Enpro Inc. (NPO) Q3 2026 Earnings Call Transcript

Greetings, and welcome to the MPRO Q3 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow with a formal presentation, and you may be placed into question queue at any time by pressing star 1 on your telephone keypad. We ask you to please ask one question, one follow-up, and return to the queue. As a reminder, this conference is being recorded. If anyone should require operator assistance, please press star 0 on your telephone keypad. It's now my pleasure to turn the call over to James Gentile, Vice President, Investor Relations. Please go ahead, James.

Thanks, Kevin, and good morning, everyone. Thank you for joining us today as we review MPRO's third quarter 2026 earnings results and discuss our increased outlook for 2026. I will remind you that this conference call is being webcast at MPRO.com, where you can find the presentation that accompanies this call. With me today are Eric Valancourt, our President and Chief Executive Officer, and Joe Broderick, our 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 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 non-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 Valancourt, our President and Chief Executive Officer. Eric?

Thanks, James, and good morning, everyone. Thank you for your interest in NPRO as we discuss our third quarter results, provide an update on our strategic progress, and share our current expectations for the balance of 2026. Before reviewing the quarter, I would like to recognize our colleagues across N-PRO. Over the past two years, they have embraced the challenge at the heart of our five-year strategic plan called N-PRO 3.0, accelerating personal and profitable growth. Throughout that time, we have encouraged and invested in our people, expanded our capabilities, strengthened our portfolio, and prepared the organization to capture attractive opportunities across our key markets to drive long-term value creation. NPRO 3.0 continues to gain traction throughout the organization, and our third quarter performance reflects our colleagues' hard work in putting this strategy into action. We are seeing the benefits of this growth focus, greater empowerment, deeper technical expertise, stronger customer partnerships, and focused execution across the company. The progress has been deliberate. In AST, we have invested to build capabilities to position the segment on the leading edge and drive higher revenue growth and profitability over the long term. For ceiling, we expanded our capabilities in compositional analysis and biopharmaceutical processing through the acquisitions of Alpha and Overlook in the fourth quarter of last year, while investing in capacity expansions across the segment. Across the company, we continue to invest in differentiated technologies, engineering talent, capacity, and processes that allow us to solve our customers' most critical problems. Those actions are strengthening our market positions and creating additional opportunities for profitable growth. At the same time, the balance of our portfolio remains an important source of strength, allowing us to drive profitable growth through market cycles. Healing Technologies continues to demonstrate excellent execution and premium profitability supported by durable aftermarket positions and an expanding set of growth opportunities. In advanced surface technologies, demand associated with advanced semiconductor production continues to strengthen, and the investments we are making to position us to support our customers as they expand capacity for artificial intelligence, advanced computing, and communications infrastructure. We remain focused on delivering today while building the capabilities required to sustain strong organic growth, profitability, and returns over the long term. Just as importantly, we are creating an environment where our colleagues can continue to grow, flourish, and perform at their best. We are pleased with our progress, energized by the opportunities ahead, and confident in EnPro's ability to create differentiated value for our customers and shareholders. Now, let me turn to highlights for the third quarter. Enpro recorded quarter sales of $350.8 million, up 22.4% year-over-year. Strong demand across semiconductor markets drove sales in the advanced surface technology segment up 25.8%, with the segment margin rate expanding 500 basis points to 25.1%. Organic sales in the ceiling technology segment increased 11.6% during the third quarter and 20.5%, including the contributions from the acquisitions of Alpha Measurement Solutions and Overlook Industries completed in the fourth quarter of 2025 and the modest impact of foreign exchange translation. Total company adjusted EBITDA increased 31.7% to $91.3 million at a margin of 26% for the third quarter. In ceiling technologies, the strong increase in sales was driven by strength in aerospace, domestic general industrial, and compositional analysis applications, as well as the contributions from the recent acquisitions and strategic pricing initiatives. Commercial vehicle OEM demand improved year over year during the third quarter. We are pleased with how SEMCO is performing, and we are confident the business is positioned for growth from expected and proven market conditions over the coming quarters as it continues to provide critical safety solutions for trailers, transport trading goods on our roadways across North America. Overall, ceiling technology's segment profitability remained strong at 32.6%, with higher sales, pricing discipline, and X1S2 execution supporting an almost 22% increase in adjusted Tegma EBITDA. In AST, robust performance across the segment was led by leading-edge precision cleaning solutions as well as strong demand for semiconductor capital equipment and coatings. Our outlook for the semiconductor-facing products and solutions remains bright, and we are well-positioned as the market forecasts continue strength ahead. Investments made to expand our capabilities in regions aligned with our customers underpin a positive outlook for our advanced surface technology segment. We expect to pursue additional capital investments in the United States and Asia through next year to support customers' leading-edge chip capacity expansions. Regionalization of supply chains continues to be a driver, while we proceed with longer-term customer expansion activities, apply our 80-20 processes, and pursue operational excellence initiatives to drive additional value in AST. As we said last quarter, customer build plans and lead times provide visibility through at least 2027 for our semiconductor-facing products and solutions. We remain focused on advancing the growth priorities underpinning the N-PRO 3.0 strategy, which will guide our performance through 2030. Over the long term, we are positioned to generate mid-to-high-level, mid-to-high single-digit organic top-line growth with robust profitability and returns. Our strong balance sheet and free cash flow allow us to reinvest in attractive, organic growth opportunities across the company and pursue capability-expanding acquisitions in key growth areas of our portfolio that meet our stringent strategic and financial criteria. Joe?

