exiting the bushing block business through either a sale or shutdown was one of the 2020 portfolio-shaping objectives. Turning to segment performance. Sealing Products 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 LeanTeq acquisition, which closed in September 2019, was a benefit, while the strategic trimming of our heavy-duty truck product portfolio over the last 12 months served as an offset. Excluding this impact from 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 LeanTeq and more favorable mix in 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 end market weakness, including 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, less $11 million in our 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 Alluxa acquisition through a combination of $237 million of cash and roll-over equity from Alluxa executives, equating to 7% of Alluxa. When taking this transaction, our 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 a few applicable reinvestment requirements related to the Fairbanks Morse and other divestitures, which we have largely met as a result of the Alluxa 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 $0.26 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 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 months 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 Alluxa acquisition, the reshaping of the heavy-duty truck business and the pending sale of GGB'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 also 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 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 as solid for both semiconductor and food and pharma, with continued softness in heavy-duty truck, general and 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 of a 15% to 25% decline in sales and the adjusted EBITDA margins of 13% to 14%. Note that these expectations do not include contributions from the acquired Alluxa business, nor uncertainties surrounding how the resurging COVID-19 crisis might impact demand and revenue. However, they now do include the impact of completed and announced divestitures. Now I'll turn the call back to Marvin for closing comments.

Marvin Riley -- Chief Executive Officer

Thank you, Milt. I am 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 material science vision and exited or divested some of those that were no longer a strategic fit. With these actions, we are well on our way to transforming EnPro into a leading technology company, using material science 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 really maximize shareholder value. Our teams have adapted well to the new ways of working as we navigate the COVID-19 pandemic, and we're well positioned as our markets recover. We continue to focus on driving operational excellence by leveraging the EnPro Operating System to reduce costs, improve productivity and achieve quality control across all our businesses. We are emerging from this challenging environment a stronger company, and 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 our 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.

Questions & Answers:


Operator

[Operator instructions] Our first question today is coming from Jeff Hammond from KeyBanc. Your line is now live.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey. Good morning, guys.

Marvin Riley -- Chief Executive Officer

Good morning, Jeff.

Milt Childress -- Chief Financial Officer

Good morning, Jeff. Good morning.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Yes. So just on Alluxa, I wanted to get a better sense of -- yes, I think it looks like the historical growth is faster than the forward growth. I just want to understand that a little bit better. And then I don't know if you can frame kind of the 2020 revenue run rate as a starting point, and kind of any profitability metrics around Alluxa would be helpful.

Marvin Riley -- Chief Executive Officer

OK. So what I'd like to do, Jeff, since I assume we'll have a lot of questions on Alluxa is I might take a little bit more time just to talk a little bit more about Alluxa in general. As I said in the prepared remarks, the TAM is roughly $13 billion and 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 in, 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 Alluxa 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.

And we feel like we will perform exceptionally well, but we want to be thoughtful and conservative in our approach as we look at Alluxa. So 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 info. from a competitive perspective.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

OK. No, I appreciate that.

Milt Childress -- Chief Financial Officer

This is -- yes. Hey, Jeff, this is Milt. It's one of the reasons that we provided the pro forma look to give you a better idea of -- 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 our overall sales' EBITDA margins as we look ahead.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

And just to be clear on that, Milt, the $95 million of sales that come out net in the EBITDA adjustment, that includes what? The Air Springs, the GGB bushing block, the Motor Wheel and then the Alluxa coming in? Is there anything else in that?

Milt Childress -- Chief Financial Officer

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

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

OK. Great. And then just on the revenue guide, good to see you guys coming closer to the better end. Can you just frame what comes -- how much is coming out in the fourth quarter for Motor Wheel and Air Springs as we kind of firm up our models?

Milt Childress -- Chief Financial Officer

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 will give you an overall pretty good result, I mean, a pretty good idea of what we're expecting for the fourth quarter. I mean, you can circle that pretty tightly. And that is going to reflect the revenues that come out.

It is going to reflect the impact of Dieuze, the impact of Air Springs, the impact of Motor Wheel and Crewson. What it does not reflect -- the guidance that we gave, what it does not reflect is the contribution from Alluxa. 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 uncertain at this point, there could be some upside, depending on when we end up closing Air Springs because it currently is operating in a profitable fashion.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

OK, and then just last one. If you look at the sequential revenue improvement, maybe versus your internal models, what end markets or businesses surprised you the most?

Marvin Riley -- Chief Executive Officer

Well, automotive, as you might see with us and as well as other companies, really on a sequential basis, rebounded 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, semiconductor.

So the big standout was automotive. It kind of came roaring back for us, of course. And then heavy-duty truck came back nicely, as I said before, and semiconductor as well.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

OK. Great. Thanks, guys. Appreciate it.

Operator

Thank you. Our next question today is coming from Ian Zaffino from Oppenheimer. Your line is now live. 

Ian Zaffino -- Oppenheimer & Co. Inc. -- Analyst

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 being deeper into other areas?

Marvin Riley -- Chief Executive Officer

Yes. I'll start, Milt, 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 now we're thinking about, obviously, organic growth in some of the areas where we've already made investments. If you look at our LeanTeq investment, which we did last year, it's growing nicely. We've got some capacity expansion plans that are under way in that business.

We want to continue to support the growth of that business. And 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 Alluxa online. They'll obviously want support to continue their expansion plans.

