ESCO Technologies Inc (ESE) 2026 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the first quarter 2026 ESCO Technologies Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. On the call today, we have Bryan Sayler, President and CEO; Chris Tucker, Senior Vice President and CFO.

And now I'd like to turn the conference over to the first speaker today, Kate Lowrey, Vice President of Investor Relations. Kate, now you have the floor.

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 laws. These statements are based on current expectations and assumptions, and 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 factors 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 these forward-looking statements, except as may be required by applicable laws or regulations. In addition, during this call, the company may discuss some non-GAAP financial measures in describing the company's operating results. A 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.

Now I'll turn the call over to Bryan.

Thanks, Kate, and thanks, everyone, for joining today's call. We are pleased to meet with you this afternoon to discuss ESCO's strong first quarter results, which have our fiscal 2026 off to a great start. We booked over $550 million in orders in the first quarter, which is an increase of 143% over the prior year.

All three of our segments saw double-digit orders growth, led by strong aerospace demand and large Navy orders at Maritime and Globe. We believe in the long-term growth drivers across our end markets, and it was great to see the positive momentum across our businesses to start the year. Top line sales growth of 35% combined with 380 points of adjusted EBIT margin expansion drove a 73% year-over-year increase in adjusted earnings per share from continuing operations to a Q1 record of $1.64 per share.

Our exceptional financial results for the quarter are a testament to our strategic positioning across our served markets combined with disciplined execution by our global team. Chris will take us through all of the financial details in the quarter, but before we get to that, I want to give you a few comments on each of the segments.

Let's start with Aerospace & Defense. As I mentioned, we're seeing tremendous order strength on both US and UK Navy programs from the Maritime business and from our organic baby business. In addition, sales were up 76% in the quarter driven by the addition of Maritime and double-digit organic growth across our Navy and aerospace programs.

The growth story here remains intact, driven by increasing build rates for commercial aerospace OEMs and sizable investments from our defense customers as they refresh and expand their capabilities. Overall, we're seeing the benefits of our A&D segment sharper focus on the Aerospace and Navy markets where the long-term outlook remains quite positive.

Switching over to our Utility Solutions Group. The results here were a little bit more mixed in the quarter. Orders were up double digits with very strong order flow for services, condition monitoring and offline test equipment at Doble. But this was partially offset by lower demand in our renewables business. Sales were up modestly over the prior year as renewables headwinds largely offset the 6% revenue growth at Doble.

Overall, we remain quite excited about the outlook for our utilities business. The majority of the activity here is driven by utility capital spending focused on grid reliability and capacity increases, and we continue to see those forecasts grow. ESCO's capabilities have a clear role to play in assisting utilities to meet growing electricity demand, and we remain bullish on the long-term prospects for growth here.

As we have discussed previously, the renewables market is recalibrating right now as US developers focus on completing current projects in order to satisfy the safe harbor provisions related to tax credits, which expire in July. This has slowed domestic renewables investments in the near term, but we continue to believe that longer term, renewables will play a vital wall as a cost competitive source of generation as utilities work to meet the increasing demand for electric power.

Finally, I'll touch on the Test business, which had a robust start to the year with orders up 17% over the prior year and revenue up 27%. This business had a nice year of recovery at 2025 and it's great to see that momentum continue with significant growth during the first quarter. This is a technology-driven business with broad capabilities to serve customers across the RF test and measurement in industrial shielding markets. The team here is executing very well, and we're excited at the outlook for test continues to improve.

Overall, our Q1 results got us off to a great start for the year. With record backlog and continuing strength across our businesses, we are raising our full year sales and earnings guidance.

With that, I'll turn it over to Chris, who will run you through the financial details for the quarter.

Thanks, Bryan. Everyone can follow along on the chart presentation. We will start on page 3, which shows the financial highlights for the first quarter. The bar charts across the top of this page clearly show that ESCO had a tremendous first quarter. The key theme with ESCO's financial performance right now is that core company performance on an organic basis is quite strong, and the ESCO Maritime acquisition is adding significantly to that base company performance. It's a powerful combination.

