EnPro Industries, Inc. (NPO) Q2 2026 Earnings Report, Transcript and Summary

Greetings, and welcome to the Enpro Second Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the call over to your host, Mr. James Gentile, Vice President, Investor Relations. Thank you. You may begin.

Thanks, Melissa, and good morning, everyone. Thank you for joining us today as we review Enpro's second quarter 2026 earnings results and discuss our increased 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 will reference a number of non-GAAP financial measures. Tables reconciling the 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?

Thanks, James, and good morning, everyone. Thank you for your interest in Enpro as we discuss our strong second quarter results, provide an update on strategic initiatives and share our current views for the balance of 2026. Before I review our results, I'd like to recognize our colleagues across the company who are accelerating their personal and professional growth Enpro 3.0. The individual growth aspect of Enpro 3.0 is not a side program. It is half of the strategy itself. Earlier this year, our colleagues set bold goals that range from deepening subject matter expertise to expanding leadership capabilities, achieving personal health, fitness or academic gains. Through accountability, hard work, encouragement and feedback, our colleagues are achieving meaningful growth. In recent years, the energy spreading throughout the organization around empowerment with purpose is motivating. It shows in our financial results as well as the personal performance of our colleagues. I'm grateful for their hard work and dedication to their communities and loved ones. Enpro is built around highly engineered products and solutions that play a vital role in customers' mission-critical platforms across a number of key end markets supported by long-term tailwinds. Our products are integral components found in leading-edge applications such as advanced semiconductor production, customized biopharmaceutical processes, space exploration and satellite communications and sensing and instrumentation of critical gas and liquid paths. We also provide a variety of safety and contamination control capabilities that support the commercial transportation of goods across North America as well as enduring specification positions in a number of critical industrial process applications. We win with our strong technical capabilities, engineering, process knowledge and specialized small batch manufacturing footprint. We partner with our customers to develop innovative solutions and to continue to invest in new products and expand our technical capabilities as well as pursuing targeted capacity expansions and efficiency projects across the company that will drive strong organic growth, profitability and compelling returns over the long term. We are pleased with our strong first half results and improved outlook for the rest of the year as our products continue to help our customers solve critical problems and operate safely, reliably and efficiently. Now on to the highlights for the second quarter. Enpro reported strong second quarter sales up 17.6% year-over-year. Strong demand across semiconductor markets drove sales in the Advanced Surface Technologies segment up 21.8%. Sealing Technologies grew 15.3% overall and 5% organically. Total company adjusted EBITDA increased more than 22% to $86.9 million at a margin of 25.6% for the second quarter. In Sealing Technologies, revenue growth of over 15% was largely driven by contributions from the acquisitions of AlpHa Measurement Solutions and Overlook Industries as well as solid organic growth, including double-digit growth in general industrial markets domestically and strong performance in aerospace markets. Commercial vehicle markets remained soft in the second quarter, although we are seeing early signs of stabilization and improvement. We are pleased