Q3 2024 ESCO Technologies Inc Earnings Call

August 7, 2024

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Operator: Good day, and thank you for standing by. Welcome to the third quarter 2024 ESCO Technologies earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You'll then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again.

Speaker Change: Good day and thank you for standing by. Welcome to the third quarter 2024 ESCO Technologies earnings call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question and answer session.

Speaker Change: To ask a question during this session, you'll need to press star one one on your telephone. You'll then hear an automated message advising your hand is raised.

Operator: Please be advised that today's conference is recorded. On the call today, we have Bryan Sayler, President and CEO; Chris Tucker, Senior Vice President and CFO. Now, I'd like to hand the conference over to our first speaker today, Kate Lowrey, Vice President of Investor Relations. Kate, you now have the floor.

To withdraw your question, please press star 1 1 again.

Please be advised that today's conference is recorded.

Kate Lbbery: On the call today, we have Bryan Sayler, President and CEO , Chris Tucker, Senior Vice President and CFO . And now I'd like to hand the conference over to our first speaker today, Kate Lowrey, Vice President of Investor Relations. Kate, you now have the floor.

Kate Lowrey: 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 8K to be filed.

Kate Lowrey: Thank you.

Speaker Change: 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 8K to be filed.

Kate Lowrey: We undertake no duty to update or revise any forward-looking statements, except as may be required by applicable laws and 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.escotechnology.com under the link Investor Relations. Now, I'll turn the call over to Bryan.

We undertake no duty to update or revise any forward-looking statements except as may be required by applicable laws and regulations.

In addition, during this call, the company may discuss some non-GAAP financial measures in describing the company's operating results.

Bryan: A reconciliation of these measures to the most comfortable 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.

Bryan Sayler: Thanks, Kate. Thanks to everyone for joining today's call. We are happy to provide an update on a lot of the exciting things that are happening here at ESCO. We are pleased with the third quarter results and are particularly excited about the continued momentum across all of our business platforms. Order growth in the quarter was substantial, and we had a record backlog of nearly $890 million as of June 30.

Bryan: Thanks Kate, and thanks everyone for joining today's call. We are happy to provide an update on a lot of the exciting things that are happening here at ESCO.

Bryan: We are pleased with the third quarter results and are particularly excited about the continued momentum across all of our business platforms.

Operator: Good day, and thank you for standing by.

Operator: Welcome to the third quarter, 2024 ESCO Technologies earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press Star 1-1 on your telephone. You'll then hear an automated message advising your hand is raised. To withdraw your question, please press Star 1-1 again.

Bryan: Order growth in the quarter was substantial, and we have record backlog of nearly 890 million dollars as of June 30th.

Bryan Sayler: This is an important indicator of the continuing strength of our end market and our formidable competitive position. Before talking about the businesses, I want to briefly highlight some additions to our board of directors. We are fortunate to bring two highly capable individuals with deep backgrounds in the utility industry onto our board. These additions to the board will become effective upon approval by the Federal Energy Regulatory Commission. The first is Penny McLean-Connor.

Kate Lowrey: This is an important indicator of the continuing strength of our end markets and our formidable competitive positions.

Bryan Sayler: Penny is an operating executive with Eversource Energy, a utility holding company based in New England, where she currently serves as Executive Vice President of Customer Experience and Energy Strategy. She is a registered licensed professional engineer and has held several positions with increasing responsibility in the utility industry since 1986. In that time, she has worked for Tampa Electric, Duke Energy Corporation, and Everson. We are also adding David Campbell to the board. David is currently president, CEO, and chair of Evergy Incorporated, a public utility holding company headquartered in Kansas City, Missouri.

Operator: Please be advised that today's conference is recorded.

Kate Lowrey: Before talking about the businesses, I want to briefly highlight some additions to our board of directors.

Kate Lowrey: On the call today, we have Bryan Sayler, President and CEO, Chris Tucker, Senior Vice President, and CFO, and now I'd like to hand the conference over to our first speaker today, Kate Lowrey, Vice President of Investor Relations. Kate, you now have the floor. Thank you.

Kate Lowrey: We are fortunate to bring two highly capable individuals with deep backgrounds in the utility industry onto our board. These additions to the board will become effective upon approval of the Federal Energy Regulatory Commission.

Kate Lowrey: Statements made during this call, which are not strictly historical, are forward-looking statements within the meeting and the safe cargo provisions of the federal security laws. These statements are based on current expectations and assumptions, and actual results may differ materially from those projected in the floor-looking statements. There are risks and uncertainties that exist in the company's operations and business environment, including, but not limited to, the risk factors, reference, and the company's press release issue today, which will be included as an exhibit to the company's form 8K to be filed.

Kate Lowrey: First is Penny McClain-Connor. Penny is an operating executive with Eversource Energy, a utility holding company based in New England, where she currently serves as Executive Vice President of Customer Experience and Energy Strategy.

Kate Lowrey: Penny is a registered licensed professional engineer and has held several positions with increasing responsibility in the utility industry since 1986. In that time, she has worked for Tampa Electric, Duke Energy Corporation, and Eversource.

Kate Lowrey: We undertake no duty to update or revise any forward-looking statements, except that may be required by applicable laws and regulations. In addition, during this call, the company may discuss some non-gap financial measures in describing the company's operating results.

Speaker Change: We are also adding David Campbell to the board. David is currently president, CEO , and chair of Evergy Incorporated, a public utility holding company headquartered in Kansas City, Missouri.

Bryan Sayler: David has held several executive positions at a number of electric and integrated energy companies in Texas, as well as an independent energy resource and investment company. Prior to that, he worked for nine years at McKinsey and Company, the last four of which he served as a partner.

Kate Lowrey: A reconciliation of these measures to the most comparable gap measures can be found in the press release issue today, and found on the company's website at www.espotechnologies.com under the link investor relations.

Speaker Change: David has held several executive positions at a number of electric and integrated energy companies in Texas as well as an independent energy resource and investment company.

Bryan Sayler: Now I'll turn the call over to Bryan. Thanks Kate.

Speaker Change: Prior to that, David worked for nine years at McKinsey & Company, the last four of which he served as a partner.

Bryan Sayler: Thanks everyone for joining today's call. We are happy to provide an update on a lot of the exciting things that are happening here at ESCO. We are pleased with the third quarter results, and are particularly excited about the continued momentum across all of our business platforms. Order growth in the quarter was substantial, and we have record backlog of nearly $890 million as of June 30th. This is an important indicator of the continuing strength of our end markets and our formidable competitive positions.

Bryan Sayler: We are thrilled to bring Penny and David onto the board. Both have deep utility industry insight, and it goes without saying how important that will be for us at ESCO as we continue to grow our utility solutions group. Penny and David attended our board meetings last week, and it's clear that they will be great contributors. We have a diverse set of industry and business experience on our board, and their guidance, insight, and governance are key to ESCO's success. On behalf of the entire board, I'm happy to extend a warm welcome to Penny and David.

Speaker Change: We are thrilled to bring Penny and David onto the board. Both have deep utility industry insight, and it goes without saying how important that will be for us at ESCO as we continue to grow our utility solutions group.

Speaker Change: Penny and David attended our board meetings last week, and it's clear that they will be great contributors.

Speaker Change: We have a diverse set of industry and business experiences on our board, and their guidance, insight, and governance are key to ESCO's success. On behalf of the entire board, I'm happy to extend a warm welcome to Penny and David.

Bryan Sayler: Chris will run you through all of the financial details for the third quarter, but before that, I want to give you a few comments on each segment, starting with aerospace and defense. We continue to have a strong outlook. As you saw in the release, we finished the quarter with a record backlog driven by significant order increases.

Bryan Sayler: Before talking about the businesses, I want to briefly highlight some additions to our board of directors. We are fortunate to bring two highly capable individuals with deep backgrounds in the utility industry on to our board. These additions to the board will become effective upon approval of the Federal Energy Regulatory Commission. First is Penny McClain Conner. Penny is an operating executive with Ever Source Energy, a utility holding company based in New England, where she currently serves as executive vice president of customer experience and energy strategy.

Speaker Change: Chris will run you through all of the financial details for the third quarter, but before that, I want to give you a few comments on each segment.

Bryan Sayler: Penny is a registered licensed professional engineer and has held several positions with increasing responsibility in the utility industry since 1986. In that time, she has worked for Tampa Electric, Duke Energy Corporation, and Ever Source. We are also adding David Campbell to the board. David is currently president, CEO and chair of Energy Incorporated, a public utility holding company headquartered in Kansas City, Missouri. David has held several executive positions at a number of electric and integrated energy companies in Texas, as well as an independent energy resource and investment company.