Then obviously, on the inorganic side, if we're able to find another Alluxa, another LeanTeq 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. 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, Milt.

Milt Childress -- Chief Financial Officer

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

Ian Zaffino -- Oppenheimer & Co. Inc. -- Analyst

OK. Great. And then also, 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?

Marvin Riley -- Chief Executive Officer

Yes. 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, right? We have IP, we have technology, we have know-how, etc., etc., 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, right? What can the business deliver? And what we've set as a 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, 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 own formula we use here for cash flow return on investment.

And we've 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 -- those characteristics we consider to be pretty strict. And 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 that end market having an underlying growth in the 5% to 7% range. And we'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 -- 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 the market if we decide to make a move.

Ian Zaffino -- Oppenheimer & Co. Inc. -- Analyst

All right. Thank you very much for the color.

Operator

Thank you. [Operator instructions] Our next question is coming from Justin Bergner from G. Research. Your line is now live. 

Justin Bergner -- g.Research -- Analyst

Good morning, Marvin. Good morning, Milt. Good morning, Jerry.

Marvin Riley -- Chief Executive Officer

Good morning. How are you doing?

Milt Childress -- Chief Financial Officer

Hey, good morning.

Justin Bergner -- g.Research -- Analyst

Good. I have a couple of clean-up questions and then some sort of bigger-picture questions. On the clean-up questions, the close of the Air Springs sale, the guidance sort of what does that assume, like a mid-quarter close at presence -- at present or end-of-year close?

Milt Childress -- Chief Financial Officer

Yes, it assumes a mid-Q4 close. So to the extent that we go beyond that that 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.

Justin Bergner -- g.Research -- Analyst

OK. 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?

Milt Childress -- Chief Financial Officer

Yes, if you look at what affected the quarter, the big areas -- the four primary areas that led to the provision in the third quarter. One was the Dieuze exit that we've 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 next year. The second item was the impairments, and that's just the impairments of indefinite trade names and just a function of what's happening in the market on the top line because bad valuations are tied to sales.

The third was the BorgWarner 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 environment -- 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 our remediation plan, where the cost of that is fairly nominal. And then that leaves two outstanding matters. Once again, this detail is in -- 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.

Justin Bergner -- g.Research -- Analyst

OK. 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, one of two-thirds of that number being cash. Just maybe that came at me a bit fast.

Milt Childress -- Chief Financial Officer

OK. I'm sorry. Could you repeat the second part of the question?

Justin Bergner -- g.Research -- Analyst

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?

Milt Childress -- Chief Financial Officer

That was the Dieuze exit -- the bushing block exit in Dieuze, France.

Justin Bergner -- g.Research -- Analyst

OK.

Milt Childress -- Chief Financial Officer

Yes. So -- and then to answer your question, if you look at the two legal settlements, one is an environmental settlement. The Water Valley is an environmental settlement. The other was the supply of bearings more than a decade ago that GGB supplied to BorgWarner.

Justin Bergner -- g.Research -- Analyst

OK. Got it. I won't dwell too much longer there. Then maybe big picture on Alluxa.

Thank you for the detail on the bridge, with respect to revenue and EBITDA. As you look at Alluxa, you mentioned sort of 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 sort of the life sciences and semiconductor end markets as a whole are growing high teens, maybe as high as low 20s? And then that would make the industrial technology portion growing more of a low double digit or were you just highlighting certain sub end markets in life sciences and semiconductor in that comment?

Marvin Riley -- Chief Executive Officer

Yes. So I might get a little more specific here than we're accustomed to, but it's easier for me to give you the thinking behind how we see some of these micro verticals that Alluxa plays in. So what we're communicating, obviously, is that 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 even faster than that. And it is possible that it will outperform, but we want to be thoughtful and constructive as we think about the acquisitions we bring on board, right? So if you look at where they play in semiconductor, which is specifically in lithography, our work says that, 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, those areas are going to grow 20-plus percent as we go forward. And in the industrial tech space, 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, yes, it is possible that we might beat the mid-teens that we have built into our model. That's what I wanted to communicate.

Justin Bergner -- g.Research -- Analyst

OK. That's very helpful. Appreciate that clarity. Finally, on the margins in Alluxa, and 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? Are you expecting any meaningful improvement or perhaps deterioration of the margins from their current high level over the next couple of years?

Marvin Riley -- Chief Executive Officer

No. Ideally, we want to keep the margin profile. That's how we're thinking about it. I mean if we -- obviously, if the business plateaued, but we're talking a substantially larger business at that point before we start seeing any degradation in the margin.

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.

Justin Bergner -- g.Research -- Analyst

Great. Thanks for taking my questions.

Marvin Riley -- Chief Executive Officer

Thank you. 

Operator

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.

Jerry Johnson -- Senior Vice President for Corporate Development and Strategy

I just wanted to say thank you, Kevin, and thank you all for joining us this morning, and have a good day.

Operator

[Operator signoff]

Jerry Johnson -- Senior Vice President for Corporate Development and Strategy

Thank you.

Duration: 52 minutes

Call participants:

Jerry Johnson -- Senior Vice President for Corporate Development and Strategy

Marvin Riley -- Chief Executive Officer

Milt Childress -- Chief Financial Officer

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Ian Zaffino -- Oppenheimer & Co. Inc. -- Analyst

Justin Bergner -- g.Research -- Analyst

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