Thank you, Eric, and good morning, everyone. We are pleased to report these strong results for the third quarter of 2026 and an increased outlook for the full year. For the third quarter, sales of $350.8 million increased 22.4% year-over-year, supported by 25.8% revenue growth at AST and organic growth of 11.6% in ceiling technologies, 20.5% including the acquisitions and a modest impact from FX. Third quarter adjusted EBITDA of $91.4 million increased 31.7% compared to the prior year period. Total company adjusted EBITDA margin of 26% expanded 180 basis points year over year, driven by operating leverage on strong sales growth, partially offset by continued operating expenses supporting growth initiatives across the organization. Corporate expenses of $13.5 million in the third quarter of 2026 increased from $10.2 million a year ago, primarily due to higher incentive compensation accruals. Adjusted diluted earnings per share of $2.66 increased 33.7%, largely driven by the same factors that supported adjusted EBITDA growth year-over-year. Moving to a discussion of segment performance, ceiling technology sales increased 20.5% to $214.7 million. Strong performance in commercial aerospace and space applications, mid-teens organic growth in domestic general industrial markets, as well as the contributions from Alpha and Overlook were the primary drivers. Revenue from commercial vehicle markets improved over 8% year over year, while we continue to see softness in general industrial and food and biopharmaceutical sales in Europe during the third quarter. Adjusted segment EBITDA increased 21.8% to $69.9 million, driven by operating leverage on higher sales, strategic pricing initiatives, and contributions from Alpha and Overlook. Adjusted segment EBITDA margin was 32.6%, remaining above 30% for the 11th consecutive quarter. We continue making targeted investments in capacity and talent across the ceiling technology segment to enhance our applied engineering and applications expertise, enabling us to provide critical solutions for our customers and drive differentiated, incremental, organic revenue growth. As we expand our opportunity set, our highly specified solutions, in turn, drive an enduring aftermarket, which is an important characteristic of an in-pro business. Turning now to advanced surface technologies. Sales for the third quarter increased 25.8%, reflecting strong demand across the segment. Demand for precision cleaning solutions tied to advanced node chip production is very strong. In addition, book the bills for our capital equipment and coating spacing solutions also continue to strengthen. Our teams are working incredibly hard to deliver these important products and solutions, while collaborating with customers to advance and expand leading-edge semiconductor production capabilities. For the third quarter, adjusted segment EBITDA increased 57.3% year-over-year to $34.3 million. The adjusted segment EBITDA margin expanded 500 basis points to 25.1%, as strong sales growth drove improved operating leverage despite continued growth investments, many of which remain pre-revenue. We continue to advance qualifications on a number of new platforms, many requiring our unique vertically integrated solutions. We are also responding to customer Thank you. During the first nine months of 2026, we generated $172.8 million of cash flow from operating activities and $129.2 million of free cash flow, net of $43.6 million in capital expenditures. This compares with $138.5 million of operating cash flow and $104.9 million of free cash flow in the prior year period. We expect capital expenditures to remain in the $60 to $65 million range for full year 2026. During the third quarter, we reduced outstanding revolving debt by $55 million, bringing the year-to-date reduction to $135 million and our net leverage ratio to 1.4 times trailing 12-month adjusted EBITDA. At September 30th, total debt was $520.7 million, and cash and cash equivalents with $83.4 million. Finally, our strong balance sheet and cash generation provide us with ample liquidity to invest in growth while continuing to return capital to shareholders. During the third quarter, we paid a regular quarterly dividend of $0.32 per share, with dividend payments totaling $20.6 million for the first nine months. In October, our board approved a new $50 million share repurchase authorization in the same amount, replacing the prior unused authorization that expired. Moving now to our increased guidance. We are raising our full year 2026 guidance and now expect revenue in the range of $1.33 to $1.34 billion, representing 16% to 17% year-over-year growth. Adjusted EBITDA in the range of $340 to $345 million, and adjusted diluted earnings per share in the range of $9.70 to $9.95. This compares with our prior guidance of 14% to 16% revenue growth, adjusted EBITDA of $330 to $340 million, and adjusted diluted earnings per share of $9.30 to $9.80. 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 ceiling technologies, order patterns remain solid into 4Q, supporting continued strong organic growth in the fourth quarter. Reported growth will also include incremental revenue from Alpha and Overlook, which contributed only a partial quarter following their acquisitions in the fourth quarter of 2025. Aerospace, including commercial space applications, and general industrial markets, including digital infrastructure and communications, water, and compositional analysis applications are the primary drivers from continued organic revenue growth in ceiling. During the third quarter, we saw improvement in commercial vehicle OEM markets, which we expect to continue through the fourth quarter and into next year. On profitability, we continue to expect ceiling 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, although slightly lower sequentially in the fourth quarter based on normal seasonality. In the advanced service technology segment, market conditions are bright. Significant multi-year investment in advanced semiconductor infrastructure continues, and we are seeing strong demand in those areas tied to this infrastructure build-out for the balance of the year with increased visibility through at least 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 sequential improvement in the fourth quarter, with year-over-year revenue growth and margin rates both greater than 25%. Thank you for your time today. I will now turn the call back to Eric for closing comments.

