Enpro Inc

We measure operating performance of our reportable segments based on segment earnings before interest, income taxes, depreciation, amortization, and other selected items ("Adjusted Segment EBITDA" or "Segment AEBITDA"), which is segment revenue reduced by operating expenses and other costs identifiable with the segment, excluding acquisition and divestiture expenses, restructuring costs, impairment charges, non-controlling interest compensation, amortization of the fair value adjustment to acquisition date inventory, and depreciation and amortization. Adjusted Segment EBITDA is not defined under GAAP and may not be comparable to similarly-titled measures used by other companies. Corporate expenses include general corporate administrative costs. Segment non-operating expenses and income, corporate expenses, net interest expense, goodwill impairment, and income taxes are not included in the computation of Adjusted Segment EBITDA. The accounting policies of the reportable segments are the same as those for Enpro.

In the first quarter of 2024, we refined our definition of Adjusted Segment EBITDA and corporate expenses to include certain other income or expenses previously reported in other expense, net. These items were primarily comprised of bank fees and certain foreign exchange transaction gains and losses. As a result of this change, for the year ended December 31, 2023, we recast our results to increase corporate expenses by $1.6 million. For the year ended December 31, 2022, we decreased Sealing

Technologies Adjusted Segment EBITDA by $1.3 million and increased Advanced Surface Technologies Adjusted Segment EBITDA by $4.7 million in addition to increasing corporate expenses by $1.7 million.

Non-controlling interest compensation allocation represents compensation expense associated with a portion of the rollover equity from the acquisitions of LeanTeq and Alluxa that was subject to reduction for certain types of employment terminations of the sellers. This expense was recorded in selling, general, and administrative expenses on our Consolidated Statements of Operations and is directly related to the terms of the acquisitions. We acquired all of the LeanTeq non-controlling interests in the fourth quarter of 2022 and all of the Alluxa non-controlling interests in the first quarter of 2024.

Other expense, net in the table above represents other expense (non-operating) on our Consolidated Statements of Operations for the respective periods presented.

2024 Compared to 2023

Sales of $1,048.7 million in 2024 decreased 1.0% from $1,059.3 million in 2023. The following table summarizes the impact of acquisitions and foreign currency on sales by segment:

Following is a discussion of operating results for each segment during 2024 compared to 2023:

Sealing Technologies. Sales of $687.2 million in 2024 reflect a 4.4% increase compared to $658.4 million in 2023. Excluding the unfavorable foreign exchange translation ($1.5 million) and the sales from a recent acquisition ($32.1 million), sales were down 0.3% or $1.8 million. Organic sales were relatively flat as strong demand in aerospace and nuclear markets, strategic pricing actions, and recovery in food and pharmaceuticals and European general industrial markets were offset by a sharp decline in commercial vehicle OEM and Asian industrial markets.

Segment AEBITDA of $224.1 million in 2024 increased 16.5% from $192.3 million in 2023. Segment AEBITDA margin increased from 29.2% in 2023 to 32.6% in 2024. Excluding the unfavorable foreign exchange translation ($0.7 million) and the contribution from a business recently acquired of ($16.9 million), Adjusted Segment EBITDA increased 8.1%, or $15.6 million. The increase in Segment AEBITDA was driven primarily by pricing gains ($20.0 million), favorable sales mix ($5.7 million), decreased labor and overhead costs ($3.9 million), and lower selling, general, and administrative costs ($1.5 million), partially offset by decreased sales volume ($15.5 million).

Advanced Surface Technologies. Sales of $362.2 million in 2024 reflect a 9.7% decrease compared to $401.2 million in 2023 driven primarily by continued weakness in semiconductor capital equipment spending, partially offset by solutions serving leading-edge applications.

Segment AEBITDA of $76.7 million in 2024 decreased 19.6% from $95.5 million in 2023. Segment AEBITDA margin decreased from 23.8% in 2023 to 21.2% in 2024. The $18.7 million decrease in Adjusted Segment EBITDA was driven primarily by lower volumes ($25.5 million), higher labor costs ($1.3 million), increased selling, general, and administrative costs ($2.3 million) and a higher level of start-up expenses for LeanTeq's new production site in Arizona, partially offset by favorable sales mix ($14.7 million).