with how our commercial vehicle business is positioned ahead of the eventual recovery in trailer demand. We also saw softness in Europe in our smaller general industrial and food and biopharmaceutical positions during the quarter. Sealing Technologies segment profitability remained strong at 33.2% with positive volume growth, pricing discipline and excellent execution. Aftermarket sales remained at 60% of the Sealing segment revenue in the quarter. In AST, order patterns strengthened as semiconductor industry expectations rose during the second quarter. Various market forecasts and indications from our customers suggest an acceleration of capital spending to support the need for more chip production as artificial intelligence, advanced computing and communications infrastructure take a quantum leap. Currently, customer build plans and lead times extend healthy visibility through 2027 for our semiconductor-facing products and solutions. Demand is accelerating for precision cleaning solutions in all regions, prompting incremental investment in capacity. Demand is also very healthy for highly engineered critical and chamber tools and our optical coatings capabilities. We remain focused on delivering for our customers by maintaining flexibility in our capacity with innovation, supply chain management, recruitment, inventory and process controls. Our ongoing process and qualification work, 80/20 efforts focusing resources on our best opportunities, together with completed and ongoing investments in people and capacity to support growth opportunities and new platforms position the AST segment to perform well as demand continues to improve in coming periods. Before I pass the call over to Joe for a more detailed review of our results, I would like to provide updates on the integrations of AlpHa and Overlook, which are going very well. We are pleased with the process analytics and compositional analysis capabilities that AlpHa and AMI bring to Enpro. We are investing in new product development, technology and applications expansion in these exciting areas to drive above top line growth over the long term. With Overlook, we are delighted with how their fluid path technology for liquid dose biologics complement Enpro's single-use biopharmaceutical capabilities. We continue to support Overlook's growth with additional capital and access to our supply chain, safety, human resources and best-in-class financial management capabilities. In both cases, we aim to provide our newer colleagues with a safe and healthy working environment and opportunities for professional development and growth while sharing best practices across the company. Our strong specified aftermarket positions in Sealing Technologies provide ample resources and talent to reinvest in key growth areas of the segment to drive mid-single-digit organic growth over the long term, complemented by strategic acquisitions that can lift the segment's growth rate over time. We remain focused on advancing the growth priorities underpinning the Enpro 3.0 strategy, which will guide our performance through 2030. Over the long term, we are positioned to generate mid- to high single-digit organic top line growth with strong profitability and returns complemented by capability expanding acquisitions in key growth areas of our portfolio that meet our stringent strategic and financial criteria. During the Enpro 3.0 horizon, we are targeting mid-single-digit organic growth in Sealing Technologies, while at AST, we are targeting high single-digit to low double-digit organic growth with both segments capable of generating 30% adjusted EBITDA margins, plus or minus 250 basis points through 2030. Our cash flows allow us to maintain our strong balance sheet with a net leverage ratio currently at 1.6x after taking into account the fourth quarter 2025 acquisitions of AlpHa and Overlook and an $80 million reduction in revolving debt so far this year. Joe?