Thank you, Joe. We are encouraged by the progress we are making across NPRO. NPRO 3.0 continues to gain traction throughout the organization. The investments made in our people are unlocking the immense potential of our team, our technological capabilities are expanding, and the investments we have made in our businesses are translating into stronger performance and an increasingly attractive set of opportunities. We remain focused on performing today while positioning the organization for tomorrow. That means continuing to invest where we have clear competitive advantages, serving our customers with excellence, and maintaining a disciplined approach to capital allocation. These priorities position Enpro to compound growth over the long term. Opportunities in front of Enpro are significant, and we believe we have the people, portfolio, talent sheet, and operating discipline to capture them. I want to thank our colleagues across the world for their hard work, dedication, and continued commitment to accelerating their personal and professional growth. Their performance is what makes executing our strategy possible. There is no better time to be a part of N-Probe. I now welcome your questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question queue, please press star 1 on your telephone keypad. Let me press star 2 if you'd like to move your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. Our first question today is coming from Jeff Hammond from KeyBank Capital Market. Your line is now live.

Hey, good morning, everyone. Good morning, Jeff. I guess two questions on ceiling. One, can you just, you know, unpack a little bit more of the acceleration? It sounds like commercial OE is helping, but there seems more to it. And then, you know, you've been kind of saying this 30 plus or minus 250, and you've been at the high end kind of three years, like just wondering if you're thinking differently about that or, you know, kind of moving the bar at all. Thanks.

Ceiling is performing in basically all different parts of the business are doing well. A lot of it tied to the digital build-out of the infrastructure, But also a lot of other good things that have in space that's doing very well. You're seeing a little improvement in the third quarter. I think we said a little over 8% in commercial vehicle OEM. And so it's really coming through its broad strength across the whole segment, and I expect that to continue. In regards to your second question, the question was now. You're distracted. Oh, high-end. Jeff, we talked about that before. Basically, we'll continue to prove out where we are. We're trying to leave a little flexibility if we want to make an acquisition that might move back down a little bit. So it's either explained later or kind of keep the range we're at. But we continue to expect to perform at that high end of the 30% plan, plus or minus 150 basis points. There isn't anything that should change that in the immediate future.

Yeah, there's nothing specifically optimal about the way the ceiling technologies is performing right now. You know, they're just executing very well. There's not a, you know, super optimal mix or anything like that, so we don't expect that to go backwards. We just want to give ourselves the ability to invest in good acquisitions that meet our strategic and financial criteria that are within that range that are going to continue to kick up the growth rate over time, right? Ceiling for us, as we said, is a mid- to high-single-digit organic grower, and we want to continue to invest in key areas of the business like we did with AMI, Alpha, and Overlook that are going to drive that. Okay, great.