Corporate expenses for 2024 decreased $4.7 million as compared to 2023. The decrease was driven primarily by a decrease in share-price-based long-term incentive compensation expenses ($4.9 million).

Interest expense, net in 2024 increased by $4.4 million as compared to 2023 primarily due to lower interest income on cash balances following the acquisition of AMI, partially offset by lower average outstanding debt.

Other expense, net in 2024 increased by $4.4 million as compared to 2023, primarily due to the increase in the valuation reserve on a long-term promissory note received in partial consideration for the sale of a non-strategic business in 2020 ($4.5 million) and increased environmental related costs ($2.8 million) partially offset by lower non-service pension related costs ($1.4 million), income realized from the settlement of a legacy claim ($0.6 million), decreased foreign exchange losses related to an intercompany note denominated in Euros ($0.4 million) and decreased costs related to divested businesses ($0.3 million).

Income tax expense from continuing operations was $21.5 million in 2024 and $30.8 million in 2023. The effective tax rates for 2024 and 2023 were 22.8% and 81.6% respectively. The effective tax rate for 2024 is higher than the U.S. federal tax rate primarily driven by higher tax rates in most foreign jurisdictions, partially offset by the favorable impact of tax credits. The effect of these items resulted in a net $3.2 million increase in income tax expense from the federal statutory rate. In 2024, we had a decrease in tax expense relative to 2023, primarily driven by 2023 goodwill impairment, which is not deductible for tax purposes.

Income from continuing operations attributable to Enpro Inc. was $72.9 million, or $3.48 per share, in 2024 compared to income from continuing operations attributable to Enpro Inc. of $10.8 million, or $0.52 per share, in 2023.

2023 Compared to 2022

For a comparison of our results of operations for the years ended December 31, 2023 to December 31, 2022, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 27, 2024.

Restructuring and Other Costs

We incurred $6.2 million, $5.0 million and $3.0 million of restructuring and impairment costs during the years ended December 31, 2024, 2023 and 2022, respectively. Additionally, in 2023 and 2022, we incurred goodwill impairment charges of $60.8 million and $65.2 million, respectively, related to the Alluxa reporting unit.

Of the restructuring and impairment costs incurred in 2024, 2023 and 2022, we incurred $2.8 million, $4.3 million and $1.8 million, respectively, of restructuring costs related to the reorganization of sites and functions, primarily in the United States and $3.4 million, $0.7 million, and $1.2 million, respectively, of non-cash impairment charges of long-lived assets. Workforce reductions associated with our restructuring activities in 2024, 2023, and 2022 totaled 77, 72, and 25 administrative and manufacturing positions, respectively.

Please see the "Overview" section of Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 3 to our consolidated financial statements for further information.

Liquidity and Capital Resources

Cash requirements for, but not limited to, working capital, capital expenditures, acquisitions, and debt repayments have been funded from cash balances on hand, revolver borrowings and cash generated from operations. We are proactively pursuing acquisition opportunities. Should we need additional capital, we have resources available, which are discussed in this section under the heading “Capital Resources.”

As of December 31, 2024, we held $49.3 million of cash and cash equivalents in the United States and $187.0 million of cash outside of the United States. If the funds held outside the United States were needed for our operations in the U.S., we have several methods to repatriate such funds without significant adverse tax effects, including repayment of intercompany loans, distributions subject to a 100 percent dividends-received deduction for income tax purposes, or distributions of previously-taxed earnings.

Because of the transition tax, GILTI, and Subpart F provisions, undistributed earnings of our foreign subsidiaries totaling $187.1 million at December 31, 2023 have been subjected to U.S. income tax or are eligible for the 100 percent dividends-received deduction under Section 245A of the Internal Revenue Code ("IRC") provided in the Tax Cuts and Jobs Act. Additionally, undistributed earnings are estimated to be $239.4 million as of December 31, 2024. Whether through the application of the 100 percent dividends received deduction, or distribution of these previously-taxed earnings, we do not intend to distribute foreign earnings that will be subject to any significant incremental U.S. or foreign tax. During 2024, we repatriated $61.3 million of earnings from our foreign subsidiaries, resulting in only $0.3 million of withholding taxes. We have determined that estimating any tax liability on our investment in foreign subsidiaries is not practicable. Therefore, we have not recorded any deferred tax liability on undistributed earnings of foreign subsidiaries.

