Enpro Inc. Q4 2025 earnings call

Thanks, Kevin, and good morning, everyone. Thank you for joining us today as we review Enpro's fourth quarter and full year 2025 earnings results, and introduce our outlook for 2026. I will remind you that this conference call is being webcast at enpro.com, where you can find the presentation that accompanies this call. With me today is Eric Vaillancourt, our President and Chief Executive Officer, and Joe Bruderek, Executive Vice President and Chief Financial Officer. During this morning's call, we'll reference a number of non-GAAP financial measures. Tables reconciling these historical non-GAAP measures to the comparable GAAP measures are included in the appendix to the presentation materials. Also, a friendly reminder that we will be making statements on this call, including our current perspectives for full year 2026 guidance, that are not historical facts and that are considered forward-looking in nature.

These statements involve a number of risks and uncertainties, including those described in our filings with the SEC. We do not undertake any obligation to update these forward-looking statements. It is now my pleasure to turn the call over to Eric Vaillancourt, our President and Chief Executive Officer. Eric?

Yeah, good morning. Since launching this next phase of our value creating strategy last year, there's been tremendous pride, motivation, and focus throughout Enpro. The inherent balance and quality of our portfolio shined once again in 2025. Our teams have made considerable progress aligning the organization to our long-term strategic goals by leveraging, by leveraging our core capabilities, engineering expertise to expand new commercial opportunities while steadily finding ways to optimize our foundation. We advanced our strategic goals in the first year of Enpro by growing organically at 7.6%, holding or expanding margins, despite increases in operating expenses supporting growth initiatives, deploying two-thirds of our capital expenditures towards growth and efficiency projects. Allocating $280 million toward value creating M&A with the acquisitions of AlpHa and Overlook.

Delivering total shareholder returns above premium peers, achieving and maintaining premium valuation reflective of a differentiated industrial technology franchise. As a learning organization, each of our colleagues completed a minimum 16 hours of training and personal development this year. We have clear line of sight in areas of the business where we can accelerate the growth and profit performance, and are excited to work on these value-creating levers again in 2026. Our growth priorities underpinning the Enpro 3.0 strategy remain unchanged and will guide our performance through 2030. Over the long term, we are positioned to generate mid- to high single-digit organic top line growth at strong profitability and return levels.

We are targeting mid-single digit organic growth in Sealing Technologies, while at AST, we are targeting at least high single digit organic growth, with both segments capable of generating 30% Adjusted segment EBITDA margins, ±250 basis points. Now on to our full year 2025 performance. Enpro performed well in 2025, with sales up 9% to $1.14 billion. Strength in aerospace, food and biopharma, firm domestic general industrial performance, as well as improving performance in semiconductor markets, were the primary drivers of the 7.6% increase in organic sales. Complementing our strong organic results were the powerful quarter contributions from the acquisitions of Alpha Measurement Solutions and Overlook Industries, completed in the fourth quarter of 2025. In addition to the AMI acquisition, completed in late 2024.

The AlpHa and Overlook teams are energized and are hitting the ground running, and we are delighted with their performance since they joined our Enpro family. We continue to be pleased with this best-in-class performance for our Sealing Technologies segment. As well, I'm encouraged by AST's steady performance during the choppiness we experienced in semiconductor capital equipment spending over the last two years. In all, we have been able to maintain premium profitability, free cash flow, and solid returns on invested capital, despite the persistent weakness we experienced in areas of semiconductor and commercial vehicle OEM demand through 2025, while continuing to invest to support growth programs at AST and throughout the organization. In Sealing Technologies, disciplined execution and efficient operations drove an Adjusted segment EBITDA margin of over 32% for the second year in a row.

