Business Overview and History

Enpro Inc. (NPO) is a leading industrial technology company that designs, develops, manufactures, and markets proprietary, value-added products and solutions for critical applications across diverse end markets. Over the past two decades, the company has evolved from a spin-off of Goodrich Corporation into a diversified industrial conglomerate with a strong focus on high-margin, technology-driven businesses.

Enpro was incorporated on January 11, 2002, as a wholly-owned subsidiary of Goodrich Corporation in anticipation of Goodrich's intended spin-off of its Engineered Industrial Products segment. The distribution of Enpro's common stock to Goodrich's existing shareholders took place on May 31, 2002, marking the company's inception as an independent publicly-traded entity.

In the early years, Enpro's operations were primarily concentrated in the Sealing Technologies and Engineered Materials segments. However, over the past decade, the company has undertaken a strategic portfolio transformation, divesting underperforming businesses and selectively acquiring innovative technology-driven companies to reshape its product offerings and end-market exposures.

The company has executed several strategic initiatives to create a portfolio of businesses that offers proprietary, industrial technology-related products and solutions with high barriers to entry, compelling margins, strong cash flow, and perpetual recurring/aftermarket revenue in markets with favorable secular tailwinds. These initiatives have widened the company's capabilities to provide solutions to the semiconductor, life sciences, and other leading-edge industries.

In September 2019, Enpro's subsidiary Lunar Investment LLC acquired all of the equity securities of LeanTeq Co, LTD. and its affiliate LeanTeq LLC. As part of this transaction, two of the equity owners of LeanTeq, who were executives of the acquired entity, acquired approximately a 10% ownership share of Lunar in the form of rollover equity. Enpro later acquired all of the LeanTeq non-controlling interests in the fourth quarter of 2022.

In October 2020, Enpro acquired Alluxa, Inc. through a merger transaction. In connection with this acquisition, three Alluxa executives received rollover equity interests in the form of approximately 7% of the total equity interest of an entity formed for the purpose of acquiring Alluxa. Enpro later acquired all outstanding equity interests in this entity in the first quarter of 2024.

Throughout its history, Enpro has faced various challenges, including managing contingent liabilities related to discontinued operations and previously owned businesses, navigating complex environmental matters, and addressing the impact of macroeconomic and industry-specific conditions on its business. The company has proactively addressed these challenges through prudent risk management, strategic decision-making, and a focus on operational excellence.

Today, Enpro operates through two primary business segments: Sealing Technologies and Advanced Surface Technologies (AST). The Sealing Technologies segment, which accounts for approximately 65% of the company's total revenue, engineers and manufactures a diverse range of critical sealing solutions for applications in industries such as chemical processing, nuclear energy, aerospace, and commercial vehicles. The AST segment, comprising the remaining 35% of revenue, provides highly-specialized products and services for the semiconductor, life sciences, and other advanced technology markets.

Financial Performance and Ratios

Over the past three fiscal years, Enpro has demonstrated a solid financial track record, with the following key metrics:

Revenue:

• 2024: $1.05 billion

• 2023: $1.06 billion
• 2022: $1.10 billion

Net Income:

• 2024: $72.9 million

• 2023: $22.2 million
• 2022: $205.1 million

Operating Cash Flow:

• 2024: $162.9 million
• 2023: $208.4 million
• 2022: $106.1 million

Free Cash Flow:

• 2024: $130.0 million
• 2023: $173.5 million
• 2022: $97.6 million

The company's financial ratios paint a picture of a well-capitalized, efficient, and profitable industrial conglomerate:

• Debt-to-Equity Ratio: 0.45 (2024)

• Current Ratio: 2.59 (2024)
• Quick Ratio: 1.89 (2024)
• Gross Profit Margin: 42.4% (2024)
• Operating Profit Margin: 14.0% (2024)
• Net Profit Margin: 5.9% (2024)
• Return on Equity: 4.3% (2024)
• Return on Assets: 2.5% (2024)

These ratios demonstrate Enpro's strong financial position, with low leverage, ample liquidity, and healthy profitability metrics that have improved over the past three years as the company has optimized its portfolio and operating efficiency.

Financials

Enpro's financial performance over the past three years shows a relatively stable revenue stream, with a slight decline from $1.10 billion in 2022 to $1.05 billion in 2024. Net income has fluctuated significantly, with a peak of $205.1 million in 2022, dropping to $22.2 million in 2023, and then recovering to $72.9 million in 2024. Operating cash flow has remained strong, increasing from $106.1 million in 2022 to $162.9 million in 2024, demonstrating the company's ability to generate cash from its operations.

In the most recent quarter (Q4 2024), Enpro reported revenue of $258.4 million, representing a 3.7% increase year-over-year. This growth was driven by strong sales performance in the Sealing Technologies segment and a recovery in European general industrial and food and pharma demand, as well as strategic pricing initiatives and the addition of AMI. These positive factors more than offset slower sales tied to wafer fab equipment at AST and a sharp decline in commercial vehicle OEM demand. Net income for the quarter stood at $13.9 million.

Enpro derives approximately 43% of its net sales from sales outside of the United States. The company has 8 primary manufacturing and service facilities approximately 50,000 square feet or larger located in 7 countries, highlighting its global presence and diversified revenue streams.

Liquidity

Enpro maintains a solid liquidity position, as evidenced by its current ratio of 2.59 and quick ratio of 1.89 in 2024. This indicates that the company has more than enough current assets to cover its short-term liabilities. The company's free cash flow has also been consistently positive and growing, reaching $130.0 million in 2024. This strong cash generation provides Enpro with flexibility to invest in growth opportunities, pay down debt, or return capital to shareholders.