Cash Flows

Operating activities of continuing operations provided cash in the amount of $162.9 million, $208.4 million and $106.1 million in 2024, 2023 and 2022, respectively. The decrease in operating cash flows in 2024 versus 2023 was primarily attributable the decline in revenue, timing of working capital, and payments related to short-term operating liabilities, as well as $18.9 million of additional tax payments made in 2024. The increase in operating cash flows in 2023 versus 2022 was primarily attributable to less income tax payments, net of refunds ($63.6 million) and improvements in net working capital. Higher tax payments in 2022 were the result of high proceeds from our divestiture of discontinued operations.

Investing activities of continuing operations used $241.5 million and $7.4 million in 2024 and 2023, respectively, and provided $302.7 million of cash in 2022. Investing activities in 2024 used cash primarily for the acquisition of AMI ($209.4 million) and investments in property, plant, and equipment ($29.1 million). Investing activities in 2023 used cash primarily for investments in property, plant, and equipment ($33.9 million), partially offset by proceeds of the sale of businesses, principally the sale of GPT ($25.9 million). Investing activities in 2022 provided cash from the sale of businesses ($301.9 million), primarily the sale of GGB, and the settlement of derivative contracts ($27.4 million). This was partially offset by investments in property, plant and equipment ($29.4 million).

Financing activities of continuing operations used $50.5 million in cash in 2024, primarily attributable to the acquisition of non-controlling interests, primarily for the acquisition of the Alluxa non-controlling interests ($18.3 million), net repayments of debt ($8.1 million) and dividend payments ($25.3 million). Financing activities of continuing operations used $170.9 million in 2023 primarily attributable to payments on our Term Loan Facilities, including the complete repayment of our Term Loan A-1 Facility, as defined and discussed below ($144.9 million), and by dividend payments ($24.3 million). Financing activities used $402.1 million in 2022, primarily attributable to a net payment our Revolving Credit Facility, as defined below, and Term Loan Facilities ($337.0 million), the acquisition of the equity interests in LeanTeq held by the LeanTeq Executives ($34.1 million) and dividend payments ($23.4 million)

Capital Resources

Senior Secured Credit Facility. On December 17, 2021, we entered into a Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”) dated as of December 17, 2021 among the Company and EnPro Holdings, as borrowers, certain of our foreign subsidiaries are from time to time party thereto, as designated borrowers, the guarantors party thereto, the lenders party thereto and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer. The Amended Credit Agreement amends, restates and replaces the Second Amended and Restated Credit Agreement dated as of June 28, 2018, as amended, among the Company and EnPro Holdings as borrowers, the guarantors party thereto, the lenders party thereto and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer.

The Amended Credit Agreement provides for credit facilities in the initial aggregate principal amount of $1,007.5 million, consisting of a five-year, senior secured revolving credit facility of $400.0 million (the “Revolving Credit Facility”), a $142.5 million senior secured term loan facility in replacement of the our existing senior secured term loan facility, maturing September 25, 2024 (the “Term Loan A-1 Facility”), a five-year, senior secured term loan facility of $315.0 million (the “Term Loan A-2 Facility”) and a 364-day, senior secured term loan facility of $150.0 million (the “364-Day Facility” and together with the Term Loan A-1 Facility and the Term Loan A-2 Facility, the "Term Loan Facilities”, which together with the Revolving Credit Facility are referred to as the "Facilities"). The Amended Credit Agreement also provides that we may seek incremental term loans and/or additional revolving credit commitments in an amount equal to the greater of $275.0 million and 100% of consolidated EBITDA for the most recently ended four-quarter period for which we have reported financial results, plus additional amounts based on a consolidated senior secured leverage ratio. The Amended Credit Agreement became effective on December 17, 2021.