Our teams are positioning the businesses to drive above market growth by leveraging our applied engineering capabilities, durable aftermarket characteristics, and specification positions to deliver important solutions to our customers in areas where we have clear technology and process advantages. In addition, our pipeline of strategic acquisitions that can expand our capabilities in key growth areas throughout the segment remains robust, possessing premium characteristics that can enhance the growth profile of the segment over time. We'll continue to be disciplined in pursuing these opportunities at the right time and at the right value for our business. At AST, revenue increased nearly 14%, with strength in solutions serving leading-edge applications and pockets of recovery in semiconductor capital equipment demand. We continue to proactively invest capital and operating resources throughout 2025 in preparation for new platforms in anticipation of a recovery in semiconductor capital equipment spending.

We are encouraged by the recent improved order flow in AST that will begin to be realized in the second half of 2026. We remain well positioned to participate in a stronger semiconductor market in coming periods, while also seeking 80/20 improvements and cost realignment opportunities to drive incremental improvement in segment profitability over time. Thanks to the inherent balance and quality of Enpro portfolio and the resilience of our business model, 2025 marked another year of robust free cash flow generation. Our cash flows allow us to maintain our strong balance sheet and a net leverage ratio of 2x after taking into account the recently completed acquisitions of AlpHa and Overlook, purchased for $280 million in aggregate.

Looking ahead to 2026 and beyond, we have ample financial flexibility to execute on our growth and optimization objectives and deliver premium results for all stakeholders. Under our Enpro 3.0 strategy, we are positioned to accelerate profitable growth through 2030. We are making considerable progress on our key growth priorities, and we'll continue to pursue select strategic acquisitions that fit our strategic characteristics of an Enpro business, drive incremental long-term growth, and add complementary talent, technology, and process expertise that expands Enpro's ability to answer critical needs of our customers. The foundation of this strategy is designed to extend our track record of strong shareholder returns and enterprise value growth, while creating opportunities for our colleagues to develop and thrive.

We have the right positioning and discipline to deliver on these targets, especially as we reinvest in growth nodes across the portfolio and drive continuous improvement to maintain and opportunistically improve profitability. At the same time, with our dual bottom line culture as a cornerstone, we encourage each of our nearly 4,000 colleagues to accelerate their personal and professional growth again in 2026. Our colleagues have made commitments to themselves and their teams to work on leadership and communication skills, financial acumen, psychological safety, and awareness. Our team is excited to continue down this path of value creation as we empower technology with purpose. Joe?

Thank you, Eric, and good morning, everyone. Turning to our results for the quarter. Enpro performed well in the fourth quarter, reflecting momentum across the portfolio and continued progress executing our Enpro 3.0 strategy. In the fourth quarter, sales increased 14.3% to $295.4 million. We saw strong sales performance in aerospace and food and biopharma within Sealing Technologies, as well as improvement in overall AST sales, led by continued strength in precision cleaning solutions, supporting leading-edge semiconductor production. In addition, strategic pricing initiatives, the partial quarter contributions from AlpHa and Overlook, and firm domestic general industrial performance helped offset slow commercial vehicle OEM sales and slow industrial sales internationally. Organic sales increased approximately 10%.

Fourth quarter Adjusted EBITDA of $69.4 million was up 19.2%, and Adjusted EBITDA margin of 23.5% was up 100 basis points. Continued robust performance in the Sealing Technologies segment and the partial quarter contribution from the acquisitions completed during the quarter were partially offset by increased operating expenses ahead of growth programs, largely in AST. Corporate expenses of $14.2 million were up $800,000 from a year ago, primarily due to increased medical costs. Adjusted diluted earnings per share of $1.99 increased nearly 27% compared to the prior year period, largely driven by the factors increasing Adjusted EBITDA and lower interest expense tied to lower net borrowings. Moving to a discussion of segment performance.