Thank you, Eric, and good morning, everyone. We are pleased to report these strong results for the second quarter of 2026 and an improved outlook for the balance of the year. For the second quarter, sales of $338.8 million increased 17.6% year-on-year, supported by 21.8% revenue growth at AST, 5% organic growth in Sealing Technologies as well as contributions from our recent acquisitions. Second quarter adjusted EBITDA of $86.9 million increased more than 22% compared to the prior year period. Total company adjusted EBITDA margin of 25.6% expanded 90 basis points year-over-year, driven by strong operating leverage on higher sales in the AST segment and consistent best-in-class performance in the Sealing Technologies segment. Corporate expenses of $15.7 million in the second quarter of 2026 increased from $12.1 million a year ago, primarily driven by higher incentive compensation accruals and $1.3 million in restructuring costs. Adjusted diluted earnings per share of $2.50 increased 23.2%, largely driven by the factors behind adjusted EBITDA growth year-over-year. Moving to a discussion of segment performance. Sealing Technologies sales increased 15.3% to $216.2 million. Growth was driven by contributions from the AlpHa and Overlook acquisitions, strong aerospace performance and double-digit organic growth in domestic general industrial markets. Nuclear and power generation applications were steady in the quarter, while commercial vehicle markets remained tepid, as Eric discussed earlier. We also observed weakness in our smaller European general industrial and food and biopharmaceutical markets during the quarter. For the second quarter, adjusted segment EBITDA increased 13.3%, driven by strong operational performance, strategic pricing initiatives, contributions from AlpHa and Overlook and foreign exchange tailwinds. These drivers were partially offset by continued softness in the commercial vehicle market and investments supporting growth initiatives across the segment. Adjusted segment EBITDA margin was 33.2% and remained above 30% for the 10th consecutive quarter. Turning now to Advanced Surface Technologies. Sales for the second quarter increased 21.8% with orders improving sequentially. Demand for precision cleaning solutions tied to advanced node chip production is very strong. In addition, book-to-bills for our capital equipment and coatings facing solutions have also materially increased. Our teams are working tirelessly to deliver these important products and solutions while collaborating with customers to advance and expand leading-edge semiconductor production capabilities. For the second quarter, adjusted segment EBITDA increased 48.5% over last year. Adjusted segment EBITDA margin expanded 430 basis points to 23.9%. Operating leverage on higher sales growth and production volumes were the primary drivers of the increase. We also saw the foreign exchange headwinds experienced in last year's second quarter normalize. We continue to progress qualifications on a number of new solutions, many requiring multiple steps to our vertical integration process and are also responding to customer demand by advancing capital investments to support new platforms driving future growth. Our #1 priority is to serve our customers and remain agile as we enter the early stages of a stronger period in semiconductor capital equipment spending. Moving to the balance sheet and cash flow. Our balance sheet remains strong, and we have ample financial flexibility to execute on our long-term organic growth initiatives and consider select acquisitions that align with our strategic priorities and deliver attractive returns. We generated strong free cash flow of more than $60 million year-to-date, including investment in working capital to support strong customer demand, while capital expenditures and capitalized software approached $30 million year-to-date in support of growth and efficiency projects. In the first half, we repaid $80 million in revolving debt, bringing our leverage ratio to 1.6x trailing 12-month adjusted EBITDA. Net debt as of June 30, 2026, stands at approximately $500 million, which includes $450 million in senior notes due 2033 and $130 million outstanding on our $800 million revolving credit facility, net of $77 million in cash and cash equivalents. We expect to continue generating strong free cash flow in 2026 while increasing our capital expenditure expectations to $60 million to $65 million, up from our previous expectation of around $50 million. These incremental investments are supporting growth opportunities, particularly in the AST segment in alignment with customer demand. Finally, our strong balance sheet and cash generation provide us with ample liquidity to make these investments while continuing to return capital to shareholders. In the second quarter, we paid a [ $0.32 ] per share quarterly dividend totaling $6.9 million. We also have an outstanding $50 million share repurchase authorization. Moving now to our increased guidance. We are raising our total year 2026 guidance issued in early May and now expect total Enpro sales to increase in the 14% to 16% range, up from 10% to 14%, adjusted EBITDA in the range of $330 million to $340 million, up from $315 million to $330 million and adjusted diluted earnings per share to a range of $9.30 to $9.80, up from $8.85 to $9.50 previously. The normalized tax rate used to calculate adjusted diluted earnings per share remains at 25% and fully diluted shares outstanding are 21.4 million. In Sealing Technologies, shorter cycle order patterns remain strong, and organic growth is expected to be in the high single digits in the second half of 2026, excluding the contributions from AlpHa and Overlook, which we still expect to be in the range of $60 million to $65 million this year. Areas such as aerospace, digital infrastructure and communications, water and compositional analysis applications are the primary drivers of the expected strong second half performance in Sealing. We are still not contemplating a significant improvement in commercial vehicle markets in our increased 2026 guidance ranges. On profitability, we continue to expect Sealing segment margins to remain at the high end of our long-term target range of 30%, plus or minus 250 basis points for the year, with ongoing growth investments continuing throughout the segment. In the Advanced Surface Technologies segment, market conditions are bright. Significant multiyear investment in advanced semiconductor infrastructure continues to accelerate, and we are seeing strong demand for the balance of the year with increased visibility through 2027. Through close partnership with our key customers responding to industry demand, we have seen significant order and backlog growth, supporting our improved outlook for the AST segment. We now expect 20% year-over-year growth in the second half of 2026 with segment revenue growth rates and adjusted segment EBITDA margin both approaching 25% exiting the year. Thank you for your time today, and I will now turn the call back to Eric for closing comments.