Chris: starting with aerospace and defense.

Chris: We continue to have a strong outlook here.

Chris: As you saw in the release, we finished the quarter with record backlog driven by significant order increases.

Bryan Sayler: The order growth was driven by continued strength from commercial and military aerospace as well as the continued strength of our Navy orders at VACO and GLOBE. The underpinnings for the market strength here are well documented, and we remain very positive on the long-term outlook for these markets. The key for us going forward will be to focus on execution and meeting customer requirements as we work to support ongoing production. Before moving on, I do want to address the space business at VAP.

Chris: The order of growth was driven by continued strength from commercial and military aerospace.

Chris: as well as the continued strength of our Navy orders at VACO and Globe. The underpinnings for the market strength here are well documented and we remain very positive on the long-term outlook for these markets.

Chris: The key for us going forward will be to focus on execution and meeting customer requirements as we work to support ongoing production increases.

Bryan Sayler: Prior to that, David worked for nine years at McKinsey Company, the last four of which he served as a partner. We are thrilled to bring Penny and David onto the board, both have deep utility industry insight and it goes without saying how important that will be for us at ESCO as we continue to grow our utility solutions group. Penny and David attended our board meetings last week and it's clear that they will be great contributors. We have a diverse set of industry and business experiences on our board and their guidance inside and governance our key to ESCO's success.

Speaker Change: Before moving on, I do want to address the space business at VACO.

Bryan Sayler: As you saw in the release, we will be reviewing strategic alternatives for this business. Just to frame it up for you a bit, our VACO subsidiary is comprised of two key businesses, Space and Navy. The Space business has a 70-year legacy in this market and continues to be a key supplier on many manned spaceflight and government satellite missions. The business has a great heritage, a tremendous group of committed employees, and a great set of technologies.

Speaker Change: As you saw in the release, we will be reviewing strategic alternatives for this business.

Bryan Sayler: Space business will continue to have a bright future in these NASA-centric missions. For ESCO, this business has sales of approximately $55 million, and we first need to decide how a carve-out from the Navy business would work.

Speaker Change: just a frame it up for you a bit

Speaker Change: Our VACO subsidiary is comprised of two key businesses, Space and Navy. The Space business has a 70-year legacy in this market and continues to be a key supplier on many manned spaceflight and government satellite missions.

Speaker Change: The business has a great legacy, a tremendous group of committed employees, and a great set of technologies.

Speaker Change: The space business will continue to have a bright future in these NASA-centric missions.

Speaker Change: For ESCO, this business has sales of approximately $55 million.

Speaker Change: and we first need to decide how a carve out from the navy business would work and second we need to decide if it has enough scale as part of esco or whether it would fit it would be better suited as part of a different enterprise that's more broadly focused on space

Bryan Sayler: And second, we need to decide if it has enough scale as part of ESCO or whether it would be better suited as part of a different enterprise that's more broadly focused on space. We are undertaking this review process now, and we'll make further comments when the review is completed or when we have determined that a disclosure is required or deemed appropriate. Next up is our utility group, where the outlook continues to be positive.

Bryan Sayler: On behalf of the entire board, I'm happy to extend a warm welcome to Penny and David.

Speaker Change: We are undertaking this review process now and will make further comments when the review is completed or when we have determined that a disclosure is required or deemed appropriate.

Bryan Sayler: Chris will run you through all of the financial details for the third quarter but before that, I want to give you a few comments on each segment, starting with aerospace and defense. We continue to have a strong outlook here. As you saw in the release, we finished the quarter with record backlog driven by significant order increases. The order growth was driven by continued strength from commercial and military aerospace as well as the continued strength of our Navy orders at VACO and Globe.

Speaker Change: Next up is our utility group, where the outlook continues to be bullish. The sales growth here was a bit more modest in the third quarter, but order growth was significant and backlogs are at healthy levels.

Bryan Sayler: The sales growth here was a bit more modest in the third quarter, but order growth was significant, and backlogs are at a healthy level. You'll recall that the third quarter of June last year was an all-time record order level for our renewables business. So that business did see an order reduction compared to last year's third quarter, but the absolute level of orders at NRG in the third quarter, 2024, was still the second highest on record.

Speaker Change: You'll recall that the third quarter of June last year was an all-time record orders level for our renewables business.

Speaker Change: So that business did see an orders reduction compared to last year's third quarter, but the absolute level of orders at NRG in the third quarter, 2024, was still the second highest on record.

Bryan Sayler: The underpinnings for the market strength here are well documented and we remain very positive on the long-term outlook for these markets. The key for us going forward will be to focus on execution and meeting customer requirements as we work to support ongoing production increases.

Bryan Sayler: We still feel great about the renewables business, and our core utility market business from Doble delivered significant order growth in the quarter and continues to see lots of opportunities for future growth. Finally, I'll touch on the test business. As we discussed last quarter, we got off to a tough start this year for the test business with significant revenue and profitability declines in Q1.

Speaker Change: We still feel great about the renewables business and our core utility market business from Doble delivered significant orders growth in the quarter and continues to see lots of opportunities for future growth.

Bryan Sayler: Before moving on, I do want to address the space business at VACO. As you saw in the release, we will be reviewing strategic alternatives for this business. Just to frame it up for you a bit, our VACO subsidiary is comprised of two key businesses, space and Navy. The space business has a 70-year legacy in this market and continues to be a key supplier on many manned spaceflight and government satellite missions. The business has a great legacy, a tremendous group of committed employees and a great set of technologies.

Speaker Change: finally i'll touch on the test business as we discussed last quarter we got off to a tough start this year for the business with significant revenue and profitability of declines in q one

Bryan Sayler: It's never fun to go through these kinds of business cycles, but the test team has responded and continues to manage well in this business. Importantly, we continue to see nice sequential improvements here in both sales and margins. The business delivered adjusted EBIT margins of 16.6% in the quarter, which on a historical basis is very good. It's a real testament to the hard work by the team and shows that the margin benefits anticipated from the MPE acquisition are coming through.

Speaker Change: It's never fun to go through these kinds of business cycles, but the test team has responded and continues to manage well through this business cycle.

Speaker Change: Importantly, we continue to see nice sequential improvements here in both sales and margins.

Speaker Change: the business delivered adjusted ebit margins of sixteen point six percent in the quarter which on a historical basis is very good

Bryan Sayler: The space business will continue to have a bright future in these NASA-centric missions. For VACO, this business has sales of approximately $55 million and we first need to decide how a carve-out from the Navy business would work and second, we need to decide if it has enough scale as part of VACO or whether it would be better suited as part of a different enterprise that's more broadly focused on space.

Speaker Change: It's a real testament to the hard work by the team and shows that the margin benefits anticipated from the MPE acquisition are coming through.

Bryan Sayler: As we have stated before, this business has broad test and measurement capabilities that will apply to a number of end markets, and we certainly expect growth to return in 2025 and beyond. With that, I'll turn it over to Chris to run you through the financial details of the quarter. Thanks, Bryan.

Speaker Change: As we have stated before, this business has broad test and measurement capabilities that will apply to a number of end markets, and we certainly expect growth to return in 2025 and beyond.

Bryan Sayler: We are undertaking this review process now and we'll make further comments when the review is completed or when we have determined that a disclosure is required or deemed appropriate.

Speaker Change: With that, I'll turn it over to Chris to run you through the financial details of the quarter.

Chris Tucker: Everyone can follow along with the chart presentation. We will start on page 3, where we will have overall financial highlights of the quarter. The top of the chart looks good here with all the bars moving in the right direction, starting on the upper left side of the chart. You can see that order growth in the quarter was tremendous.

Chris: Thanks Bryan. Everyone can follow along on the chart presentation. We will start on page 3 where we will have overall financial highlights of the quarter.

Bryan Sayler: Next up is our utility group where the outlook continues to be bullish. The sales growth here was a bit more modest than the third quarter, but ordered growth was significant and VAC logs are at a healthy level.

Chris: The top of the chart looks good here with all the bars moving in the right direction, starting on the upper left side of the chart.

Chris Tucker: The growth in the quarter was tremendous at 46%, as all three segments had book-to-bill ratios of over 1.1, which resulted in a record backlog of 889,000.

Speaker Change: You can see that order growth in the quarter was tremendous at 46%, as all three segments had book-to-bill ratios of over 1.1, which resulted in a record backlog of $889 million.

Bryan Sayler: You'll recall that the third quarter of June last year was an all-time record orders level for our renewables business. So that business did see an order's reduction compared to last year's third quarter, but the absolute level of orders at NRG in the third quarter, 2024, was still the second highest on record. We still feel great about the renewables business and our core utility market business from Doble delivered significant orders growth in the quarter and continues to see lots of opportunities for future growth.