Sealing Technologies sales of $187.1 million in the fourth quarter increased almost 15% versus last year. Healthy demand in aerospace and food and biopharma markets, strategic pricing actions, firm domestic general industrial sales, and the partial quarter contribution from acquisitions completed during the fourth quarter offset continued weakness in commercial vehicle OEM demand and slow industrial markets internationally. Nuclear sales remained temporarily choppy during the quarter in Europe as well. Organic sales were up nearly 8% year-over-year. For the fourth quarter, Adjusted segment EBITDA increased more than 21%, with Adjusted segment EBITDA margin expanding 180 basis points to 32.8%. Strategic pricing, improved volume, and the additions of AlpHa and Overlook, as well as firm aftermarket demand in the commercial vehicle market, also contributed to the consistent year-over-year profit performance.

We expect best-in-class performance in Sealing Technologies to continue. 65% of the segment sales are tied to critical positions in the aftermarket, offering the segment stability during periods of uncertainty. In addition, we continue to earn new business by leveraging the segment's technological expertise, process know-how, and applied engineering capabilities to drive above-market organic revenue growth and to help our customers safeguard their critical environments. Overall, Sealing Technologies is well positioned to drive mid-single-digit top-line growth organically, with strong profitability during Enpro 3.0. Turning to Advanced Surface Technologies. In the fourth quarter, sales increased 13.4% to $108.4 million. We saw continued strength in precision cleaning solutions tied to leading-edge applications, along with pockets of strength in precision components, supporting semiconductor capital equipment and growth in optical coatings. Adjusted segment EBITDA increased approximately 3% versus last year.

Adjusted segment EBITDA margin remained above 20%. We continue to invest in certain areas of the segment to support strength we are seeing in the leading edge. Increased expenses supporting growth programs, which totaled approximately $2 million in the fourth quarter and more than $8 million for the full year, continued ahead of revenue. Last quarter, we discussed a number of factors that will drive our near-term performance in AST, where we expect lower sales growth year-over-year in the first half, followed by improved performance in the second half, as Eric noted, evidenced by current order patterns. Also, as a reminder, we shipped $12 million of safety stock inventory in 2025 to support customer supply chain transitions, which we do not expect to recur in 2026.

On the cost side, we continue to make progress on optimization plans in AST and remain committed to expanding AST margins through appropriate operating leverage on sales growth, especially as we begin to realize the benefits of investments in operational resources supporting growth programs in coming quarters. We are well-positioned to support our customers during the upcoming ramp and remain focused on delivering AST profitability toward 30% of sales, ±250 basis points on high single digit, low double-digit revenue growth within the Enpro 3.0 planning horizon. Turning to the balance sheet and cash flow. Our balance sheet remains strong, and we exited 2025 with a net leverage ratio of 2 times, inclusive of the $280 million in cash used to acquire Alpha Measurement Solutions and Overlook Industries during the fourth quarter.

We continue to generate ample free cash flow to invest the necessary capital and operating expenses into our strategic organic growth opportunities. In 2025, we generated more than $150 million in free cash flow, net of $48 million of property, plant, and equipment, and capitalized software expenditures in 2025. This was up 18% from the $130 million in 2024, net of $33 million of capital expenditures. During the fourth quarter, we substantially completed and settled the termination of Enpro's U.S. defined benefit pension plan. As a result of this transaction, Enpro incurred a non-cash settlement loss of $67.2 million, which was recorded to other non-operating expense, primarily associated with recognition of life-to-date actuarial losses attributed to the plan, previously deferred and accumulated other comprehensive income.

During this plan settlement process, existing plan assets more than fully satisfy the cash settlement obligations. Overall, we maintain ample financial flexibility to execute our strategic initiatives, both organically and through strategic acquisitions that broaden our capabilities. Earlier last year, we expanded our revolving credit facility to $800 million from $400 million previously, and currently have more than $580 million of available capacity. We are also maintaining our commitment to return capital to shareholders, and during 2025, we paid a $0.31 per share quarterly dividend, totaling $26.2 million for the year. On February thirteenth, our board of directors approved another increase to the quarterly dividend to $0.32 per share, representing the eleventh consecutive annual increase since we initiated a quarterly dividend in 2015.