Borrowings under the 364-Day Facility bore interest at an annual rate of LIBOR plus 1.50% or base rate plus 0.50%. Initially, borrowings under the Facilities (other than the 364-Day Facility) bore interest at an annual rate of LIBOR plus 1.75% or base rate plus 0.75%, although these interest rates were subject to incremental increase or decrease based on a consolidated total net leverage ratio. On November 8, 2022, we entered into a First Amendment to the Amended Credit Agreement, which replaced the LIBOR-based interest rate option with an option based on Term SOFR ("Secured Overnight Financing Rate") plus (i) a credit spread adjustment of 0.10% and (ii) 1.75%, again subject to incremental increase or decrease based on a consolidated total net leverage ratio. In addition, a commitment fee accrues with respect to the unused amount of the Revolving Credit Facility at an annual rate of 0.225%, which rate is also subject to incremental increase or decrease based on a consolidated total net leverage ratio.

The Term Loan A-1 Facility amortized on a quarterly basis in an annual amount equal to 2.50% of the original principal amount of the Term Loan A-1 Facility ($150.0 million) in year one after the closing, 5.00% of such original principal amount in year two and 1.25% of such original principal amount in each of the first three quarters of year three, with the remaining outstanding principal amount payable at maturity. The Term Loan A-2 Facility amortizes on a quarterly basis in an annual amount equal to 2.5% of the original principal amount of the Term Loan A-2 Facility in each of years one through three, 5.0% of such original principal amount in year four and 1.25% of such original principal amount in each of the first three quarters of year five, with the remaining outstanding principal amount payable at maturity. The 364-Day Facility did not amortize and was repaid in full in the quarter ended September 30, 2022. The Facilities are subject to prepayment with the net cash proceeds of certain asset sales not reinvested in acquisitions within a specified period, casualty or condemnation events, and non-permitted debt issuances. On July 21, 2023, we entered into a waiver agreement under Amended Credit Agreement that waived the requirement to prepay the Facilities with remaining excess net cash proceeds related to the sale of GGB and GPT that had not been reinvested in operating assets within 365 days from the date of the sale. In conjunction with this waiver, on July 26, 2023, we voluntarily prepaid all outstanding borrowings and accrued and unpaid interest under the Term Loan A-1 Facility (a remaining principal balance of $133.1 million and accrued interest of $0.6 million). After taking into account the repayment of borrowings under the Term Loan A-1 Facility noted above, forecasted capital expenditures, and other applicable expenditures, we met all reinvestment requirements under the indenture related to the excess net cash proceeds from the sales of GGB and GPT. There is no prepayment penalty for a full or partial repayment of the Facilities at any time.

The Company and EnPro Holdings are the permitted borrowers under the Facilities. We have the ability to add wholly owned foreign subsidiaries as borrowers under the Revolving Credit Facility. Each of our domestic, consolidated subsidiaries (other than any subsidiaries that may be designated as "unrestricted" by the Company from time to time an inactive subsidiaries) is required to guarantee the obligations of the borrowers under the Facilities, and each of our existing domestic, consolidated subsidiaries (other than inactive subsidiaries) has entered into the Amended Credit Agreement to provide such a guarantee.

Borrowings under the Facilities are secured by a first-priority pledge of the following assets:

•100% of the capital stock of each domestic subsidiary of the Company (other than unrestricted or inactive subsidiaries);

•65% of the capital stock of any first tier foreign subsidiary of the Company and its domestic subsidiaries (other than unrestricted or inactive subsidiaries); and

•substantially all of the assets (including, without limitation, machinery and equipment, inventory and other goods, accounts receivable, bank accounts, general intangibles, financial assets, investment property, license rights, patents, trademarks, trade names, copyrights, chattel paper, insurance proceeds, contract rights, hedge agreements, documents, instruments, indemnification rights, tax refunds and cash, but excluding real estate interests) of the Company and its domestic subsidiaries (other than unrestricted or inactive subsidiaries).

The Amended Credit Agreement contains certain financial covenants and required financial ratios, including:

•a maximum consolidated total net leverage ratio of not more than 4.75 to 1.0 (with total debt, for the purposes of such ratio, to be net of up to $150 million of unrestricted cash of Enpro Inc. and its consolidated subsidiaries), which ratio will decrease to 4.5 to 1.0 for each fiscal quarter beginning with the fiscal quarter ending March 31, 2022 and ending with the fiscal quarter ending December 31, 2022, and to 4.0 to 1.0 for each quarter thereafter; and, once so decreased, may be increased (up to three times) at the borrowers' option to not more than 4.5 to 1.0 for the for-quarter period following a significant acquisition; and

•a minimum consolidated interest coverage ratio of at least 2.5 to 1.0.