Chris Tucker: Next are sales, which were up 5%, comprised of a 4% increase.

Chris Tucker: 4% organic growth and a one point contribution from the MPE acquisition.

Speaker Change: Next is sales which were up 5% comprised of a 4% organic growth and a one-point contribution from the MPE acquisition.

Chris Tucker: Adjusted EBIT was up 50 basis points in the quarter, and adjusted EPS improved by over 6%. Moving to the next chart, we will cover the A and D segment. You can see this segment was a key driver of overall order growth with an increase of 79%, although we were up against a lower count from last year's third quarter.

Speaker Change: Adjusted EBIT was up 50 basis points in the quarter, and adjusted EPS improved by over 6%.

Speaker Change: Moving to the next chart, we will cover the A&D segment.

Speaker Change: You can see this segment was a key driver of overall order growth with an increase of 79%.

Bryan Sayler: Finally, I'll touch on the test business. As we discussed last quarter, we got off to a tough start this year for the business with significant revenue and profitability declines in Q1. It's never fun to go through these kinds of business cycles, but the test team has responded and continues to manage well through this business cycle. Importantly, we continue to see nice sequential improvements here in both sales and margins. The business delivered adjusted even margins of 16.6 percent in the quarter, which on a historical basis is very good. It's a real testament to the hard work by the team and shows that the margin benefits anticipated from the MPE acquisition are coming through.

Chris Tucker: Still saw excellent order intake on the Navy side with VACO bringing in over 40 million Navy orders during the third quarter. Additionally, commercial and defense aerospace orders continue to deliver strong growth at both PTI

Speaker Change: we were up against a lower comp from last year's third quarter but still saw excellent order intake on the navy side with vacover bring in over forty million of navy orders during the third quarter

Speaker Change: Additionally, the Commercial and Defense Aerospace Orders continue to deliver strong growth at both PTI and CRISAIR.

Chris Tucker: and Chrysler. On the sales side, there was an increase of nearly 11%.

Chris Tucker: with growth led by Navy and Aerospace. Adjusted EBIT margins for the quarter came in at 18.7%, which was a decline of 220 basis points.

Speaker Change: On the sales side, there was an increase of nearly 11% with growth led by Navy and Aerospace.

Speaker Change: Adjusted EBIT margins for the quarter came in at 18.7%, which was a decline of 220 basis points.

Speaker Change: We saw additional margin declines in the quarter from the VACO space business with additional profitability challenges on developmental contracts.

Chris Tucker: $2 million against the guidance that was provided last quarter.

Speaker Change: This cost us approximately $2 million against the guidance that was provided last quarter.

Chris Tucker: Additionally, we had an unfavorable mix in the quarter at PTI driven by timing of sales on different OEM and aftermarket platforms. Moving on to chart five, we will cover the utility solutions group.

Speaker Change: Additionally, we had unfavorable mix in the quarter at PTI driven by timing of sales on different OEM and aftermarket platforms.

Christopher Tucker: With that, I'll turn it over to Chris to run you through the financial details of the quarter. Thanks, Brian. Everyone can follow along on the chart presentation.

Speaker Change: Moving on to chart 5, we will cover the utility solutions group, where orders increased by 17% during the quarter.

Chris Tucker: Where orders increased by 17% during the quarter. The growth was driven by Doble, which delivered a 30% increase as customers continued to...

Speaker Change: the growth was driven by doableble which delivered a thirty percent increase as customers continue to request significant service work and do more testing as they maximize uptime of existing assets while continuing to struggle with lead times on new equipment like transformers

Christopher Tucker: We will start on page three where we'll have overall financial highlights of the quarter. The top of the chart looks good here with all the bars moving in the right direction. Starting on the upper left side of the chart, you can see the order growth in the quarter was tremendous. At 46 percent, as all three segments had booked to bill ratios of over 1.1, which resulted in a record backlog of $889 million.

Chris Tucker: to request significant service work and do more testing as they maximize the uptime of existing assets while continuing to struggle with lead times on new equipment like transformers. Orders for NRG decreased by $4 million, but as mentioned by Bryan, we were up against a very tough comparison to last year's record third quarter amount. Sales for the quarter were essentially flat, as growth rates moderated after many quarters of double-digit growth. However, adjusted EBIT margins for the segment increased by 180 basis points with a favorable mix from the service business and favorable price impacts more than offsetting inflationary pressures.

Speaker Change: Orders for NRG decreased by 4 million, but as mentioned by Bryan, we were up against a very tough comparison to last year's record third quarter amount.

Christopher Tucker: Next is sales, which were up 5 percent comprised of a 4 percent organic growth and a one point contribution from the MPE acquisition. Adjusted EBIT was up 50 basis points in the quarter and adjusted EPS improved by over 6 percent.

Speaker Change: sales for the quarter were essentially flat as growth rates moderated after many quarters of double-digit growth

Speaker Change: Adjusted EBIT margins for the segment increased by 180 basis points with favorable mix from the service business and favorable price impacts more than offsetting inflationary pressures.

Chris Tucker: Next in chart 6, we'll cover the test business. Orders increased by more than 40% in the quarter for tests. This was great to see after weakness through the first six months of the year. However, strong U.S. bookings drove the growth. Sales in the quarter were down 5% on an organic basis.

Christopher Tucker: Moving to the next chart, we will cover the A and D segment. You can see this segment was a key driver of overall order growth with an increase of 79 percent. We were up against a lower count from last year's third quarter, but still saw excellent order intake on the Navy side with VACO bringing in over 40 million of Navy orders during the third quarter. Additionally, the commercial and defense aerospace orders continued to deliver strong growth at both PTI and Creser.

Speaker Change: next is sharp six we 'recover the test business

Speaker Change: Orders increased by more than 40% in the quarter for tests. This was great to see after weakness through the first six months of the year.

Speaker Change: Strong U.S. bookings drove the growth.

Chris Tucker: on an organic basis, with MPE adding six points of growth.

Speaker Change: Sales in the quarter were down 5% on an organic basis, with MPE adding 6 points of growth.

Chris Tucker: Sales grew sequentially compared to the second quarter, which is an important trend as the business works towards recovery. Margins in the quarter were up by 100 basis points as we saw a favorable margin impact from the MPE acquisition and cost reduction savings offsetting volume de-leverage and unfavorable mix. Moving on from the segment details to the next chart.

Speaker Change: Sales grew sequentially compared to the second quarter, which is an important trend as the business works towards recovery.

Christopher Tucker: On the sales side, there was an increase of nearly 11 percent with growth led by Navy and Aerospace. Adjusted EBIT margins for the quarter came in at 18.7 percent, which was a decline of 220 basis points. We saw additional margin declines in the quarter from the VACO space business with additional profitability challenges on developmental contracts. This cost us approximately $2 million against a guidance that was provided last quarter.

Speaker Change: Margins in the quarter were up by 100 basis points as we saw a favorable margin impact from the MPE acquisition and cost reduction savings offsetting volume de-leverage and unfavorable mix.

Chris Tucker: We have our year-to-date order and P&L highlights on chart number 7. Really strong performance year-to-date, with orders up nearly 22 percent. The growth has been led by sizable orders in the Navy businesses, as well as continued strength from commercial and defense aerospace markets. Sales year-to-date are up 6.6%, with AMD up 13.5% and Utility Solutions up 8.5%, which were slightly offset by an 8.9% drop at test. Margins have improved nicely, with increases from both Aerospace and Defense and the Utility Solutions Group, although we have seen test margins drop on lower volume through the first nine months of the year.

Speaker Change: Moving on from the segment details to the next chart, we have our year-to-date order and P&L highlights on chart number seven.

Speaker Change: Really strong performance year-to-date with orders up nearly 22%. The growth has been led by sizable orders in the Navy businesses, as well as continued strength from commercial and defense aerospace markets.

Christopher Tucker: Additionally, we had unfavorable mix in the quarter at PTI driven by timing of sales on different OEM and aftermarket platforms. Moving on to chart five, we will cover the utility solutions group where orders increased by 17% during the quarter. The growth was driven by Doble which delivered a 30% increase. As customers continue to request significant service work and do more testing as they maximize uptime of existing assets while continuing to struggle with lead times on new equipment like transformers.

Speaker Change: Sales year-to-date are up 6.6% with A&D up 13.5% and utility solutions up 8.5% which were slightly offset by an 8.9% drop at test.

Speaker Change: Margins have improved nicely, with increases from both Aerospace and Defense and the Utility Solutions Group, while we have seen test margins drop on lower volume through the first nine months of the year.