Moving now to our 2026 guidance. Taking into consideration all the factors that we know currently, we expect total Enpro sales growth to be in the range of 8%-12% in 2026, including the contribution of approximately $60 million from the acquisitions of AlpHa and Overlook, completed in the fourth quarter of 2025. We expect Adjusted EBITDA to be in the range of $305 million-$320 million, including $16 million-$17 million contributed from the recent acquisitions. Adjusted diluted earnings per share is expected to be in the range of $8.50-$9.20. The normalized tax rate used to calculate Adjusted diluted earnings per share remains at 25%, and fully diluted shares outstanding are approximately 21.3 million.

Capital expenditures in 2026 are expected to be approximately $50 million or around 4% of sales, as we continue to invest in growth opportunities across the company at accretive margin and return thresholds. In the Sealing Technologies segment, we expect revenue growth, including the contributions from the fourth quarter acquisitions of AlpHa and Overlook, to approach 15% in 2026, with mid-single-digit organic growth for the year. We see continued strength in aerospace and food and biopharma markets, and steady domestic general industrial demand drivers. We expect our commercial excellence programs, new growth programs leveraging differentiated capabilities, and focus on solving critical problems for our customers to drive above-market growth this year. While we do not expect a significant recovery in commercial vehicle OEM demand to occur in 2026, aftermarket drivers in that market remain firm.

We expect strong operational performance to continue in Sealing Technologies, with Adjusted segment EBITDA margin to again exceed 30% this year. In the Advanced Surface Technologies segment, we are seeing clear signs of a robust recovery in semiconductor capital equipment spending, as capacity for leading-edge applications gains momentum. Today, we expect AST sales to grow high single digits, inclusive of the previously mentioned $12 million of equipment sales that we do not expect to recur this year, with the second half of 2026 being stronger than the first half Precision Cleaning Solutions is expected to perform well throughout the year, as fab utilization and expansion of capacity for leading-edge applications accelerates.

On the equipment side, we expect growth to accelerate as we move through the year, predominantly driven by a second-half improvement multiple industry sources are predicting will occur, and supported by our recent order patterns. We also expect demand for optical coatings to grow as demand signals improve in semiconductor and communications infrastructure markets. We expect to see Adjusted segment EBITDA margin expansion in AST in 2026, with margins increasing throughout the year. We expect AST's second-half profitability to be materially better than current run rates, as demand improves and we begin to leverage our recent growth investments. Thank you for your time today, and I will now turn the call back to Eric for closing comments.

Thanks. Thanks, Joe. I got so excited to talk about our, about our results and future, I jumped right over our world-class safety performance. So I want to take a minute to recognize our teams across the company for their excellent safety performance in 2025. Safety is our first core value at Enpro, and we begin every meeting with our safety pledge, striving to achieve an injury-free and psychologically safe workplace. Every day, we look after each other, and we make sure we return home safely to our loved ones. In 2025, we recorded our best safety statistics ever, with a total recordable incident rate of 0.64 and a lost time case rate of 0.09.

Our world-class safety results reflect the day-to-day commitment of our active and engaged environmental health and safety communities of practice, whose steadfast leadership and development of strong, repeatable processes enable us to achieve these terrific, terrific outcomes. I'd like to celebrate these milestones as we continue to strive towards an injury-free place, workplace. Our value-creating strategy remains unchanged, and we are energized to deliver another year of strong performance and execution for our customers and shareholders in 2026. We continue to invest in areas where we are strongest while pursuing strategic acquisitions that build upon our leading-edge capabilities at attractive growth and margin levels. I want to again recognize our dedicated colleagues across the company who are the driving force beyond our success. Thanks to their contributions, we have a clear path to achieve our vision for Enpro 3.0. Thank you for joining us today.

Life is good as Enpro and our best days are ahead. We now welcome your questions.