ESCO Technologies, Inc. 2026 Q3 Earnings Call

Thank you. Statements made during this call, which are not strictly historical, are forward-looking statements within the meaning of the safe harbor provisions of the Federal Securities Law. These statements are based on current expectations and assumptions. Actual results may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the company's operations and business environment, including but not limited to, the risk referenced in the company's press release issued today, which will be included as an exhibit to the company's Form 8-K to be filed. We undertake no duty to update or revise any forward-looking statements, except as may be required by applicable laws or regulations. During the call, the company may discuss some non-GAAP financial measures in describing the company's operating results.

Reconciliation of these measures to the most comparable GAAP measures can be found in the press release issued today and found on the company's website at www.escotechnologies.com under the link Investor Relations. I'll turn the call over to Bryan.

Thanks, Kate. Thanks everyone for joining today's call. We're pleased to meet with you this afternoon to discuss ESCO's third quarter results. In Q3, we continued to see positive momentum in each of our business segments as demand across our served end markets continues to build. Aerospace, utility, and test orders were all strong, driving a consolidated book-to-bill of 1.21. This continuing strength lifted backlog to record levels across A&D, test, Doble, and at the consolidated level. This is all clear evidence of growing end market demand and the strength of our competitive position. Operationally, Q3 was another strong quarter of revenue and earnings performance. Continued order strength is flowing through to drive high single-digit organic revenue growth and operating leverage.

Over the past year or so, we have been working on development and implementation of an enterprise-wide continuous improvement process, which we will call the ESCO Operating System. Although we are still in the early stages of the operating system implementation, we are already beginning to see impacts across our businesses through greater consistency in execution and are building a stronger foundation for sustainable value creation over time. Chris will run you through all of the financial details for the third quarter. Before that, I wanted to give you a few comments on each segment. Starting with Aerospace & Defense. I recently had the opportunity to attend the Farnborough Airshow. It was really a great event, and it made clear that investments will continue to be made by our customers to support a continued robust demand outlook.

On the commercial side, the industry continues to be supported by a global aircraft backlog of approximately 18,000 aircraft, with an estimated unmet demand of an additional 5,000 aircraft. This demand backdrop underpins a long-duration production ramp and creates a compelling growth runway for OEMs, suppliers, and subcontractors across the aerospace value chain. At the same time, the show made clear that defense, security, and strategic resilience are becoming increasingly central to the industry narrative. Defense companies represented roughly half of the record exhibitor base at Farnborough, reflecting elevated military spending and a more complex geopolitical backdrop. Taken together, Farnborough reinforced the aerospace growth trajectory, supporting a durable multiyear production cycle. Strong commercial OEM and services outlooks remain intact while defense demand appears positioned to accelerate as governments prioritize readiness, modernization, and resilient supply chains.

On the Navy side, we continue to see evidence of a strong commitment to submarine programs. Last week, the Navy awarded the largest shipbuilding contract in history to the prime contractors for the remaining 9 Block VI Virginia-class and the next 5 Columbia-class submarines. ESCO is already under contract with the primes for this content, and the Navy's actions last week increase our confidence in the long-term outlook for submarine programs. Turning to the Utility Solutions Group, Doble's continued order strength has translated into double-digit revenue growth year to date as rising power demand, electrification, and grid modernization are all increasing the need for reliable, well-maintained electrical infrastructure.

As utilities expand their generation, transmission, and distribution capacity to support data centers, EVs, industrial electrification, heat pumps, and other sources of load growth, they must invest in tools that help maintain aging assets, diagnose and prevent failures, reduce downtime, and ensure grid reliability, safety, and compliance. In addition, as they progress on the longer-term infrastructure build-out, they need support in commissioning new assets and maintaining a larger, more complex grid. These are durable demand drivers for utility test instrumentation providers like Doble and Megger. Related to the Megger acquisition, we continue to work through the regulatory filing process in the required countries. This is all going smoothly, the timing is tracking to our expectations. We continue to believe that this process should be completed in a timeframe that results in closing the deal in the first quarter of our fiscal 2027.