And then you mentioned some incremental capital investments in North America, Asia. Can you just maybe talk about what you're thinking about in terms of capital outlay, what that maybe means for CapEx into 27, and are these kind of more greenfield or expansions? Thanks.

Yeah, I mean, we continue to see really strong growth opportunities in our key areas of strength within AST. That's both on the design and manufacture of critical in-chamber tools and some of our key areas of strength, like gas dispersion, etch deposition broadly, as well as, you know, in our precision cleaning business tied to leading-edge chip manufacturing. We continue to see great growth prospects in both of those areas. So, you know, some of the growth that we had anticipated over the course of many years is accelerating into the near term. And the growth investments we made over the last couple of years, we see a way to grow into those. And, you know, the future growth predicted over the next few years is now anticipated to be needed sooner. So we're pulling those growth investments forward, and we expect our capital investment total outlay to increase next year. We're not ready to guide specifically on that specific number, but we do expect it to step up into 27 based on that accelerated need for more growth capacity.

It's more due to expansion than greenfield at this point, Jeff. Continuing to expand in Arizona, continuing to expand in Taiwan, et cetera. Singapore.

California.

California as well.

Okay.

Excellent. Thanks, guys.

Thank you. Next question is coming from Tomo Sano from J.P. Morgan. Your line is now live.

Hi. Good morning, everyone. Congrats on the quarter.

Good morning. Thanks, Tomo.

Thank you. Maybe just on the U.S. and Asia semiconductor capacity expansions as we talk about, could you give us a clearer timeline for completion? And I think it's hard to say about the revenue impact from each region, but is this capex tied to firm customer commitments, or is it more of for bet on anticipated demand? Thank you.

Yeah, it's tied to customer commitments and new customer wins, et cetera. So it's absolutely tied to that. So we have visibility into that for the future. The capacity expansions are going to be, as we said earlier, Singapore, most of it initially tied to leading-edge cleaning, and then also some vertically integrated products that are new customer wins. They're driving some of that expansion as well. Those would be driving expansions in the U.S.

And if you think about timing, I mean, some of them are starting as soon as now, at the end of this year, but more meaningfully progressing through 2027. Some of them are simple, you know, additional clean room space buildouts, which can have a shorter time horizon. Others are, you know, additional building or capacity expansion on an existing site. So those may make, you know, in the time from 6 to 12 to 18 months at some time. But again, as Eric mentioned, right, these are absolutely in concert with our key customers, supporting their growth plans, their build plans, and invisibility through at least 27, in some cases, you know, kind of growth predicted in 28 and 29.

You know, the five-year plan for CapEx suggests 3.5 to 4.5 percent of revenue Thank you.

That's helpful. And just one follow-up on stealing margin holding up to 32.6% pretty high level. How are you balancing pricing against the raw materials cost, cost errors, and are your pricing actions fully offsetting input cost inflations, or is there still a lag? Thank you.

Yeah, so we expect our pricing actions, along with some operational efficiency, some other levers we can pull that absolutely won't have any meaningful impact in price increases. Our teams do a really good job of getting that into the marketplace where we can capture it, and when we can't, we minimize it through other improvement activities. So I don't expect any material impact on our margins. Our supply chain guys are really, really good.

They're excellent. Yeah. Thank you.

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

Hi, Grace. Thank you very much, and a very good quarter and very good commentary. I don't know if you guys have this or maybe a little bit of color, but can you be able to give us kind of the performance of, in AST, you call it OE versus aftermarket, And, you know, how do we expect that mix to kind of change over time, just given all the kind of growth projects you have and all the kind of contracts you've won? So just thinking about that. Thanks.

Yeah, thanks, Ian. If you look at our AST business, you know, about 60% of our business overall is tied to the OE cycle and about 40% aftermarket in that range, you know, depending on the quarter. However, the aftermarket side has been growing as a percentage of the total over the last five years. You know, our precision cleaning business has grown throughout as it's tied to leading-edge chip production, and as that part of the market has grown as a percentage of the whole, you know, we've continued to grow significantly. We see that as a continued driver for us going forward, right? Our precision cleaning business tied in with every key advanced node as that market continues to progress, And that business continuing to grow over time, at least at the average of overall AST. And, you know, the areas that we have capabilities tied to vertical integration, vertical integrated offerings, and critical in-chamber tools expected to still grow and continue to grow, right? So as a percentage of the total, you know, we expect our precision cleaning to grow a little bit faster, but both segments driving, you know, good, strong growth.