The Amended Credit Agreement contains affirmative and negative covenants (subject, in each case, to customary exceptions and qualifications), including covenants that limit our ability to, among other things:

•grant liens on our assets;

•incur additional indebtedness (including guarantees and other contingent obligations);

•make certain investments (including loans and advances);

•merge or make other fundamental changes;

•sell or otherwise dispose of property or assets;

•pay dividends and other distributions and prepay certain indebtedness;

•make changes in the nature of our business;

•enter into transactions with our affiliates;

•enter into burdensome contracts; and

•modify or terminate documents related to certain indebtedness.

We were in compliance with all covenants of the Amended Credit Agreement as of December 31, 2024. The borrowing availability under our Revolving Credit Facility at December 31, 2024 was $390 million after giving consideration to $10.0 million of outstanding letters of credit. The principal balance of our outstanding Term Loan A-2 Facility at December 31, 2024 was $291.4 million.

Senior Notes. On October 17, 2018, we completed the offering of $350 million aggregate principal amount of our 5.75% senior notes due 2026 (the "Senior Notes") and applied the net proceeds of that offering, together with borrowings under the Revolving Credit Facility, to redeem on October 31, 2018 the full $450 million aggregate principal amount of our outstanding 5.875% senior notes due 2022.

The Senior Notes were issued to investors at 100% of the principal amount thereof. The Senior Notes are unsecured, unsubordinated obligations of Enpro and mature on October 15, 2026. Interest on the Senior Notes accrues at a rate of 5.75% per annum and is payable semi-annually in cash in arrears on April 15 and October 15 of each year, commencing April 15, 2019. The Senior Notes are required to be guaranteed on a senior unsecured basis by each of Enpro’s existing and future direct and indirect domestic subsidiaries that is a borrower under, or guarantees, our indebtedness under the Revolving Credit Facility or guarantees any other Capital Markets Indebtedness (as defined in the indenture governing the Senior Notes) of Enpro or any of the guarantors.

Commencing on October 15, 2021, we may, on any one or more occasions, redeem all or a part of the Senior Notes at specified redemption prices plus accrued and unpaid interest. In addition, we may redeem a portion of the aggregate principal amount of the Senior Notes before October 15, 2021 with the net cash proceeds from certain equity offerings at a specified redemption price plus accrued and unpaid interest, if any, to, but not including, the redemption date. Prior to October 15, 2021, we could redeem some or all of the Senior Notes at a redemption price of 100% of the principal amount, plus accrued and unpaid interest, if any, to, but not including, the redemption date, plus a “make whole” premium.

Each holder of the Senior Notes may require us to repurchase some or all of the Senior Notes held by such holder for cash upon the occurrence of a defined “change of control” event. Our ability to redeem the Senior Notes prior to maturity is subject to certain conditions, including in certain cases the payment of make-whole amounts.

The indenture governing the Senior Notes requires us to apply the net cash proceeds of certain asset sales not reinvested in acquisitions, capital expenditures, or used to repay or otherwise reduce specified indebtedness within a specified period, to the extent the remaining net proceeds exceed a specified amount, to offer to repurchase the Senior Notes at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest.

Contractual Obligations

A summary of our contractual obligations and commitments at December 31, 2024 is as follows:

The payments for long-term debt shown in the table above reflect the contractual principal amount for the Senior Notes and term loans under our Amended Credit Agreement. In our Consolidated Balance Sheet, these amounts are shown net of a debt discount of $2.2 million. Additional discussion regarding the Senior Notes and Amended Credit Agreement is included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations in “Liquidity and Capital Resources – Capital Resources,” and in Note 11, "Debt," to the consolidated financial statements. The interest on debt represents the contractual interest coupon. It does not include the debt discount accretion, which also is a component of interest expense.

The estimated payments of environmental liabilities is based on information currently known to us. However, it is possible that these estimates will vary from actual results and it is possible that these estimates may be updated if new information becomes available in the future or if there are changes in the facts and circumstances related to these liabilities. Additional discussion regarding these liabilities is included earlier in this Management’s Discussion and Analysis of Financial Condition and Results of Operations in “Contingencies – Environmental" and "Contingencies – Crucible Steel Corporation a/k/a Crucible, Inc.,” and in Note 19, "Commitments and Contingencies," to the consolidated financial statements.

