ESCO Technologies Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Completed Maritime acquisition and VACCO divestiture, marking portfolio strategy progress. Aerospace & Defense now focuses on aircraft and Navy markets with durable growth drivers. Team worked hard on closing deals and integrating Maritime. Monitored macro factors, teams managing risks. Aerospace & Defense had exceptional quarter with double-digit organic growth, margin increase, and record backlog. Utility Group had strong orders but flattish sales/margin. Test had strong revenue growth but margin fluctuations.

Segment Performance

• Aerospace & Defense: Aerospace revenue up almost 20% in the quarter and 15% YTD. Achieved double-digit organic growth, 560 basis point margin increase, and ended with record backlog of $832 million. Orders increased significantly, with $364 million from Maritime acquisition backlog and $50 million from Maritime in the 2 months it was owned by ESCO. Organic orders strong with Globe's Virginia and Columbia Class orders.
• Utility Group: Flattish quarter for sales and margin but experienced strong orders. Year-to-date results positive with demand drivers intact. Doble critical for utilities, order growth strong. Renewables market recalibrating, but confident in long-term role.
• Test: Strong revenue quarter, 21% growth Y/Y and 15% YTD. Margins improved sequentially but down Y/Y. Team reduced costs, EBIT margin in mid-teens.

Guidance

• Updated guidance: Removed VACCO impact, reducing sales projection by ~$125 million and adjusted EPS by ~$0.50. Increased sales guide by $20 million at low and high ends. Tightened adjusted EPS range, bottom up $0.40 and high end up $0.25, representing 21%-24% growth Y/Y. Tariff impact at low end of previous range. Proceeds from VACCO divestiture in July helped.

Risks

• Macroeconomic factors like evolving trade policies and geopolitical uncertainty. Uncertainty in renewables market affecting utility group's NRG business. Tariff impacts, though managed within guidance range.

Question and Answer

Q: About A&D orders, shipset content and margin progression.

A: No big change from communication, Maritime integration ongoing. Core company margins phenomenal with price, mix, leverage, and ESCO operating system impact.

Q: Increase in outlook, sourcing of growth.

A: Test outperforming, A&D incremental volume, NRG takedown, tariffs lower than expected, VACCO proceeds.

Q: Impact of VACCO lap in 2026.

A: VACCO in discontinued operations, Navy dynamics strong, Maritime partial year impact, positive outlook for 2026.

Q: Naval deliveries pace.

A: Pace expected to increase, better guidance in November, Navy progression positive.

Q: USG margins, Doble.

A: Q3 margins below anticipation due to sales timing, but YTD positive, orders strong for Doble.

Q: UK-Australia nuclear sub treaty impact.

A: Positive for business, AUKUS review ongoing, investments in UK shipbuilding to pay off, maybe sooner.