ESCO Technologies(ESE) - 2025 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Orders increased by nearly 22% in the quarter, resulting in a record backlog of $932 million [15] - Sales grew by 6.6% in the quarter, with all three segments contributing to the increase [15] - Adjusted EBIT margins were at 18%, with incremental margins on sales growth at 56%, leading to adjusted earnings per share of $1.35, a 24% increase year-over-year [15][21] Business Segment Data and Key Metrics Changes - Aerospace and Defense: Orders were up 5% with nearly 8% sales growth, driven by commercial aerospace and Navy orders. Adjusted EBIT margins increased by 400 basis points, with EBIT dollars up 28% due to favorable pricing and mix [16][18] - Utility Solutions Group: Orders grew nearly 17%, with sales up 4%. Doble experienced 5% sales growth, while NRG's sales were flat. Adjusted EBIT margins improved to 23%, up 290 basis points year-over-year [17][19] - Test Business: Orders surged by 75% compared to last year, with sales up 9%. Margins improved to 12.4%, benefiting from volume leverage and price increases [19][20] Market Data and Key Metrics Changes - The aerospace market shows fundamental demand for additional commercial and defense aircraft, with expectations for continued growth despite recent moderation in order rates [8][9] - The utility market is experiencing a favorable business cycle, driven by increased electricity demand and aging infrastructure [11][12] - The test business is recovering, with strong activity in EMC testing, healthcare, and industrial markets [13][14] Company Strategy and Development Direction - The company completed a major acquisition of SMMP, rebranding it as ESCO Maritime Solutions, which is expected to enhance margin and growth profiles [10][24] - The strategic planning process indicates a focus on delivering above-market growth by assessing end markets and strategies [6] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating macroeconomic uncertainties and geopolitical risks, highlighting strong underlying business conditions [4][5] - The long-term outlook for aerospace and defense remains positive, with expectations for continued growth despite short-term challenges [7][9] - The company anticipates growth in the utility sector due to increasing electricity demand and the importance of renewable technologies [12] Other Important Information - The company expects sales growth of 6% to 8% for the year, with adjusted earnings per share guidance increased to a range of $5.65 to $5.85 [23][24] - The acquisition is projected to contribute adjusted earnings per share in the range of $0.20 to $0.30 [23] Q&A Session Summary Question: Update on the sale of VACCO - Management indicated ongoing interest in the sale process, with a decision expected by May [28] Question: Performance of the underlying business - The business has stabilized with improved performance compared to last year, although margins remain lower than other segments [30] Question: Clarification on tariff impacts - The estimated tariff impact of $2 million to $4 million is a net number, factoring in mitigation efforts [32][34] Question: Cash generation from Maritime Solutions - Management expects strong cash flow benefits from the Maritime acquisition, with ongoing assessments as integration progresses [40] Question: Thoughts on the 2025 and 2026 budget for shipbuilding - Management is optimistic about the shipbuilding budget, noting strong visibility and progress in programs [42][43] Question: Commercial aircraft orders moderation - Management noted a slight moderation in orders due to inventory management but remains confident in future growth [68] Question: Status of Department of Defense programs - Programs related to submarines and Navy initiatives are prioritized, with a positive order flow expected [70]