Chris Tucker: Next is chart eight, where we have the cash flow highlights. We see an increase of $26.3 million in operating cash flow compared to the first nine months of last year. We have also increased capital spending so far this year-to-date, mostly related to capacity increases across the A&E business. You can also see on the chart that we have increased acquisition spend this year driven by the MPE transaction. We had a small number of share repurchases during the third quarter, and year-to-date, we have spent $8 million compared to $3 million.

Christopher Tucker: Orders for NRG decreased by 4 million but as mentioned by Bryan we were up against a very tough comparison to last year's record third quarter amount. Sales for the quarter were essentially flat as growth rates moderated after many quarters of double digit growth. The adjusted EBIT margins for the segment increased by 180 basis points with favorable mix from the service business and favorable price impacts more than offsetting inflationary pressures.

Speaker Change: Next is chart 8 where we have the cash flow highlights.

Speaker Change: You see here an increase of $26.3 million of increased operating cash flow compared to the first nine months of last year.

Speaker Change: We also have increased capital spending so far year-to-date, mostly related to capacity increases across the A&E businesses.

Speaker Change: You can also see on the chart that we have increased acquisition spend this year driven by the MPE transaction.

Christopher Tucker: Next is chart six where we will cover the test business. Orders increased by more than 40% in the quarter for tests this was great to see after weakness through the first six months of the year. Strong US bookings drove the growth. Sales in the quarter were down 5% on an organic basis with MPE adding 6 points of growth.

Speaker Change: We had a small number of share repurchases during the third quarter, and year-to-date we have spent $8 million compared to $12.4 million in the prior year.

Chris Tucker: Compared to $12.4 million in the prior year,

Chris Tucker: Last is chart nine, where we have the updated guidance for 2024. Our sales outlook for growth is 7-8% for the year and adjusted earnings per share of $4.5 million.

Speaker Change: Last is chart 9 where we have the updated guidance for 2024.

Speaker Change: Our sales outlook for growth is 7-8% for the year and adjusted earnings per share of $4.10 to $4.20.

Chris Tucker: of $4.10 to $4.20.

Christopher Tucker: Sales grew sequentially compared to a second quarter which is an important trend as the business works towards recovery. Marges in the quarter were up by 100 basis points as we saw a favorable margin impact from the MPE acquisition and cost reduction savings offsetting volume delivery and unfavorable mix.

Speaker Change: The adjusted EPS outlook excludes any impact of further profitability erosion at the VACO space business.

Speaker Change: As mentioned in the press release, we currently estimate these additional profitability challenges could be worth $5-7 million at the EBIT line, but we have excluded them from the current outlook and will plan to quantify these impacts at year-end.

Chris Tucker: Thank you.

Christopher Tucker: Moving on from the segment details to the next chart we have our year-to-date order and P&L highlights on chart number seven. Really strong performance year-to-date with orders up nearly 22% the growth has been led by sizable orders in the Navy businesses as well as continued strength from commercial and defense aerospace markets. Sales year-to-date are up 6.6% with AMD up 13.5% and utility solutions up 8.5% which were slightly offset by an 8.9% drop at test.

Chris Tucker: The midpoint of the 410 to 420 adjusted EPS range represents 12% growth compared to the prior year.

Speaker Change: The midpoint of the 410 to 420 adjusted EPS range represents 12% growth compared to prior year and would also represent a 3-year compound annual growth rate of 17%.

Chris Tucker: and would also represent a three-year compound annual growth rate of 17%.

Bryan Sayler: A strong record of growth as ESCO looks to close out another record year. That concludes the financial update. Now I'll turn it back over to Bryan. Thanks, Chris.

Speaker Change: A strong record of growth as ESCO looks to close out another record year.

Speaker Change: That concludes the financial update and now I'll turn it back over to Bryan.

Bryan Sayler: As you heard, we've had another good quarter, and we're looking at another year of double-digit earnings growth with record backlogs. We continue to feel great about the long-term prospects for ESCO. Before going into the Q&A, I want to give a quick update on the signature management and power acquisition that we announced back in July. We have completed all of the required regulatory filings in both the United States and the United Kingdom.

Bryan: Thanks, Chris. As you heard, we've had another good quarter, and we're looking at another year of double-digit earnings growth. With record backlogs, we continue to feel great about the long-term prospects for ESCO.

Christopher Tucker: Marges have improved nicely with increases from both aerospace and defense and the utility solutions group. While we have seen test margins drop on lower volume to the first nine months of the year.

Speaker Change: Before going into the Q&A, I want to give a quick update on the signature management and power acquisition that we announced back in July .

Christopher Tucker: Next is chart 8 where we have the cash flow highlights. You see here an increase of 26.3 million of increased operating cash flow compared to the first nine months of last year. We also have increased capital spending so far year-to-date mostly related to capacity increases across the AMD businesses.

Bryan: We have completed all of the required regulatory filings in both the United States and the United Kingdom.

Bryan: The timing on those processes can be uncertain, so we'll have to wait and see what happens. But we've been through this before and continue to believe that we can close the deal in the first quarter of fiscal 2025.

Christopher Tucker: You can also see on the chart that we have increased acquisition spend this year driven by the MPE transaction. We have a small number of share repurchases during the third quarter and year-to-date we spent $8 million compared to $12.4 million in the prior year.

Bryan: This is a very exciting deal for ESCO as we bring on a talented group of employees, a key set of technologies, and the ability to expand the way that we serve the Navy market in both the U.S. and the U.K.

Christopher Tucker: Last is Shark 9, where we have the updated guidance for 2024. Our sales outlook for growth is 7-8% for the year and adjusted earnings per share of $4.10 to $4.20. The adjusted EPS outlook excludes any impact of further profitability erosion at the VACO space business. As mentioned were 5-7 million at the EBIT line, but we have excluded them from the current outlook and will plan to quantify these impacts at year end.

Bryan Sayler: The timing of those processes can be uncertain, so we'll have to wait and see what happens, but we've been through this before and continue to believe that we can close the deal in the first quarter of fiscal 2025. This is a very exciting deal for ESCO as we bring on a talented group of employees, a key set of technologies, and the ability to expand the way that we serve the Navy market in both the U.S. and the U.K. So that concludes the opening remarks, and we can start the Q&A now. Thank you.

Speaker Change: So that concludes the opening remarks and we can start the Q&A now.

Christopher Tucker: The midpoint of the 4-10 to $4.20 adjusted EPS range represents 12% growth compared to prior year, and would also represent a 3-year compound annual growth rate of 17%. A strong record of growth as ESCO looks to close out another record year.

Operator: Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A list. Our first question comes from the line of Tommy Moll with Stevens Incorporated. Your line is now open. Good afternoon.

Speaker Change: Thank you. As a reminder, to ask a question you'll need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question please press star 1 1 again. Please stand by while we compile our Q&A roster.

Tommy Moll: Good afternoon, and thank you for taking my questions. Hi Tommy.

Speaker Change: Our first question comes in the line of Tommy Moll with Stevens Incorporated. Your line is now open.

Tommy Moll: Good afternoon and thank you for taking my questions.

Bryan Sayler: Bryan, a strong quarter on Navy orders once again, and my question is, does this show the realization of the upsized ship set content you discussed early in this calendar year? 45 million is right around where I had it pegged. Are there additional ship set awards here? Any context you can give us on what you just reported would be helpful. Thank you.

Speaker Change: Bye, Tommy. Bye, Tommy.

Tommy Moll: Bryan, a strong quarter on Navy orders once again and my question is does this show the realization of the upsized ship set content you discussed?

Speaker Change: early in this calendar year. $45 million is right around where I had it pegged. Are there additional ship set awards here? Any context you can give us on what you just reported would be helpful. Thank you.

Bryan Sayler: That concludes the financial update, and now I'll turn it back over to Bryan. Thanks, Chris. As you heard, we've had another good quarter, and we're looking at another year of double-digit earnings growth with record backlogs.

Bryan Sayler: Tommy, no. The orders we got in the prior quarter were mostly Navy spares and other pieces. We are still anticipating the larger orders that we've been talking about. Unfortunately, I can't make any news on that, but I would say we're getting close.

Bryan: Tommy Nelst, the orders we got in the prior quarter are mostly Navy spares and other pieces.

Bryan Sayler: We continue to feel great about the long-term prospects for ESCO.

Bryan Sayler: Before going into the Q&A, I want to give a quick update on the signature management and power acquisition that we announced back in July. We have completed all of the required regulatory filings in both the United States and the United Kingdom. The timing on those processes can be uncertain, so we'll have to wait and see what happens, but we've been through this before, and continue to believe that we can close the deal in the first quarter of fiscal 2025.