Getting the numbers, we start with orders, which increased 143%, organic order growth was double digit for all three business platforms with Aerospace & Defense being particularly strong. Maritime added $238 million of orders as the business received large contract awards in the UK. On the sales side, the reported growth was 35%, which was comprised of 11% organic growth and $51 million of sales from Maritime. On the profitability side, we saw adjusted EBIT margins improved by 380 basis points to 19.4% and adjusted earnings per share increased by nearly 73% to $1.64 per share.

Next, we'll go through the segment highlights, starting with Aerospace & Defense on page 4. A great quarter here, starting with orders, which came in at over $380 million compared to $75 million in the prior year quarter. Order activity was quite strong from the commercial and military aircraft customers. Additionally, Navy order activity was also very strong with organic growth driven by Virginia Class Block VI orders.

Sales in the quarter were $144 million with organic growth of 14%. This robust organic growth was driven by strength from commercial and defense aerospace, as well as the Navy business. So really nice performance from all parts of the core Aerospace & Defense platform.

On the profitability side, we had tremendous increases with adjusted EBIT margins up to 26.5%, which is more than 500 basis points of improvement. Adjusted EBIT and adjusted EBITDA dollars both more than doubled from last year's first quarter. Again, this demonstrates the strength of our base company performance and the additive impact of the ESCO Maritime acquisition. Margin increases were due to positive impacts from leveraging sales growth and increased prices, while Q1 also had favorable mix due to aftermarket sales.

Next, we'll go to chart 5 in the Utility Solutions Group. Orders here were up 10% in the first quarter, driven by strong performance at Doble, where orders grew by 15%. Backlog finished at nearly $155 million, up 8% since September 30. Sales in the quarter were up a modest 1%. Doble sales growth of 6% was mostly offset by declines in NRG.

Doble continues to see good end-market activity across a number of product lines serving the regulated utility customer base, while NRG continues to see near-term market weakness as the renewable activity resets. Adjusted EBIT dollars were down just over 4% with price increases and sales volume leverage at Doble, unable to offset margin drops in NRG.

Next, we have the Test business on page 6. This business had a terrific start to fiscal '26 with orders up over 17% and sales up nearly 27%. This business is seeing robust market activity centered around US Test & Measurement, industrial shielding, medical shielding and power filters. Adjusted EBIT margins improved nicely increasing to 13.8%, which represents an increase of 320 basis points from last year's first quarter. The business is leveraging the sales growth nicely and also increasing margins via price increases and cost containment.

Going to chart 7, we have cash flow highlights for the first quarter. Operating cash flow in the first quarter was very strong, more than doubling the $68.9 million on a continuing operations basis. This was led by an increase in contract liabilities at the Navy businesses. Capital spending increased slightly in the quarter, and there was also a payment of just over $5 million during the quarter for the final working capital settlement related to the ESCO Maritime acquisition last year.

Our last chart is number 8, where we have the updated 2026 guidance. With the great start to the year, we were able to substantially increase the 2026 outlook. The sales guidance is increasing by $20 million at the midpoint to a range of $1.29 billion to $1.33 billion. The increase is coming primarily from the Test business where we had Q1 outperformance in sales and orders driving up the full year forecast. The original sales guidance for Test was for growth in the range of 3% to 5% and the updated guide is for revenue growth in the range of 9% to 11%. Additionally, we had a slight increase in the A&D sales outlook.

Overall, sales increased -- the sales increase is driving increased adjusted EBIT performance expectations for 2026. Additionally, the first quarter tax rate was favorable, and that impact will flow to the full year forecast. This means that full year tax rate projections are now in the range of 23% to 23.5% compared to 237% to 24.1% in the original guidance. All of this drives the full year adjusted earnings per share to a range of $7.90 to $8.15 per share.

Compared to the prior guidance range, this is an increase of $0.38 per share at the midpoint and represents growth of 31% to 35% compared to 2025 adjusted earnings per share. The original outlook represented a strong growth plan for ESCO, and we are pleased to share this increased forecast, representing an even stronger growth trajectory.

That completes the financial summary, and now I'll turn it back over to Bryan.