As of December 31, 2024, Enpro had $236.3 million in cash and cash equivalents. The company also maintains a $400 million senior secured revolving credit facility, of which $390 million was available as of December 31, 2024, after considering $10 million of outstanding letters of credit. This robust liquidity position strengthens Enpro's ability to navigate market uncertainties and pursue strategic initiatives.

Segmental Performance and Outlook

Sealing Technologies Segment: The Sealing Technologies segment has been a consistent performer for Enpro, delivering steady revenue growth and exceptional profitability. In 2024, the segment recorded sales of $687.2 million, up 4.4% year-over-year on an organic basis, with an adjusted EBITDA margin of 32.6%. This segment engineers and manufactures value-added products and solutions that safeguard a variety of critical environments, including metallic, non-metallic and composite material gaskets, dynamic seals, compression packing, elastomeric components, and custom-engineered mechanical seals.

The segment's products are used in diverse applications across chemical and petrochemical processing, nuclear energy, hydrogen, natural gas, food and biopharmaceutical processing, primary metal manufacturing, mining, water and waste treatment, commercial vehicle, aerospace, medical, filtration, and semiconductor fabrication industries. Many of these products are used in highly demanding applications with extreme temperatures, pressures, and corrosive environments, where performance and durability are vital to safety and environmental protection.

Management expects the Sealing Technologies segment to continue delivering low to mid-single-digit revenue growth in 2025, driven by strength in aerospace, nuclear, and general industrial end markets, as well as strategic pricing actions and operational efficiency improvements. The segment is expected to maintain adjusted EBITDA margins of around 30%.

Advanced Surface Technologies (AST) Segment: The AST segment, which serves the semiconductor, life sciences, and other advanced technology industries, faced headwinds in 2024 due to weaknesses in semiconductor capital equipment spending. Segment revenue declined 9.7% year-over-year to $362.2 million, but the business maintained an adjusted EBITDA margin of 21.2%.

This segment applies proprietary technologies, processes, and capabilities to deliver a highly differentiated suite of products and solutions for challenging applications in high-growth markets. Services include cleaning, coating, testing, refurbishment, and verification for critical components and assemblies used in semiconductor manufacturing equipment, as well as designing, manufacturing, and selling specialized optical filters and thin-film coatings for industrial technology, life sciences, communications, and semiconductor applications.

Looking ahead, management expects AST revenue to grow in the mid-to-high single digits in 2025, as the company capitalizes on opportunities in leading-edge semiconductor applications and the optical filters market, while also implementing operational enhancements to drive margin expansion. Adjusted segment EBITDA margins are expected to remain above 20% for the year.

Guidance and Outlook

For the full year 2025, Enpro expects to deliver low-to-mid single-digit revenue growth, with adjusted EBITDA in the range of $262 million to $277 million and adjusted diluted earnings per share of $7.00 to $7.70. This guidance reflects the company's confidence in its ability to navigate the current market environment and capitalize on favorable long-term trends in its core end markets.

The company anticipates capital expenditures of around $50 million, or 4.5% of sales, in 2025. The normalized tax rate used to calculate adjusted diluted EPS remains at 25%, with fully diluted shares outstanding of approximately 21 million.

This guidance builds upon Enpro's strong performance in 2024, where the company reported adjusted EBITDA of approximately $255 million, up 7% year-over-year, despite persistent weakness in semiconductor capital equipment demand and a sharp decline in commercial vehicle OEM sales. The adjusted EBITDA margin in 2024 was 24.3%, up 180 basis points from the prior year.

Risks and Challenges

While Enpro has demonstrated its resilience and adaptability, the company faces several risks and challenges that investors should consider:

1. Dependence on Semiconductor Industry: The AST segment's strong exposure to the semiconductor capital equipment market makes Enpro vulnerable to cyclical downturns and volatility in that industry.

2. Competitive Landscape: Enpro operates in highly competitive markets, with the need to continually invest in innovation and technology to maintain its advantage over peers.

3. Regulatory and Environmental Compliance: As a manufacturer, Enpro is subject to various environmental, health, and safety regulations, which could result in increased compliance costs or litigation risks.

4. Acquisition Integration: The company's strategy of inorganic growth through selective acquisitions carries integration risks that could impact financial and operational performance.

5. Macroeconomic Conditions: Enpro's diverse end markets expose the company to global economic fluctuations, which could affect demand for its products and solutions.

Despite these risks, Enpro's proven track record, resilient business model, and strong financial position position the company well to navigate the challenges and continue delivering value to its shareholders.

Conclusion

Enpro Inc. is a leading industrial technology company that has transformed itself over the past decade into a diversified, high-performance conglomerate serving critical applications across a wide range of end markets. With its focus on innovative, proprietary solutions, healthy financials, and promising long-term growth prospects, Enpro appears well-positioned to capitalize on favorable industry trends and create value for its shareholders.

The company's two main segments, Sealing Technologies and Advanced Surface Technologies, provide a balanced portfolio of products and services that cater to diverse industries with high barriers to entry. Enpro's strong global presence, with 43% of net sales coming from outside the United States and manufacturing facilities in 7 countries, provides geographical diversification and access to growth markets.

Enpro's solid financial performance, including consistent revenue streams, improving profitability, and strong cash flow generation, underpins its ability to invest in growth initiatives and navigate market challenges. The company's robust liquidity position, with substantial cash reserves and available credit, further enhances its financial flexibility.

Looking ahead, Enpro's guidance for 2025 reflects confidence in its ability to drive growth and maintain strong margins across both segments. The company's focus on high-value, mission-critical products and solutions, coupled with its operational excellence initiatives, positions it well to capitalize on long-term trends in its core markets and deliver sustainable value to shareholders.