Speaker Change: we are still anticipating the larger orders that we've been talking about unfortunately can't make any news on that but i'd say we're getting close

Tommy Moll: And that leads me to my follow-up here, Bryan. I am fully aware that this is not the quarter to give formal guidance for 2025, but I'm just doing some simple math here. Your cumulative orders year to date across A and D, I'm getting to something like a 50% increase year over year. Now the timing of that record backlog unlocking, we obviously can't see from our side, but is there any reasonable scenario where that segment doesn't grow revenue double digits next year?

Tommy Moll: Okay.

Speaker Change: And then that leads me to my follow-up here, Bryan.

Speaker Change: This is not the quarter to give formal guidance for 2025, but I'm just doing some simple math here. Your cumulative orders year-to-date across A&D, I'm getting to something like a 50% increase year-over-year.

Bryan Sayler: This is a very exciting deal for ESCO, as we bring on a talented group of employees, a key set of technologies, and the ability to expand the way that we serve the Navy market in both the U.S, and the UK.

Speaker Change: Now, the timing of that record backlog unlocking, we obviously can't see from our side, but is there any reasonable scenario where that segment doesn't grow revenue double digits next year?

Bryan Sayler: And just to be clear, you're talking specifically about the Navy. I was, well, yeah.

Operator: So that concludes the opening remarks, and we can start the Q&A now. Thank you. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile our Q&A roster.

Tommy Moll: I was, well, yeah, I shifted there. That was at the A and D segment level, is what I was describing.

Speaker Change: And just to be clear, you're talking specifically about the Navy piece.

Speaker Change: Well, yeah, I shifted there. That was at the A&E segment level is what I was describing.

Bryan Sayler: You're right; it's too early to give guidance, but I don't think your math is off in any significant way.

Speaker Change: and

Tommy Moll: wellum

Speaker Change: You're right, it's too early to give guidance, but I don't think your math is off in any significant way.

Tommy Moll: Our first question comes in the line of Tommy Moell with Stevens Incorporated. Your line is now open. Good afternoon, and thank you for taking my questions. Brian, a strong quarter on Navy orders once again, and my question is, does this show the realization of the upsized ship set content you discussed early in this calendar year 45 million is right around where I had it pegged? Are there additional ship set awards here?

Bryan Sayler: Any context or insight on big pieces of that backlog that may have a more extended timeline to unlock, even if qualitative, not quantitative, just anything you would highlight for us. It's a pretty big number.

Tommy Moll: sure

Speaker Change: Any context or insight on big pieces of that backlog that may have a more extended timeline to unlock, even if qualitative, not quantitative, just anything you would highlight for us. It's a pretty big number at this point.

Bryan Sayler: Yeah, I would say that the way you want to think about that is on the commercial and military aircraft side, generally we're quoting something like a little bit less than a year of lead time out of those factories. And so, generally speaking, the aircraft backlogs will be cleared in about a year. The Navy backlogs do go out a little bit further. I would say what we have in place right now is probably looking out 18 months to two years.

Speaker Change: Yeah, I would say that, you know, the way you want to think about that is on the commercial and military aircraft side, you're generally we're quoting something like a little bit less than a year of lead time out of those factories.

Tommy Moll: Any context you can give us on what you just reported will be helpful. Tommy Moell, the orders we got in the prior quarter are mostly Navy spares and other pieces. We are still anticipating the larger orders that we've been talking about.

Tommy Moll: And so, generally speaking, the aircraft backlogs will convert in about a year.

Tommy Moll: The Navy backlogs do go out a little bit further.

Tommy Moll: I would say what we have in place right now

Bryan Sayler: Unfortunately, I can't make any news on that, but I'd say we're getting close, and then that leads me to my follow up here, Brian, fully aware that this is not the quarter to give formal guidance for 2025, but I'm just doing some simple math here. Your cumulative orders, your to date across A and B, I'm getting to something like a 50% increase year over year. Now, the timing of that record backlog unlocking, we obviously can't see from our side, but is there any reasonable scenario where that segment doesn't grow revenue double digits next year?

Tommy Moll: is probably looking at, you know, 18 months to two years.

Bryan Sayler: These larger orders that I've been describing, the awards will go out for multiple additional years. What we're seeing is a steady rate of production for the Navy. I think that that's certainly on that double-digit path.

Tommy Moll: These larger orders that I've been, you know, describing will...

Tommy Moll: The award will go out for multiple additional years, so what we're seeing is a steady ramp rate of production for the Navy, and I think that that's certainly on that double-digit path.

Tommy Moll: Thank you, Bryan. I'll turn it back.

Operator: Thank you. As a reminder, if you'd like to ask a question, please press star one on your telephone and wait for your name to be announced. Our next question comes from the line of John Tanwanteng with CJS Securities. Your line is now open.

Speaker Change: thank you as a reminder if you'd like to ask a question please press startar one one on your telephone and wait for your name to be announced

Bryan Sayler: And you're just to be clear, you're talking specifically about the Navy piece. I was at, well, yeah, I shifted there. That was at the A and D segment level is what I was describing gadget. You're right, it's too early to give guidance, but I don't think your math is off in any significant way. Sure, any context or insight on big pieces of that backlog that may have a more extended timeline to unlock, even if qualitative, not quantitative, just anything you would highlight for us, it's a pretty big number at this point.

Speaker Change: Our next question comes to the line of John Tanwanteng with CJF Securities. Your line is now open.

John Tanwanteng: Hi, thank you for taking my questions. My first one is just on the vacuous space business you gave a revenue number for, but I was wondering on average what the profitability of that business looks like, you know, on a normalized basis.

John Tanwanteng: Hi, thank you for taking my questions. My first one is just on the vacuous space business you gave a revenue number for, but I was wondering, on average, what the profitability of that business looks like, you know, on a normalized basis.

Bryan Sayler: Yeah, John, I would say we're probably not going to disclose that specifically. And honestly, we're still working on some of

Speaker Change: Yeah, John , I would say we're probably not going to disclose that specifically and honestly we're still working on some of the carve-out around that but I would tell you it's certainly below segment averages overall.

Bryan Sayler: We're working on some of the carve-out around that, but I would tell you it's certainly below segment averages overall.

John Tanwanteng: Okay, great. And the number that you're excluding from Q4, just in terms of the profitability erosion, is that the expected EBIT in the segment for Q4?

Speaker Change: Okay, great. And the number that you're excluding from Q4, just in terms of the profitability erosion, is that the expected EBIT in the segment for Q4?

Bryan Sayler: It would be a potential delta, you know, of negative EBIT beyond kind of what's in that guidance of 410 to 420.

Bryan Sayler: Yeah, I would, I would say that, you know, the way you want to think about that is on the commercial and military aircraft side. You're generally worth floating something like rule the less than a year of lead time out of those factories. And so generally speaking, the aircraft backlogs will convert in about a year. The Navy backlogs do go out a little bit further. I would say what we have in place right now is probably looking out, you know, 18 months to two years.

Speaker Change: It would be a potential delta, you know, of negative E, but beyond kind of what's in that guidance of 410 to 420.

Bryan Sayler: And that's a risk item. We don't know that that's going to happen. We just wanted to make sure we clearly identified the kind of downside there.

Speaker Change: And that's a risk item. We don't know that that's going to happen. We just wanted to make sure we clearly identified the kind of downside there.

John Tanwanteng: Okay, can you tell us a little bit more about what's going on in the program that is having this additional cost and the nature of it?

Speaker Change: Okay, can you tell us a little bit more about what's going on in the program that is having this additional cost and the nature of it?

Bryan Sayler: Yeah, so I think that we're still on the same path that we've been talking about for the last few quarters. We have a small number of firm-fixed price development programs that we are working through. And, you know, first of all, we're not taking new programs like that, so there's a finite number of programs. And what's happening is that we have, you know, we've accepted some requirements that are a little more challenging than normal.

Speaker Change: I think that we're still on the same path that we've been talking about for the last few quarters. We have a small number of firm-fixed price.

Speaker Change: development programs that we are working through and so first of all we're not taking new programs like that so it's a finite

Bryan Sayler: These larger orders that I've been, you know, describing will, the award will go out for multiple additional years. So, you know, what we're seeing is a steady ramp rate of production for the Navy. And I think that that's certainly on that double digit path.

Speaker Change: a number of programs.

Speaker Change: And what's happening is that we've accepted some requirements that are a little more challenging than normal. And so as we go into the test stand, if the products

Bryan Sayler: And so, as we go into the test stand, you know, if the products are performing as expected, we're going to be fine. But if we do have additional, you know, go-backs, it could cost additional money in terms of both, you know, engineering time and fabrication and test time. And so that's what we've tried to do is put a kind of a bottom end on what that would look like.