Thank you, Joe. Our primary goal is to maximize the potential of our business while creating an environment for our colleagues to grow and flourish. There is purposeful balance inherent in the Enpro portfolio in addition to consistent execution and disciplined capital allocation focused on organic growth and strategic M&A position the company to perform well in a variety of macroeconomic environments, while driving our goals to increase enterprise value and generate attractive returns for our shareholders. As I have said many times in the past, there is no better time to be a part of Enpro. Thank you for your interest in Enpro. We'll now welcome your questions.

[Operator Instructions] Our first question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Eric, thanks for the Enpro 3.0 update. That was great. Just on the guide, I mean, it seems like most or all of the raise is AST. Is that right? Or are we feeling a little bit better about Sealing? And maybe just what underpins kind of that acceleration in growth in Sealing into the second half?

Yes. Jeff, the majority of the guidance raise is AST, although Sealing is improving through the year. I mean we talked about it last quarter that we would see mid-single digits to high single-digit organic growth in Sealing for the second half of the year, and that's coming to fruition. I mean we've seen improved orders in both general industrial, aerospace, and compositional analysis in a couple of our other end markets. So the majority is AST, but we're definitely seeing strong organic industrial demand in Sealing as well.

Okay. And then just on the CapEx raise, is this just simply adding capacity around AST or maybe talk more about some of the incremental growth investments?

Yes, Jeff, we're just pulling forward some investments just to accelerate the growth really in the cleaning space in AST. So we talked before about our Arizona investment. We're pulling forward to the second phase of that. We're also adding capacity in Milpitas, California and continuing to invest in Taiwan to keep up with customer demand.

Okay. If I could just slip one more in. Just you mentioned domestic general industrial up double digits. I know that's kind of a catch-all category. But maybe just expand on what you're seeing there? Is that just PMI driven or something broader than that?

Jeff, it's really in our core industrial markets in the U.S. So think of chemical, process industries, other industrial applications. There's no doubt we're benefiting from some of the infrastructure build-out around data centers and other key applications that are sort of core to Garlock. So yes, that's really driving compositional analysis, another area that falls into our general industrial space, and we're seeing strong demand in AMI and some of those core natural gas applications.

Our next question comes from the line of Tomo Sano with JPMorgan.

Congrats on the quarter. On the 430 bps AST margin improvement, could you talk about the key contributions? And if you could distinguish what portion of the AST margin uplift is sustainable versus transient going forward?

Yes. So Tomo, as you said, we saw about 430 basis points of year-over-year margin improvement in AST. If you recall looking back, we did have an unfavorable FX related to transactional Taiwanese working capital last year. So that was a little over $2 million. So that did -- that was more of a prior year issue that was favorable item year-over-year. The rest is really all driven by stronger volume, both on the sales side, improved production, the leverage we're getting on that and improved volumes related to increased inventory. We're seeing incredibly strong demand for the second half of the year and now into 2027. So our teams in AST have worked hard to build inventory to support that demand and support our customers as we expect that to ramp up. So we have been able to build a little inventory, which is bringing us some volume leverage as well.

And one follow-up on the -- could you walk us through the environmental reserve build and how you frame the risk range for incremental reserves and cash outflows, please?

Yes. So the increase in environmental reserves that we took this quarter was related to legacy related environmental liabilities from many decades before Enpro was founded. So our teams have been working really hard over the years to kind of manage these legacy liabilities and have done a really nice job partnering with the local communities, the government, et cetera, to manage them to the right outcome. So this was specifically related to uranium mines in Arizona that go back many decades. And we've come to what we think is a probable solution with the government and the local communities that will require some management of the soil and some other movements of that in the coming years. So that was now a probable solution, and we've increased our reserve to reflect that likely outcome.

And just to add on that, the $60 million reserves at a pretty strong midpoint with the EPA and other governmental agencies. And first, cash outflow won't happen for the next 3 years or so. So we think we're more than amply reserved to make sure that we're bringing those areas that were going back is [indiscernible] as far as 1950s back to proper condition.

Yes. And that will be as long as potentially a 10-year project. So cash outflow will not be -- we don't expect to be meaningful in any given year.

[Operator Instructions] Our next question comes from the line of Steve Ferazani with Sidoti & Company.

Appreciate all the detail on the call. Eric, can you talk a little bit about the performance of compositional analysis really since you acquired AMI and now adding AlpHa? Obviously, on the AMI side, probably when you acquired it, you weren't expecting the kind of domestic natural gas production growth and demand that we're seeing. I'm assuming that's got to be outperforming your expectations from a couple of years ago. And now adding it AlpHa, your outlook for an opportunities in compositional analysis, do you see ability to grow the addressable market, take share? And what are the opportunities ahead even on an M&A side?

That's a lot. Yes, we did expect growth in natural gas. That was part of the thesis, although we also expect that we can take the same technology and the same sensors and put them in other spaces. So measuring moisture, oxygen, H2S. So those sensors can be used in a whole bunch of applications, including biopharmaceutical and a range of products. We expect to be able to expand the geography. So they're basically North American focused. We can take the same technology in Europe and other places and all other applications. So yes, we can grow the TAM. It's a wide opportunity, and we're accelerating that growth and really excited about it. AlpHa is just another one. In addition, we remain active and looking at targets all the time for extra M&A. And so we remain active and hopeful.

