ESCO TECHNOLOGIES INC Q2 FY2025 earnings call

Operational Performance

• First half of fiscal 2025 had good operational performance and strategic developments, including completion of a major acquisition.

Segment Insights

• Aerospace and defense has positive long-term outlook with continued growth expected in aerospace (fundamental demand for aircraft) and Navy (robust activity in prioritized submarine programs).
• Utility group has strong business cycle in electricity and utility markets, with Doble driving growth and renewables market recalibrating but showing improved order activity.
• Test business has stabilized with accelerating orders, healthy backlogs, and diverse end markets, though monitoring macroeconomic uncertainties and tariffs.

Acquisition

• Closed SM&P acquisition on April 25th, rebranded to ESCO Maritime Solutions, which is trending well and meeting projections made at the time of the deal announcement last July.

Aerospace and Defense: Orders up 5% in the quarter, sales up nearly 8%, adjusted EBIT margins up 400 basis points, adjusted EBIT dollars up 28%. Utility Solutions Group: Orders up nearly 17%, sales up 4% (Doble up 5%, NRG flat), adjusted EBIT margins 23%, improvement of 290 basis points. Test: Orders up 75%, sales up 9%, margins improved modestly to 12.4%.

Sales

• Projected 6%-8% growth before ESCO Maritime acquisition; five months of ownership estimate sales in the range of $90 to $100 million.

Adjusted Earnings per Share

• Previously guided $5.55 to $5.75 per share, increased to $5.65 to $5.85 per share, with unfavorable tariff impacts factored in at $2 to $4 million.
• ESCO Maritime expected to contribute adjusted earnings per share in the range of $0.20 to $0.30, leading to updated all-in guidance of $5.85 to $6.15 per share on an adjusted basis.

• Macro-economic uncertainties, trade issues, and geopolitical events pose risks to the business.
• Potential impacts on the test segment due to global trade flows and tariffs, which the team is monitoring and reacting to mitigate.

Q: Hi. Good afternoon. Thank you for taking my questions, and nice quarter, and congrats on raising the guidance out there. I was wondering if you could touch on the sale of VACCO or the exploration process. Do you have any updates there, and just how should we be thinking about it at this point?

A: Sure. Well, we've been going through a pretty involved process there to potentially sell the business. We have had a lot of interest, and we have active interest now, but it is taking a little bit longer than we anticipated to come to a conclusion. Right now, we would expect to know how it's going to end by the end of May, and that could include both a sale, and it could also include us making a decision that we're going to retain the business. But, we will provide notice to you if we make a decision to sell the business when we do that. And otherwise, we'll talk about it again on the next call.

Q: Hi, good afternoon. On the Maritime Solutions cash generation, I think you referenced it in the prepared remarks there. Is that strong cash profile just a short-term dynamic or how long will that, you know, kind of strong free cash from the asset continue?

A: Well, I think what we were talking about there was more kind of the earnings impact and adjusted earnings per share in sales. So, on the cash flow, honestly, we would expect some benefit there in the year. We're still kind of working through some of those details with them as we onboard them, but the numbers we were talking to were more adjusted earnings per share.

Q: Good afternoon, and thanks for taking my questions. I want to start on ESCO maritime solutions. It's always dangerous. It's always dangerous when analysts take partial year P&L impacts and try to project into future years when we don't have a whole lot of historical to go from. And so, if a fair baseline assumption might be to just look at the profit contribution you're offering us for this fiscal year. Think about the annualized version of that and then slap some form of a double-digit growth rate on that base as we think about 2026. Is there any more intelligent way that you can help frame what we all ought to be thinking about for 2026? Understand you've controlled the asset for not that long. But any guidance you could provide would be helpful?

A: Yes, I think your construct there, Tommy, is reasonable. You're right. I mean, we were able to get with them right after closing on the 25th, get some kind of detail to kind of pull together what we saw for the balance of our fiscal year. We haven't been able to get under the hood for very long, as you say. And so I think that the good news is, as Bryan said, I mean, we see them as on track. The backlogs are really healthy. So they're kind of trending at or above the kind of plans we were thinking of whenever we announced this last July. And I think, yes, if you kind of do a monthly run rate for this year and you put growth on top of that in kind of the low, double-digit range, we would expect that's kind of the way it's trending. Obviously, you know, we're working with them. We've got to get the plans re-calendarized and all these kind of things. They've been kind of a calendar year company until now. So we've got more work to do. So we'll give more precision, hopefully, and more clarity on that as time goes forward. But I think, what you're talking about is really a pretty reasonable way to look at it as you think about '26.