Operator: Thank you, Brian. I'll turn it back. Thank you. As a reminder, if you'd like to ask a question, please press star one on your telephone and wait for your name to be announced.

Speaker Change: will may perform as expected you what we're going to be fine but if we do have additional goback could cost additional money in terms of both

Speaker Change: engineering time and fabrication and test time and so that's what we're trying to do is put a kind about a bottom and what that would look like

John Tanwanteng: Our next question comes from the line of John Tanwantang with C.J.S. Securities. Your line is now open. Hi, thank you for taking my questions. My first one is just on the back of space business. You gave a revenue number four, but I was wondering on average what the profitability of that business looks like, you know, on a normalized basis.

John Tanwanteng: Got it. Okay, that's helpful. Thank you.

Speaker Change: Got it. Okay, that's helpful. Thank you. And then you you brought on two new, you know directors from from the energy space or utility space I'm just wondering

Speaker Change: Is that prelude to just a bigger focus on that on that segment just given the power demands that we're seeing?

Bryan Sayler: Yeah, John, I would say we're probably not going to disclose that specifically and honestly, we're still working on some of the carve out around that, but I would tell you it's certainly below segment averages overall. Okay, great. And the number that you're excluding from Q4 just in terms of the profitability erosion, is that the expected EBIT in the segment for Q4? It would be a potential delta of negative e bit beyond what's in that guidance of 410 to 420. And that's a risk item. We don't know that that's going to happen. We just wanted to make sure we clearly identified the kind of downside there.

Speaker Change: as t growross that wewere seeing inthenext couple ofyears fromallthese y datacenters

John Tanwanteng: And then you brought on two new directors from the energy space or utility space. I'm just wondering, is that prelude to just a bigger focus on that segment, just given the power demands that we're seeing, you know, and growth that we're seeing in the next couple of years from all these, you know, EVs and data centers and everything that's going on? Yeah.

Speaker Change: and

Speaker Change: Yeah, so listen, you know, our board has, you know, really wide range of experiences.

Speaker Change: We've had a couple of board members that have retired over the last year or two, so as the nominating governance committee was kind of going through and determining, you know, where do we have strengths and where do we have gaps?

Bryan Sayler: Yeah, so listen, you know, our board has a really wide range of experiences. And, you know, we've had a couple of board members that have retired over the last year or two.

Speaker Change: One of the things that we identified is that the big area of focus for us is going to be aerospace and defense. We've got really good coverage there. We've got three directors that have worked all sides of that, both at the big primes in the government side and at Tier 1 suppliers.

Bryan Sayler: So as the nominating governance committee was kind of going through and determining, you know, where we have strengths and where we have gaps, one of the things that we identified is that the big area of focus for us is going to be aerospace and defense. We've got really good coverage there. We've got three directors that have worked on all sides of that, both at the big primes on the government side and at tier one suppliers.

Bryan Sayler: Can you tell us a little bit more about what's going on in the program that it's having a traditional cost in the nature of it? Yeah, so I think that we're still on the same path that we've been talking about for the last few quarters. We have a small number of firm, fixed, price development programs that we are working through. And so first of all, we're not taking new programs like that, so it's a finite number of programs.

Bryan Sayler: So we feel really good about our coverage on the A&D side, but we've only got one independent director on the utility side, and he's done a great job. He's kind of been instrumental in helping us build that segment out over the last seven or eight years, but we felt like that bringing on two new board members from that segment would be appropriate. And one of the characteristics of that is that folks from that segment come with a broader set of cybersecurity skills and things like that that we also found to be quite valuable.

Speaker Change: So, we feel really good about our coverage on the...

Speaker Change: The A&D side, but we've only got one independent director on the utility side, and he's done a great job. He's kind of been instrumental in helping us build that segment out over the last seven or eight years.

Bryan Sayler: And what's happening is that we've accepted some requirements that are a little more challenging than normal. And so, as we go into the test stand, if the products are what they perform as expected, we're going to be fine. But if we do have additional gobacks, it could cost additional money in terms of both engineering time and fabrication and test time. And so that's what we try to do is put a kind of a bottom end on what that would look like. Got it. Okay, that's helpful.

Speaker Change: But we felt like that bringing on two new board members from that segment would be appropriate. And one of the characteristics of that is that folks out of that segment come with a broader set of cyber security skills and things like that that we also found to be quite valuable.

John Tanwanteng: Thank you.

John Tanwanteng: Understood, thank you. I'll jump back in the queue.

Speaker Change: Understood, thank you. I'll jump back in queue.

Operator: I'm showing no further questions at this time and would now like to turn the call back to Bryan Sayler for closing remarks.

Speaker Change: Thank you. I'm showing no further questions at this time and would now like to turn the call back to Bryan Sayler for closing remarks.

Bryan Sayler: Did John Tanwanteng jump back in for questions? Oh, I see he did. Now we're seeing one on the screen, yeah.

Speaker Change: What is it?

Speaker Change: Did John Tanwanteng jump back in for questions? Oh, I see he did. Yeah, we're seeing one on the screen.

Operator: Yes, John, your line is now open again.

John Tanwanteng: Great, thanks. I was just wondering if you could talk about the test business and the incremental improvement you're expecting to see next quarter. I mean, you had some pretty good jumps from Q1 to Q2 and Q2 to Q3, but what kind of, what degree of recovery do we think you can see in those markets as we go forward?

Bryan Sayler: And then you brought on two new directors from this energy space or utility space. I'm just wondering, is that prey to just a bigger focus on that on that segment just given the power demands that we're seeing? You know, it grows that we're seeing in the next couple of years from all these EVs and data centers when we're going to go on.

Speaker Change: Yes, John your line is now open again.

Bryan Sayler: Yeah, so listen, our board has really wide range of experiences. And we've had a couple of board members that have retired over the last year or two. So as the nominating governor's committee was kind of going through and determining where do we have strengths and where do we have gaps. One of the things that we identified is that the big area of focus for us is going to be aerospace and defense.

Bryan Sayler: Yeah, listen. I think that, you know, as we've communicated a couple of times, the big downstrokes here were in China, and on the wireless side, we've kind of absorbed that now. The good news is we're seeing good growth out of the balance of the business, particularly in the U.S., particularly in our medical and EMP businesses, and the team has done a really good job of kind of taking costs out of the business and really refocusing on marginal returns.

Speaker Change: in those markets as we go forward.

Speaker Change: Yeah, listen, I think that, um...

Speaker Change: You know, as we've communicated a couple of times, the big downstrokes here were in China.

Speaker Change: And on the wireless side, we've kind of absorbed that now.

Speaker Change: The good news is we're seeing good growth out of the balance of the business, particularly in the U.S., particularly in our medical sector.

Speaker Change: in our EMP businesses.

Bryan Sayler: We've got really good coverage there. We've got three directors that have worked all sides of that, both at the big primes in the government side and at tier one suppliers. So we feel really good about our coverage on the A and D side. But we've only got one independent director on the utility side and he's done a great job. He's kind of instrumental in helping us build that segment out over the last seven or eight years.

Speaker Change: And the team has done a really good job of kind of taking cost out of the business and really refocusing on marginal returns. So in terms of expectations, what you should see is continued sequential growth.

Bryan Sayler: So in terms of expectations, what you should see is continued sequential growth for both revenue and margin, so I would kind of use that 60.5% as kind of your starting point and move up from there. Got it. Thanks, guys.

Speaker Change: for both revenue and margin. So I would kind of use that 60.5% as kind of your starting point and move up from there.

Speaker Change: Got it. Thanks, guys.

John Tanwanteng: Thanks, John .

Bryan Sayler: But we felt like that bringing on two new board members from that segment would be appropriate. And one of the characteristics of that is that folks out of that segment come with a broader set of cybersecurity skills and things like that that we also found to be quite valuable. I understand. Thank you. I'll jump back and keep.

Speaker Change: Thank you.

Operator: Our next question comes from the line of Tommy Moll with Stevens. Your line is now open.

Speaker Change: Our next question comes from the line of Tommy Moll with Stevens. Your line is now open.

Operator: Thank you.

Tommy Moll: Hi, I figured I'd throw in a follow-up on your guidance for the full year EPS. You took a little bit out. And I'm just curious, was all of that Delta?

Tommy Moll: Hi, I figured I'd throw in a follow-up on your guidance for the full-year EPS.

John Tanwanteng: You took a little bit out, and I'm just curious, was all of that delta explained by the VACO space trends, or were there any other factors driving that, Bryan?