Thanks, Chris. So as you've heard from our commentary, Q1 was a great start to the year. Robust orders and strong execution has put us in a position to raise our outlook for the full year.

So with that, we're finished with our prepared remarks and can turn it over to the Q&A.

(Operator Instructions)

Tommy Moll, Stephens.

Good afternoon and thanks for taking my questions. Bryan, my first question is on the A&D orders. To the extent you can comment on shipset content on either side of the Atlantic, if there's any update there, we'd appreciate it. And maybe bigger picture on orders. Last quarter's 0.83 book-to-bill was clearly not the right level. This quarter's 2.66 is probably not a sustainable level. But how would you -- just give us something about the -- some kind of enduring takeaway here on the state of affairs there.

Well, I'll take the last piece first. And that is, I think the enduring takeaway is that the long-term demand in all of these markets is really, really good. I think we've signaled a number of times that Navy, in particular, is going to be very lumpy. I think we mentioned in November's conference call that we had a large couple of hundred million dollar order in the UK that came through.

Unfortunately, the way that the MOD thinks about those things, we're not really in a position to be able to give you specifics on platforms or our content there. So I would not be able to give you a lot of detail there. I'd say over on the US side, we also received in the quarter about $30 billion in orders for Virginia Class Block VI, and we would expect that to kind of be continuing. But again, that's going to come in big chunks.

And so that's going to be kind of lumpy. And it's not always going to be in the same quarter every year. So the year-over-year, quarter-to-quarter comparisons aren't really great. I think the other big story here is that we really did see pretty robust return to orders from our aerospace OEMs. 2025 was kind of a year that was a little soft on the order side as build rates were kind of stable and there seemed to be a lot of management of inventory going on in the supply chain, but we think that they're kind of through that. We're really encouraged to see Boeing and the other OEM is kind of getting their build rates up. And we're starting to see that come through on our order book.

I'd also say there was a pretty good amount of military aircraft activity in the quarter as well. That's something that is more stable, probably we'll be lumpy through more quarter cycle. But generally speaking, we'll be pretty repetitive on a year-to-year basis with a little bit of growth.

Bryan, if I could stay on A&D for another question. Just looking at the results in the first quarter and the guide for the year, I'm talking revenue now. It looks conservative at first glance. I mean you raised it from a 7% to an 8% at the midpoint, but you started the year in the teens on a pretty tough comp. So maybe walk me back from that assumption if there's something I'm missing here.

Yes. Tommy, this is Chris. I would say that we do expect that the first quarter is going to be the strongest growth. And we would expect to still see solid growth through the year, but maybe kind of taper down a little bit. And then when we get to Q4, we have kind of lower growth overall.

Again, I think that's a function of the comps a little bit. So we still see a high single-digit outlook there in the core business, but understanding it's a little bit front-end loaded.

Thank you both. I'll turn it back.

(Operator Instructions) John Tanwanteng, CJS.

Hi, thank you for taking my questions, and a really great quarter and outlook, guys. If you could start, what's driving the strength in Test? And how did that change so quickly in the span of 90 days?

Listen, the -- a lot of our traditional core markets, particularly electromagnetic compatibility, medical shielding, those really came back very, very strong this year. This quarter, I would say we want a couple of pretty good-sized orders, and that's really -- because it happened earlier in the year, we're going to see a lot of that come through as revenue within the year.

I would also say that we're starting -- we've seen kind of a return to regular orders from our -- kind of our EMP filter, product line that supports some of the government data centers and that sort of thing. So listen, just a pretty broad based. I would tell you that the one area that we're still not feeling love on is the wireless business.

I mean, we did see a little bit of growth there, but it's coming off a very low base. So that's the one area where we're probably still looking for some recovery. But I would say, overall, quite good. A little bit of A&D in there, some microwave stuff. So really good -- and I would say Europe and the US were the two big leaders there.

Got it. And then, are you within sight of the trough of the NRG business? Or do you think that's going to extend a little further out?

Yes. Listen, I think that what we believe about that is that the focus for all of the developers in the US is really they're hyper focused on kind of getting as much done on their existing projects by the end of July so that they can qualify as much of that as possible for those tax credits.