Teams from both ESCO and Megger are actively collaborating on important integration planning activities. We believe this advance work will help establish a clear path for efficient, well-coordinated integration of Doble and Megger while keeping us focused on achieving the anticipated synergies. Bringing Megger into the ESCO portfolio will build greater scale in utility solutions and reinforce our role as a trusted partner to utility customers around the world. The acquisition is an important milestone in the continued advancement of our portfolio, and we remain optimistic about the long-term prospects for the utility markets that we serve. Finally, I'll touch on the test business, which had another strong orders quarter with 42% growth over the prior year. Test order strength in Q3 was driven by industrial shielding projects and electromagnetic interference filters. On industrial shielding, those orders primarily relate to secure shielded rooms in both the U.S. and Europe.

The EMI filters are for use in commercial and government data centers. The continued demand strength at Test is encouraging, and the team there is doing a really nice job of improving execution and expanding margins as their end market momentum continues. With that, I'll turn it over to Chris to run you through the financial details of the quarter.

Thanks, Bryan. Everyone can follow along on the chart presentation. We will start on page three, which shows the financial highlights for the third quarter. ESCO had another strong quarter of top-line growth, translating to even better growth in adjusted earnings and operating cash flow. Getting to the numbers, we start with orders, where the book-to-bill ratio in the quarter was 121%. All three segments delivered book-to-bill ratios over 100%, leading to a record backlog of $1.54 billion. Order growth in the quarter was negative, but that resulted mostly from the $364 million of acquired backlog from the Maritime acquisition that took place in last year's third quarter. Turning to sales, reported growth was 14%, which was comprised of 8% organic growth and $23 million of incremental sales from Maritime.

Just to remind everyone, we had a two-month impact from Maritime in last year's third quarter, while this year was a full three-month impact. On the profitability side, we saw adjusted EBIT margins improve by 90 basis points to 22% and adjusted earnings per share increase by 37.5% to $2.20 per share. Next, we will go through segment highlights, starting with Aerospace & Defense on page four. Another great quarter here as the A&D business continues to deliver for ESCO. Starting with orders, A&D had a book-to-bill ratio of 116%, with particular strength from our aircraft components business. You can see from the bar chart on the left, we showed a large percentage decline in orders compared to last year. There were two main factors driving the percentage drop. First, and as mentioned previously, there was $364 million of acquired backlog from Maritime last year.

Second, the Navy business at Globe received $82 million of Virginia and Columbia class orders in last year's third quarter, which did not fully repeat this year. With backlog of $1.1 billion, the business continues to be situated well for future growth. Sales in the quarter were $168 million, which represents an increase of 23%. Organic growth was 9%. The organic growth was driven by 10% increases from commercial and Aerospace & Defense, as well as 10% from the Navy business. Really nice performance from all parts of the core Aerospace & Defense platform. On the profitability side, we had good improvement to 30% adjusted EBIT margins, an increase of 120 basis points. Margin increases were due to positive impacts from leveraging sales growth and increased prices. Next, we will go to chart five in the Utility Solutions Group.

Orders here were up 20% in the third quarter, that was driven by exceptional performance at Doble, where orders grew by 30%. We did see weak orders performance at NRG, where the renewables markets continue to be very soft. Sales in the quarter were up 8%. Again, the growth was driven by Doble, where sales increased by 17%. Doble continues to see strong end market activity across a number of product lines serving their regulated utility customer base. Adjusted EBIT margins in the quarter declined by 130 basis points. Doble margins increased modestly, but were more than offset by margin declines at NRG. Next, we have the test business on page six. This business had another good quarter, starting with orders, which increased by 42%. The order growth was driven by industrial shielding products, projects, and EMI filters in the U.S.