Operator: I'm showing no further questions at this time and would now like to turn the call back to Brian sailor for closing remarks. Did the John can one thing drop jump back in for questions. Oh, I see you did. Now we're seeing one on the screen. Yeah. Yes. John, your line is now open again. Great. Thank you.

Chris Tucker: Yeah, Tommy, this is Chris. That was the majority of it.

Chris Tucker: What was embedded in that third quarter, you know, I mentioned in my comments, we took about a $2 million hit there in the third quarter versus what we had expected when we gave that guidance at kind of the beginning of the quarter. So that flows to the year. That's the bigger part of it. And then I would say, you know, the test business.

Chris: Yeah, Tommy, this is Chris. That was that was the majority of it was kind of what was embedded in that third quarter. You know, I mentioned in my comments we took about a two million dollar hit there in the third quarter versus what we had.

John Tanwanteng: expected when we gave that guidance at kind of the beginning of the quarter.

John Tanwanteng: I was just wondering if you could talk about the test business and the incremental approval when you're expecting to see the next quarter. I mean, you had some pretty good jobs from Q1 to Q2 and Q2 to Q3, but what kind of what degree of a coverage do we think you can you can see in that in those markets as we go forward? Yeah, the big downstrokes here were in China. And on the wireless side, we've kind of absorbed that now.

John Tanwanteng: So that flows to the year, that's the bigger part of it. And then I would say that, you know, the test business is a little bit weaker than whenever we laid out the guidance over the last...

Chris Tucker: is a little bit weaker than whenever we laid out the guidance over the last, you know, quarter or so. Not a big shift, but we've seen the fourth quarter come down slightly. We still expect some nice sequential improvement there, but just not quite as much as we had baked in before.

John Tanwanteng: quarter or so, not a big shift, but we've seen the fourth quarter come down slightly. We still expect some nice sequential improvement there, but just not quite as much as we had baked in before.

Tommy Moll: Okay, thank you, Chris. And while we're at it, I might as well throw one in on Doble. Hopefully, I'm not overstaying my welcome here, but it looks like you were up a little bit, year over year, and there were some puts and takes within the double umbrella. So whatever insight you can provide for us there would be helpful, and I'm at a higher level. If we look across the utility and the market this quarter, it does seem like there are more puts and takes this time around versus a quarter ago, and I don't know if you feel like that may be calendar slash election uncertainty or if the end market may be slowing a bit. Just any kind of insight you have would be helpful.

Speaker Change: Okay, thank you, Chris. And while we're at it, I might as well throw one in on DOBL, hopefully not overstaying my welcome here, but it looks like you were up a little bit year over year.

John Tanwanteng: The good news is we're seeing good growth out of the balance of the business, particularly in the US, particularly in our medical, in our EMP businesses. And the team has done a really good job of kind of taking cost out of the business and really refocusing on marginal returns. So in terms of expectations, what you should see is continued sequential growth for both revenue and margin. So I would kind of use that 16 and a half percent as kind of your starting point and move up from there. Got it. Thanks, guys. Thanks, John. Thank you.

Speaker Change: and there were some puts and takes within the Doeble umbrella and so whatever insight you can provide for us there would be helpful and I'm at a higher level I'm curious if we look across the utility and market this quarter

John Tanwanteng: It does seem like there are more puts and takes this time around versus a quarter ago, and I don't know if you feel like that may be calendar slash election uncertainty, or if the end market may be slowing a bit. Just any kind of insight you have would be helpful.

Chris Tucker: Well, yeah, I don't think there's been more or different puts and takes here. I think that, within the utility solutions group, you have seen some softening on the renewable side compared to the prior year. And I want to restate that the prior year was, you know, an incredibly explosive comparison quarter for both orders and revenue. So on the renewable side, that came down a little bit. Global was up by a lot.

Speaker Change: well yes i don't think there's been more or different fos and takes here i think that

Tommy Moll: Our next question comes from the line of Tommy Mole with Stevens. Your line is now open. Hi, I figured I'd throw in a follow up on your guidance for the full year EPS. You took a little bit out and I'm just curious, was all of that delta explained by the VACO space trends or were there any other factors driving up, Brian? Yeah, Tommy, this is Chris. That was the majority of it was kind of what was embedded in that third quarter.

Speaker Change: You know, within the Utility Solutions Group, you know, you have seen some softening on the renewable side compared to the prior year, and I want to restate, the prior year was

Speaker Change: You know an incredibly explosive Comparison quarter for both you know orders and and and revenue so on the util on the renewable side that came down a little bit

Tommy Moll: You know, I mentioned in my comments, we took about a $2 million hit there in the third quarter versus what we had expected when we gave that guidance at kind of the beginning in the quarter. So that flows to the year. That's the bigger part of it. And then I would say that the test business is a little bit weaker than whenever we laid out the guidance over the last quarter or so, not a big shift, but we've seen the fourth quarter come down slightly. We still expect some nice sequential improvement there, but just not as quite as much as we had baked in before. Okay, thank you, Chris.

Speaker Change: double is up by by a lot and you know we're seeing just continued uptake on our services in our hardware as utilities are really

Chris Tucker: And, you know, we're seeing just continued uptake on our services and our hardware as utilities are really pushing hard to maintain their current assets. You know, they're facing big growth in demand, and they're somewhat restrained in their ability to add capacity to their system. So what they're really focused on across the board is maintaining their current assets, and that really plays right into the wheelhouse for Doble. So we've had really good growth. You know, Doble, USG is up eight and a half percent over the prior year. Doble was up seven, and NRG was up 13.7.

Speaker Change: Pushing hard to maintain their current assets, you know, they're they're facing big growth in demand

Speaker Change: and they re somewhat restrained on their ability to add capacity to their system so what they're really focused on

Speaker Change: across the board is maintaining their current assets. And that really plays right into the wheelhouse for Doble. So we've had really good growth. You know, Doble

Tommy Moll: And while we're at it, I might as well throw one in on double. Hopefully not overstay my welcome here, but it looks like you were up a little bit year over year, and there were some puts and takes within the double umbrella. And so whatever insight you can provide for us there would be helpful.

Speaker Change: The USG is up 8.5% over the prior year, DOBL was up 7% and NRG was up 13.7%.

Chris Tucker: So, you know, our perspective is that that's, you know, that's going to continue. You mentioned the election. We get that question from time to time.

Speaker Change: Yeah, our perspective is that that's, you know, that's going to continue.

Chris Tucker: It's one of many factors that we think about that could have an impact on our business, you know, technical, regulatory, and economic issues. And we've assessed it, and we frankly don't see a significant benefit or a significant threat to any of ESCO's businesses based on the outcome of the election. So, you know, the bottom line is we're not rooting for anybody here, and we don't feel vulnerable either way it goes. Thanks.

Speaker Change: You know, you mentioned the election, you know, we get that question from time to time.

Speaker Change: We, it's one of many factors that we think about that could have an impact on our business, you know, technical, regulatory, economic issues.

Bryan Sayler: And I'm at a higher level, I'm curious if we look across the utility and market this quarter, it does seem like there are more puts and takes this time around versus a quarter ago. And I don't know if you feel like that may be calendar slash election uncertainty, or if the end market may be slowing a bit, just any kind of insight you have would be helpful. Well, yeah, I don't think there's been more or different puts and takes here.

Speaker Change: And we've assessed it, and we frankly don't see...

Speaker Change: a significant benefit or a significant threat to any of ESCO's businesses based on, you know, the outcome of the election. So, you know, bottom line is we're not rooting for anybody here and we don't feel vulnerable either way it goes.

Tommy Moll: Thank you, Bryan. I'll turn it back and appreciate the time.

Bryan Sayler: I think that within the utility solutions group, you have seen some softening on the renewable side compared to the prior year, and I want to restate the prior year was an incredibly explosive comparison quarter for both orders and revenue. So on the renewable side that came down a little bit, the double was up by a lot. And we're seeing just continued uptake on our services, in our hardware, as utilities are really pushing hard to maintain their current assets.

Speaker Change: Thank you, Bryan. I'll turn it back and appreciate the time.

Operator: At this time, I'm showing no further questions, and we'll turn it back to Bryan Sayler for closing remarks.

Bryan Sayler: thank you

Speaker Change: At this time, I'm showing no further questions, and we'll turn it back to Bryan Sayler for closer remarks.

Bryan Sayler: All right, thanks everyone. I really appreciate you taking some time. We're excited about what's happening at ESCO and we'll talk to you next quarter. A thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc, Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc ESCO Technologies Inc. [music]

Bryan Sayler: All right, thanks everyone. I really appreciate you taking some time. We're excited about what's happening at ESCO, and we'll talk to you next quarter.