And so a lot of our content has already been delivered on some of those projects. And so that's leading them to make lower investments right now on new projects. But we expect that, that's going to kind of revert in the second half of 2026. So it might be in our fourth quarter, it might be in the first quarter of next year. That's when we think that things are going to kind of return to what we would call normal growth, which would be kind of high single digits kind of like our regulated utility business operates.

So please remember, John, that for -- after the inflation Reduction Act was put in place, that whole market kind of got turbocharged for two or three years. And now they're kind of getting off that sugar high from all those tax incentives, and it's going to take a couple more months to kind of get back into the pocket and really making good decisions. The renewables business will have a big role to play because it is very cost-effective, relatively easy to deploy and the assets are available. And those are all characteristics that utilities are looking for.

Got it. And then last one, if I could. Just the large orders of the Maritime business. Can you just talk about how they layer in over the next couple of years? And if that's an acceleration of the growth rate or if that's in line with what your expectations were?

Yes. I would say it's in line kind of since we've owned the company, we closed the deal at the end of April. And so these were kind of the expectations were that this order would come in. As far as how that layers in, I would say we would get a little revenue starting in the fourth quarter, and then you'll start to see it kind of kick in more in '27 and '28. So these are long-term contracts and programs that really kind of help solidify the outlook for '27 and beyond, I would say.

So that's kind of how we're thinking about them and really not much of a revenue impact this year, although there will be a little bit towards the end of the year.

Got it thank you

(Operator Instructions) Tommy Moll, Stephens.

Thanks for a follow-up question here. I had to ask on capital allocation. You'll look not too long from now and potentially have a net cash balance sheet. So I'm just curious what comments you can make on M&A funnel or capital allocation more broadly. Thank you.

Yes, yes. Well, listen, I think with the sale of the VACCO business and the completion of the Maritime business, and that integration is kind of going pretty well. Our cash flow really has been outstanding, and our leverage is pretty low. We aren't actively rebuilding a pipeline of M&A opportunities. The market looks pretty healthy. And we do see a number of different prospects on the horizon, nothing we can announce at this point in time, but we do have a couple of good things that we could get some done this year.

So that's really our primary focus for deployment of capital would be to continue to add good fit, strategic acquisitions. I think that we're going to continue to be a little bit picky, focused primarily on our Utility segment, our Aircraft Components segment and our Navy segment, where we think we understand those markets pretty well, and they are all markets that have really good long-term secular growth characteristics. So that's kind of where our focus is right now.

Thank you.

John Tanwanteng, CJS.

Thanks for the follow-up. I was wondering if you could talk a little bit more about the military business in the A&D segment that is not maybe you mentioned strength in military aircraft. Just wondering where that's coming from, number one? And if there's anything outside of that, maybe drones or munitions that's driving some strength there.

Yes. I'd say it's pretty broad-based. But a couple of highlights there. You would have seen in the 2025 reconciliation bill that they put a lot of money out there. They're buying 21 of the F-15 EX fighters.

That's a platform that we have a lot of content on. There's a lot going on with regard to the sixth-generation fighter platform, the F-47, and that's been a positive story for us. So yes, there's a lot of good things going on. But I would say, yes, the traditional kind of F-35 missile programs, all those things are all kind of coming through for us.

Got it. Thank you. And then just for the broader airplane business, the commercial side, how closely does your guidance, I guess, mirrors the targeted production rates at the OEMs? Or are you still giving them a little cushion in your outlook?

No, we still have cushion. I think that we follow our OEM partners very, very closely. But I think that we have our own opinion, which is probably modestly skeptical of their ability to get -- to reach their targets. And so when we are communicating to you, I think you should assume there's a little bit of discount on there, which -- listen, if they're successful, then that's going to be all upside for ESCO.

Got it. Thank you, guys

Thank you. And this concludes today's Q&A session. I would like to turn the call back over to Bryan for closing remarks. Please go ahead.

Well, listen, thanks for taking a little bit of time to hear about our first quarter. We're pretty excited about the results and probably more excited about our growth prospects going forward. So we'll look forward to talking to you again next quarter.

Thank you for joining today's program. You may all disconnect.