The table does not include obligations under our pension plans, which is included in Note 14, "Pension," to the consolidated financial statements.

Share Repurchase Program

Enpro’s board of directors approved a new share repurchase authorization in October 2024, replacing the previous $50.0 million authorization that expired in October 2024. No shares were purchased under the prior repurchase program. Under the replacement authorization, which, other than the expiration date, is identical to the prior authorization, the Company may repurchase up to $50.0 million of shares in both open market and privately negotiated transactions. The Company’s management is authorized to determine the timing and amount of any such repurchases based on its evaluation of market conditions, capital alternatives, and other factors. Repurchases may also be made under Rule 10b5-1 plans, which could result in the repurchase of shares during periods when the Company otherwise would be precluded from doing so under insider trading laws. The new share repurchase authorization expires in October 2026.

Dividends

On January 13, 2015, our board of directors adopted a policy under which it intends to declare regular quarterly cash dividends on Enpro’s common stock, with the determination of whether to declare a dividend and the amount being considered each quarter, after taking into account our cash flow, earnings, cash position, financial position and other relevant matters. In 2022, our board declared a dividend of $0.28 per share in each quarter, in 2023, our board declared a dividend of $0.29 per share in each quarter, and in 2024 our board declared a dividend of $0.30 per share in each quarter. On February 13, 2025 we announced that our board of directors had increased the quarterly dividend to $0.31 per share, commencing with the dividend to be paid on March 19, 2025 to all shareholders of record as of March 5, 2025. Each of the Credit Agreement and the indenture governing the Senior Notes includes covenants restricting the payment of dividends, but includes a basket permitting the payment of cash dividends of up to $50.0 million per year under the Credit Agreement and $60.0 million per year under the indenture governing the Senior Notes. Other baskets may be available under that the agreement governing the Revolving Credit Facility and the indenture governing the Senior Notes to permit the payment of dividends in excess of the respective basket amount.

Critical Accounting Estimates

The preparation of our Consolidated Financial Statements, in accordance with accounting principles generally accepted in the United States, requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures pertaining to contingent assets and liabilities. Note 1, “Overview, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Guidance,” to the Consolidated Financial Statements describes the significant accounting policies used to prepare the Consolidated Financial Statements and recently issued accounting guidance. On an ongoing basis we evaluate our estimates, including, but not limited to, those related to bad debts, inventories, intangible assets, income taxes, warranty obligations, restructuring, pensions, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from our estimates.

We believe the following accounting estimates are the most critical. Some of them involve significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the estimated fair value of the net assets of acquired businesses. Goodwill is not amortized, but instead is subject to annual impairment testing that is conducted each calendar year in the fourth quarter. Our annual impairment testing for all of our intangible assets is November 1 of each year.

The goodwill asset impairment test involves comparing the fair value of a reporting unit to its carrying amount. An impairment charge is recognized when the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. Interim tests during the year may be required if an event occurs or circumstances change (a "triggering event") that in management's judgement would more likely than not reduce the fair value of a reporting unit below its’ carrying amount.

To estimate the fair value of the four of our five reporting units with goodwill balances remaining, we use both a discounted cash flow and a market valuation approach. The discounted cash flow approach uses cash flow projections and a discount rate to calculate the fair value of each reporting unit while the market approach relies on market multiples of similar companies. The key assumptions used for the discounted cash flow approach include projected revenues and profit margins, projected capital expenditures, changes in working capital, and the discount and tax rates. For the market approach, we select a group of peer companies that we believe are best representative of each reporting unit. We used a 75% weighting for the discounted cash flow valuation approach and a 25% weighting for the market valuation approach, reflecting our belief that the discounted cash flow valuation approach is a better indicator of a reporting unit's value since it reflects the specific cash flows anticipated to be generated in the future by the business.