Excellent. In terms of the growth, can you talk about where you are in pricing across your segments, the opportunities there to drive further revenue and margin growth? And if I can just add this into this question, we're hearing a lot about this through the earnings season. Were there any tariff refunds in the number?

The tariff refunds, we always say were minimal and manageable. We said that all the way on the way up. So it will be the same on the way down. So there's a little bit, but not a significant impact. In terms of pricing power, yes, there's still pricing opportunities a little bit with AlpHa and our newer acquisitions. We don't have the same pricing discipline as we do, I would say, throughout Enpro. There's still also a little bit of price opportunity always in just targeted applications, but it's niche. We'll get our standard industrial raise in Sealing every year, 2% or so. We don't do cost plus pricing, Steve. It's all value pricing. So it looks at the application and what we contribute and how -- so it's always strategic pricing. It's not broad-based other than our general increases that happen basically once a year. And so I never think there -- I always think there is opportunity for price someplace, and it's being agile enough to figure out where to apply it.

Yes. Our qualified and specified positions with strong aftermarket, especially in Sealing Technologies is a key element to driving strategic pricing initiatives in the future.

Our next question comes from the line of Ian Zaffino with Oppenheimer & Company.

Just like to dig down in AST a little bit more. Maybe talk about kind of where the strength is as far as maybe cleaning versus components, optical coatings, where is that? And as we look into second quarter, is that all kind of -- I'm sorry, second half. Is that all just leading edge driven? Or any other kind of commentary you could give us around maybe your whole product lineup?

It's broad-based. So it's throughout our cleaning business is growing strong. Precision Machining is growing very well as well. Optical coatings is a little bit slower than that, but still doing great. So all in all, it's broad-based and wide. So mostly it is still leading edge, but there is -- we're benefiting it throughout the whole cycle, if you will.

Ian, I'll just add. As you know, our Precision Cleaning business is all leading edge, right? So as they continue to see leading edge infrastructure build-out and increased production, we're benefiting very well with our key customers from a cleaning perspective. We continue to invest in new capacity across all of our geographies really based on the current demand and projected future demand over the next couple of years. So that's all leading edge. Our equipment business is a little bit of mix of both. But there's clear significant investment going on right now in leading-edge chip architecture and infrastructure for advanced AI and other computing, which is driving a lot of that build-out for equipment.

Okay. And then on the commercial vehicle, is that all on the trailer side? And anything else you're kind of seeing? And then what's kind of your outlook? And I know it's been relatively soft, but we're kind of seeing an improvement in the truck side. And I know they're not exactly correlated, but kind of same [indiscernible] in the ecosystem. So wondering what kind of visibility is there? Any kind of optimism you have in that segment? Or any other color you could give us?

Yes. It is mostly trailer. It's more than what, 70% trailer. So it's a large -- certainly the largest part of it. I think it might be larger than that. We are -- I am optimistic. Let me say this, FPR (sic) [ FTR ] is posting double-digit growth next year, I think 17%, 18% last time I saw. I do think that will happen. The investment in truck came ahead of the trailer, if you look -- and some of that was to be pollution controls and extra cost in trucks. So first, they invested there. You saw the growth in trucking this year. We're starting to see some signs of it improving in the second half of this year, although still not significant. But I think we're at definitely -- I would say we're at the bottom and getting better, and there's starting to be momentum there. I'm excited about next year for that business.

[indiscernible] more than 2/3 as a percentage of revenue in commercial vehicle as well.

The other thing, that team performs very, very well. We've maintained very good margins through this whole cycle. The team executes well. And so I'm excited they'll see a little bit recovery and do very well. It's kind of upturn here. We've also taken some share in the downturn that will show up later.

And we've also made some select capacity and process expansions to position the business well to perform as the market inevitably recovers.

Yes. I could give you a little more color on that. We basically added a line during this downturn to support aftermarket. In the past, we've had challenges when the market was growing fast with keeping up with both OEM and aftermarket. And so we added a second line there that will help us in this upturn.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Gentile for any final comments.

We're seeing strong momentum across the portfolio, and we want to thank you all for your support and look forward to talking to you and report Q3 in early November. Thanks.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.