Okay, so then, you know, I guess that would be a follow-up here, is how do we then think about margins given kind of, you know, what we're seeing out there as far as, you know, maybe mix being moved around a little bit more than, you know, what it was previously, and then maybe kind of, not the ceiling, but what would be maybe a target margin that we could kind of look at, you know, as this business kind of develops and matures things?

Yeah, we've said as part of NPRO 3.0, we believe AST has the ability to be a 30% EBITDA segment margin over time, right? And, you know, we were able to maintain 20% under all market conditions over the last several years, and we're focused on, you know, marching those margins up in the high 20s, low 30% in the NPRO 3.0 time horizon. And we've seen good, strong margin performance on the incremental volume that we've seen so far in the last couple of quarters. And so if you think about where are the key areas that's going to come from, to march it up to that 30 percent, it's going to come from volume leverage, continued growth in our key areas of strength that are going to drive the overall margin rate and mix up, And some of the self-help, you know, 80-20 portfolio and asset optimization opportunities that we're going to have over the midterm there. So we've seen good performance on the incremental margins of at least 40% on the volume that is coming through this ramp. And we're focused on the other two levers to kind of march up to that 30% over time.

Okay. Thank you very much.

Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Steve, Eric, signing from Sedota. Your line is now live.

Morning, Eric, Joe. Appreciate all the detail on the call. Joe, that leverage down back to certainly the lower end we've seen over the last several years. It's about a year since you made the last, the Overlook and the Alpha acquisitions. 4Q typically is a very strong cash flow quarter for you guys. Any shifts in how you're thinking about capital allocation, how M&A fits in that, given sort of, if we can look at 2027, I know it sounds like CapEx will be a little bit higher, but any shift in how you're thinking about that, given the incredible strength and cash flow generation and low leverage you're back at?

Yeah, thanks for the question, Steve. And the short answer is no. No shift in capital allocation priorities. We continue to have really great opportunities to invest in organic growth in areas that meet our return thresholds and continue to drive, you know, customer support and customer advancement in a lot of key areas. So that still remains our number one priority. We're generating good cash, as you said. And so, we have the opportunity to continue to pay down debt with excess cash in the meantime. But we are focused on, you know, the critical M&A that advances our opportunities in multiple segments that is going to help us drive additional growth and meet our overall, you know, margin and return thresholds. We have a number of opportunities in our pipeline and some of our key growth segments, similar to what you mentioned where we invested in AMI and Alpha and Overlook, and we're just looking for the right opportunity and the right timing for those to come to fruition. We feel good about the pipeline, and that continues to be the priority for cash after organic CapEx growth investment.

In some of these niche-year growth markets that you've been focused on in the last couple of years, I know compositional analysis, biopharm is in there. What's the market like? Would they typically be? And beyond those markets, are you typically looking at smaller acquisitions and given the growth opportunities, what's the pricing outlook look like for what you might be exploring?

We look at things every week, and, I mean, literally, I think we looked at 160-something this year as an example. So we just remain very, very disciplined and very focused on what we like, and we track things for a long period of time. Some of the opportunities at Pipeline now have been tracking since 2012. So we like to get to know the people we're thinking about, and we know the business, and we spend our time doing our research on that. And so, no, there's opportunities, but pricing is going to be, the businesses we want are going to be competitive because we are buying good businesses. We're not buying fixer-uppers. At the same time, we remain disciplined and focused on what we're going to do. So, we have lots of opportunities and just very, very selective.

There's no question that over the last several years, Enfro's reputation as a credible acquirer has accelerated. I think our integration processes, the companies that have joined our portfolio and their experience joining Enfro has been differentiated, and we are getting much more interest from sellers as well, which is good to see.

Excellent. Great. Thanks, everyone.

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

The energy around our company is exciting. We have strong momentum in the portfolio, and we look forward to updating you in February when we report Q4 and guide for 2027. We look forward to talking to you all as we go to the Baird Conference and visit with many of you into the end of the year. Thanks.

Thank you, everyone. Thank you. That does conclude today's teleconference webcast. You may just connect your line at this time and have a wonderful day. We thank you for your participation today.