At the time of our annual test as of November 1, 2022, our updated forecast and projections based upon our annual projection and analysis indicated that the carrying value of the Alluxa reporting unit exceeded fair value by $65.2 million which has been recognized as an impairment charge in the fourth quarter of 2022. This was primarily driven by the increase in discount rate from 12.0% as of November 1, 2021 to 14.6% as of November 1, 2022. In the second quarter of 2023, we determined the lower than previously projected actual and forecasted financial performance of our Alluxa reporting unit to be a triggering event for an interim goodwill impairment test. We determined the carrying value of our Alluxa reporting unit to exceed its fair value and, as a result, we impaired the remaining $60.8 million of goodwill related to Alluxa. Our Consolidated Balance Sheet at December 31, 2024 and 2023 reflects no goodwill related to Alluxa.

The fair value of our semiconductor reporting unit, included in the Advanced Surface Technologies segment, exceeded carrying value by approximately 17% as of November 1, 2024. The carrying value of the Semiconductor reporting unit as of December 31, 2024 includes $532.2 million of goodwill. We considered the sensitivity of the valuation of our Semiconductor reporting unit to adverse changes in our projected cash flows under two separate alternative scenarios. First, with a 5% reduction in forecasted sales used in our valuation model, we estimate the fair value of the Semiconductor reporting unit would exceed its carrying value by less than 4%. Second, with a 1% increase in the discount rate as of November 1, 2024 we estimate our fair value of the Semiconductor reporting unit would exceed its carrying value by less than 2%. All annual and interim impairment tests of goodwill for the Semiconductor reporting unit performed during the 3-years ended December 31, 2024 indicated there was no impairment of goodwill for the Semiconductor reporting unit.

The fair value of the three reporting units of our Sealing Technologies segment all exceeded their respective carrying values by more than 75% as of November 1, 2024. Our annual impairment test of the goodwill for the three reporting units of our Sealing Technologies segment as of November 1, 2023 and 2022 indicated no impairment.

Annual assessments are conducted in the context of information that was reasonably available to us as of the date of the assessment including our best estimates of future sales volumes and prices; material and labor cost and availability; operational efficiency including the impact of projected capital asset additions, and the discount rates and tax rates. We will perform our next annual goodwill impairment tests as of November 1, 2025; or earlier, if adverse changes in circumstances result in our assessment that a triggering event has occurred at any of our reporting units and an interim test is required.

Other intangible assets are recorded at cost or, when acquired as a part of a business combination, at estimated fair value. These assets include customer relationships, patents and other technology-related assets, trademarks, licenses, and non-compete agreements. Intangible assets that have definite lives are amortized using a method that reflects the pattern in which the economic benefits of the assets are consumed or the straight-line method over estimated useful lives of 1 to 21 years.

Intangible assets with indefinite lives, which consist primarily of trade names and future products that were in development at the time of the acquisition of AMI in January 2024, are subject to at least annual impairment testing. The impairment testing for the indefinite lived trade names compares the fair value of the intangible asset with its carrying amount using the relief from royalty method. Key assumptions used in the relief from royalty method are projected revenues and royalty, discount, tax, and terminal growth rates. Impairment testing for these assets were conducted as of November 1 in 2024, 2023 and 2022 and indicated no impairment. Impairment testing related to the future products that were in development at the time of the acquisition of AMI compares the fair value of the intangible asset with its carrying value using a multi-period excess earnings method. Key assumptions used in the excess earnings method are projected revenues and profit margins, obsolescence factors, and tax, discount, and long-term growth rates. This testing was conducted as of November 1, 2024, the first testing period after the asset was acquired, and indicated no impairment. Interim tests may be required if an event occurs or circumstances change that would more likely than not reduce the fair value below the carrying value or change the useful life of the asset. For additional information regarding the acquisition of AMI, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview as well as Note 2 to the Consolidated Financial Statements.

Many of the factors used in assessing fair value are outside the control of management, and it is reasonably likely that assumptions and estimates will change in future periods. These changes could result in future impairments. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview” as well as Notes 1 and 8 to the Consolidated Financial Statements.

Business Combinations

Over the past several years, we have executed several strategic acquisitions, most of which are material. We utilize the acquisition method of accounting for business combinations. The estimated fair value of assets acquired and liabilities assumed in a business combination are included in our Consolidated Balance Sheet beginning on the acquisition date. We may evaluate these values and adjust our estimates up to one-year from the date the business was acquired.

