ESCO Technologies Inc. (ESE) Earnings

Management highlights

### Overall Business Momentum & Backlog - Consolidated book-to-bill ratio hit 1.21 in Q3, with all three segments delivering book-to-bill ratios above 100%, driving a new record consolidated backlog of $1.54 billion - The company is rolling out the enterprise-wide ESCO Operating System, a continuous improvement program; early implementation has already improved execution consistency and built a stronger foundation for long-term sustainable value creation ### Aerospace and Defense Segment End Market Outlook - The Farnborough Air Show confirmed robust long-term demand: the global commercial aircraft industry holds an existing backlog of ~18,000 aircraft plus an estimated unmet demand of 5,000 additional aircraft, supporting a multi-year production ramp - Defense demand is accelerating globally, driven by elevated military spending, geopolitical complexity, and government priorities for readiness, modernization, and resilient supply chains; defense companies made up half of all Farnborough exhibitors - The U.S. Navy recently awarded the largest shipbuilding contract in history for Virginia-class and Columbia-class submarines; ESCO is already under contract for work on these programs, increasing management confidence in the long-term submarine outlook ### Utility Solutions Segment End Market & Megger Acquisition Update - Durable demand drivers are supporting growth: rising power demand, electrification of transport/industry/heating, and grid modernization are driving utility investment in reliable infrastructure, creating ongoing demand for testing, monitoring, and maintenance products - The Megger acquisition regulatory review process is progressing on schedule, with closing expected in Q1 of fiscal 2027 - Integration planning is already underway between ESCO and Megger teams to enable a smooth, efficient close, capture expected synergies, and build greater scale in the global utility solutions market ### Test Business Performance - The segment posted very strong 42% year-over-year order growth, driven by demand for secure industrial shielding rooms and EMI filters for critical infrastructure data centers - The segment has improved execution and expanded margins as end market momentum continues

Guidance

- Full year 2026 adjusted earnings per share guidance is raised to $8.30 to $8.40 per share, representing 38% to 39% year-over-year growth from fiscal 2025, and is expected to deliver another record annual result - Updated full year 2026 organic revenue growth guidance by segment: 8% to 10% for A&D (excluding the 2025 Maritime acquisition), 10% to 12% for the test business, and 4% to 6% for the overall utility segment; Doble (within USG) is expected to deliver low double-digit full year growth - Management expects 30% A&D incremental EBIT margin as a baseline, and anticipates margins will actually move above this level over time as the ESCO Operating System is implemented - If the Megger acquisition closes on the expected timeline, the fiscal 2027 guidance to be released in November 2026 will include the acquired business - Management expects long-term free cash flow conversion to adjusted net earnings to hold around 100%; 2026 year-to-date conversion is above this target due to timing of advance payments on large Navy contracts

Segment performance

1. Aerospace and Defense (A&D): Q3 sales were $168 million, representing 23% total year-over-year growth and 9% organic growth. Organic growth was 10% across both commercial/defense aerospace and the Navy submarine business. Adjusted EBIT margin came in at 30%, an increase of 120 basis points year-over-year. The segment achieved a book-to-bill ratio of 116%, and holds a total backlog of $1.1 billion, positioning it well for future growth. It contributes approximately 55% of total consolidated quarterly sales. 2. Utility Solutions Group (USG): Q3 sales increased 8% year-over-year, with growth entirely driven by Doble, which delivered 17% year-over-year sales growth. Orders overall were up 20% year-over-year, with Doble orders growing 30% while NRG (the renewables-focused utility subsidiary) posted weak order performance due to a soft renewables market. Adjusted EBIT margin for the segment declined 130 basis points year-over-year, as modest margin expansion at Doble was more than offset by significant margin declines at NRG. It contributes approximately 28% of total consolidated quarterly sales. 3. Test Business (TESS): Q3 orders increased 42% year-over-year, driven by demand for industrial shielding projects for secure facilities in the U.S. and Europe, and electromagnetic interference (EMI) filters for commercial and government data centers. Q3 sales increased 5% year-over-year. Adjusted EBIT margin increased 50 basis points to 16.4%, with volume leverage partially offset by ongoing inflationary pressures. It contributes approximately 17% of total consolidated quarterly sales.

Risks & headwinds

- Actual results may differ materially from forward-looking projections due to existing operational and market risks, including factors outlined in the company's recent 8-K filing - The renewables market remains soft, and NRG (the utility renewables segment) is expected to post another year-over-year revenue decline in Q4 2026, with a return to growth not expected until fiscal 2027 - While no material new inflationary pressures were seen in Q3, the company notes ongoing general inflationary risk that could impact margins - Surface ship programs have previously experienced revenue push-outs due to yard ramp challenges, and while no additional push-outs have occurred, programs remain under close watch

Analyst Q&A

• Q: What is the customer base for TESS's data center-related EMI filter and shielding orders, and has it broadened recently? /

  A: Demand for EMP/EMI protection is concentrated among data centers that house critical infrastructure data, including government and utility systems, not all general data centers. Management says they have gained good market traction with existing customers in this space and are seeing growing adoption of these requirements overall, but declined to share specific customer details.

• Q: What is driving Doble's strong 30% order growth, and has Megger seen similar demand strength? /

  A: Doble's order growth is broad-based across product lines, led by a 67% jump in condition monitoring driven by large high-voltage cable monitoring orders, with growth also in services, protection products, and offline testing, plus a large cybersecurity client renewal. Only the NRG renewables business is a laggard, though it has seen sequential improvement. Management says Megger is also seeing strong order growth year-over-year, confirming broad-based improvement in the overall utility market.

• Q: What factors drove USG margin decline in the quarter, and are new inflationary pressures a factor? /

  A: Margin decline was driven by two key factors: unfavorable product mix at Doble, plus timing of SG&A and cost of goods sold expenses. Most significantly, NRG (the renewables business) posted much lower margins than it did in the year-ago quarter, dragging down overall segment results. No material discrete inflationary pressures, such as from electronics components, impacted the segment in Q3.

• Q: When will NRG return to year-over-year growth, and what are the key headwinds it is facing? /

  A: The main headwind is delayed renewables developer capital spending, as developers focused on completing existing projects to qualify for expiring U.S. tax credits, cutting back on new diagnostic purchases. Another year-over-year revenue decline is expected in Q4 2026 due to tough comparisons, but sequential growth has already started. Management expects a return to high single-digit growth from a lower base starting in fiscal 2027, with solar expected to recover faster than wind due to wind's permitting and tariff headwinds. The company has already cut costs at NRG to align with current demand levels.

• Q: What are the top priorities for the first 100 days post-closing of the Megger acquisition? /

  A: Pre-close integration planning is already well advanced. Key near-term priorities after closing include finalizing and communicating the combined business plan, evaluating the combined manufacturing footprint, harmonizing product lines, developing an aligned go-to-market strategy, and launching a unified combined identity for the merged utility business.