We estimate the fair-value of the assets acquired and liabilities assumed in a business combination using various valuation methods that are appropriate for the specific business combination or the specific asset or liability being valued. Various techniques are used to determine the fair-value of intangible assets, which require judgement and often comprise a significant portion of total assets acquired in a business combination. We use the income approach to determine the fair-value of our intangible assets, primarily using the relief-from-royalty or multi-period excess earnings methods. Under these valuation approaches, we use key assumptions in valuing the assets, including projected revenues and profit margins, royalty rates, obsolescence factors, customer attrition rates, contributory asset charges, tax rates, discount rates and long-term growth rates. Any excess total consideration transferred in a business combination greater than the fair value of identifiable assets acquired net of liabilities assumed is recorded as goodwill.

For additional information regarding our acquisitions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview as well as Note 2 to the Consolidated Financial Statements.

Environmental

Although we believe past operations were in substantial compliance with the then applicable regulations, we or one or more of our subsidiaries are involved with various remediation activities or an investigation to determine responsibility for environmental conditions at 21 sites.

Our policy is to accrue environmental investigation and remediation costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. In general, due to uncertainties regarding, among other factors, changes to operating and monitoring requirements based on the ongoing performance of the remediation system and/or changes to applicable legal and regulatory requirements, we do not consider costs for remediation activities beyond five years to be reasonably estimable. To the extent that capital costs to be incurred more than five years out, such as costs for the construction or decommissioning of remediation systems, can be reasonable estimated such costs are included in our environmental reserves. For sites with multiple future projected cost scenarios for identified feasible investigation and remediation options where no one estimate is more likely than all the others, our policy is to accrue the lowest estimate among the range of estimates. The measurement of our liability is based on an evaluation of currently available facts with respect to each individual situation and takes into consideration factors such as existing technology, presently enacted laws and regulations and prior experience in the remediation of similar contaminated sites. Liabilities are established for all sites based on these factors. As assessments and remediation progress at individual sites, these liabilities are reviewed and adjusted to reflect additional technical data and legal information. Given the uncertainties regarding the status of laws, regulations, enforcement policies, the impact of other parties potentially being fully or partially liable, technology and information related to individual sites, we do not believe it is possible to develop an estimate of the range of reasonably possible environmental loss in excess of our recorded liabilities.

We believe that our accruals for specific environmental liabilities are adequate based on currently available information. Based upon limited information regarding any incremental remediation or other actions that may be required at these sites, we cannot estimate any further loss or a reasonably possible range of loss related to these matters. Actual costs to be incurred in future periods may vary from estimates because of the inherent uncertainties in evaluating environmental exposures due to unknown and changing conditions, changing government regulations and legal standards regarding liability.

Income Taxes

We use the asset and liability method of accounting for income taxes. Temporary differences arising between the tax basis of an asset or liability and its carrying amount on the Consolidated Balance Sheet are used to calculate future income tax assets or liabilities. This method also requires the recognition of deferred tax benefits, such as net operating loss carryforwards. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income (losses) in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment of the change. A tax benefit from an uncertain tax position is recognized only if we believe it is more likely than not that the position will be sustained on its technical merits. If the recognition threshold for the tax position is met, only the portion of the tax benefit that we believe is greater than 50 percent likely to be realized is recorded. Our future results may include favorable or unfavorable adjustments to our estimated tax liabilities due to closure of income tax examinations, statute expirations, new regulatory or judicial pronouncements, changes in tax laws, changes in projected levels of taxable income, future tax planning strategies, or other relevant events.

OECD/G20 Base Erosion and Profit Shifting Project - Pillar 2

The Organization for Economic Co-operation and Development (the “OECD”) has introduced a framework to implement a global minimum corporate tax of 15%, referred to as Pillar Two, that is effective for tax years beginning in 2024.

While it is uncertain whether the U.S. will enact legislation to adopt Pillar Two, certain countries in which we operate have enacted legislation to adopt Pillar Two. The adoption of Pillar Two has had no impact on our income tax expense for the year ended December 31, 2024 and we expect there to be a minimal impact in subsequent years.

Impact of Pending Accounting Pronouncements

See Note 1, "Overview, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Guidance," to our consolidated financial statements for a discussion of recently issued accounting guidance that we have not yet adopted.