Operator: Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.

Speaker Change: Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.

Operator: Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc, Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Kate Lowrey, ESCO Technologies Inc [music] This is a production of ESCO, the European Southern Observatory. Transcribed by ESCO, Translated by — Good day and thank you for standing by. Welcome to the third quarter 2024 ESCO Technologies Earnings Call.

Bryan Sayler: Thanks, Kate. Thanks, everyone, for joining today's call. We are happy to provide an update on a lot of the exciting things that are happening here at ESCO. We are pleased with the third quarter results and are particularly excited about the continued momentum across all of our business platforms. Order growth in the quarter was substantial, and we had a record backlog of nearly $890 million as of June 30.

Bryan Sayler: They're facing big growth in demand, and they're somewhat restrained on their ability to add capacity to their system. So what they're really focused on across the board is maintaining their current assets, and that really plays right into the wheelhouse for double. So we've had really good growth, you know, double USG is up eight and a half percent over the prior year, double was up seven and NRG was up 13.7. So our perspective is that that's, you know, that's going to continue.

Operator: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You'll then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again.

Bryan Sayler: You mentioned the election, you know, we get that question from time to time. It's one of many factors that we think about that could have an impact on our business, you know, technical regulatory, economic issues, and we've assessed it, and we frankly don't see a significant benefit or a significant threat to any of Esco's businesses based on, you know, the outcome of the election. So, you know, bottom line is we're not rooting for anybody here, and we don't feel vulnerable either way it goes.

Kate Lowrey: 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 8K to be filed.

Speaker Change: Music Music Music

Speaker Change: oh

Speaker Change: Thanks for watching!

Speaker Change: Good day and thank you for standing by. Welcome to the third quarter 2024 ESCO Technologies Earnings Call.

Bryan Sayler: Penny is an operating executive with Eversource Energy, a utility holding company based in New England, where she currently serves as Executive Vice President of Customer Experience and Energy Strategy. She is a registered, licensed professional engineer and has held several positions with increasing responsibility in the utility industry since 1986. In that time, she has worked for Tampa Electric, Duke Energy Corporation, and Everson. We are also adding David Campbell to the board. David is currently president, CEO, and chair of Evergy Incorporated, a public utility holding company headquartered in Kansas City, Missouri.

Speaker Change: At this time, all participants are in a listen-only mode.

Speaker Change: After the speaker's presentation, there will be a question and answer session.

Speaker Change: To ask a question during this session, you'll need to press star 11 on your telephone. You'll then hear an automated message advising your hand is raised.

Speaker Change: To withdraw your question, please press star 1 1 again.

Speaker Change: Please be advised that today's conference is recorded.

Kate Lbtery: on the call today we have brian saaylor president and ceeo chris tpmer senior vice president and cfo and now i'd like to hand the conference over to our first speaker today kate lbtery vice president of investor relations k you know how a floor

Kate Lbtery: Thank you.

Kate Lbtery: These statements are based on current expectations and assumptions, and actual results may differ materially from those projected in the forward-looking statements.

Kate Lbtery: 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 8K to be filed.

Kate Lbtery: We undertake no duty to update or revise any forward-looking statements, except as may be required by applicable laws and regulations.

Kate Lbtery: In addition, during this call, the company may discuss some non-GAAP financial measures in describing the company's operating results.

Bryan Sayler: A reconciliation of these measures to the most comparable gap 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.

Bryan Sayler: Thanks, Kate. Thanks, everyone, for joining today's call. We are happy to provide an update on a lot of the exciting things that are happening here at ESCO.

Bryan Sayler: We are pleased with the third quarter results and are particularly excited about the continued momentum across all of our business platforms.

Bryan Sayler: Order growth in the quarter was substantial and we have record backlog of nearly 890 million dollars as of June 30th.

Bryan Sayler: This is an important indicator of the continuing strength of our end markets and our formidable competitive positions.

Speaker Change: by talking about before talking about the businesses i want to briefly highlight some additions to our board of directors

Bryan Sayler: We are fortunate to bring two highly capable individuals with deep backgrounds in the utility industry onto our board. These additions to the board will become effective upon approval of the Federal Energy Regulatory Commission.

Bryan Sayler: First is Penny McLean-Connor. Penny is an operating executive with Eversource Energy, a utility holding company based in New England, where she currently serves as Executive Vice President of Customer Experience and Energy Strategy.

Bryan Sayler: Penny is a registered, licensed professional engineer and has held several positions with increasing responsibility in the utility industry since 1986. In that time, she has worked for Tampa Electric, Duke Energy Corporation, and Eversource.

Speaker Change: David has held several executive positions at a number of electric and integrated energy companies in Texas as well as an independent energy resource and investment company.

Tommy Moll: Thank you, Brian.

Speaker Change: Prior to that, David worked for nine years at McKinsey & Company, the last four of which he served as a partner.

Operator: I'll turn it back and appreciate the time.

Operator: Thank you.

Speaker Change: We are thrilled to bring Penny and David onto the board. Both have deep utility industry insight. And it goes without saying how important that will be for us at ESCO as we continue to grow our utility solutions group.

Bryan Sayler: At this time, I'm showing no further questions and we'll turn it back to Bryan Sayler for closer remarks. All right, thanks everyone. I really appreciate you taking some time. We're excited about what's happening at ESCO and we'll talk to you next quarter.

Speaker Change: Penny and David attended our board meetings last week, and it's clear that they will be great contributors.

Operator: Okay, thank you for your participation in today's conference.

Chris: chris will run you through all of the financial details for the third quarter of but before that i want to give you a few comments on each segment

Bryan Sayler: The order growth was driven by continued strength from commercial and military aerospace as well as the continued strength of our Navy orders at VACO and Globe. The underpinnings for the market strength here are well-documented, and we remain very positive on the long-term outlook for these markets. The key for us going forward will be to focus on execution and meeting customer requirements as we work to support ongoing production increases. Before moving on, I do want to address the space business at VAP.

Kate Lowrey: This does conclude the program and you may now disconnect. [inaudible] Thomas Moll, Jonathan Tanwanteng, Jonathan Tanwanteng Thomas Moll, Jonathan Tanwanteng, Jonathan Tanwanteng Thomas Moll, Jonathan Tanwanteng Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Thomas Moll, Jonathan Tanwanteng, John Franzreb, Bryan Sayler, Thomas Moll,[inaudible] Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr.[inaudible] These statements are based on current expectations and assumptions and actual results may differ materially from those projected in the forward-looking statements.

Chris: starting with aerospace and defense.

Chris: We continue to have a strong outlook here.

Chris: As you saw in the release, we finished the quarter with record backlog driven by significant order increases.

Bryan Sayler: The order of growth was driven by continued strength from commercial and military aerospace.

Chris: as well as the continued strength of our Navy orders at VACO and GLOBE.

Bryan Sayler: Before moving on, I do want to address the space business at VACO.

Bryan Sayler: As you saw in the release, we will be reviewing strategic alternatives for this business.

Speaker Change: just to frame it up for you a bit.

Chris: The business has a great legacy, a tremendous group of committed employees, and a great set of technologies.

Bryan Sayler: The space business will continue to have a bright future in these NASA-centric missions.

Bryan Sayler: For ESCO, this business has sales of approximately $55 million.

Speaker Change: And we first need to decide how a carve-out from the Navy business would work. And second, we need to decide if it has enough scale as part of ESCO, or whether it would be better suited as part of a different enterprise that's more broadly focused on space.

Bryan Sayler: We are undertaking this review process now, and will make further comments when the review is completed or when we have determined that a disclosure is required or deemed appropriate.

Kate Lowrey: The 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 issue today, which will be included as an exhibit to the company's form 8K to be filed. We undertake no duty to update or revise any forward-looking statements except as may be required by applicable laws and regulations. In addition, during this call, the company may discuss some non-gap financial measures and describe in the company's operating results. A reconciliation of these measures to the most comparable gap measures can be found in the press release issue today and found on the company's website at www.espootagnologies.com under the link investor relations.

Kate Lowrey: Now I'll turn the call over to Bryan. Thanks, Kate. Thanks to everyone for joining today's call.

Speaker Change: Next up is our utility group where the outlook continues to be bullish. The sales growth here was a bit more modest in the third quarter, but order growth was significant and backlogs are at healthy levels.

Bryan Sayler: The sales growth here was a bit more modest in the third quarter, but order growth was significant, and backlogs are at healthy levels. You'll recall that the third quarter of June last year was an all-time record order level for our renewables business. So that business did see an order reduction compared to last year's third quarter. But the absolute level of orders at NRG in the third quarter, 2024, was still the second highest on record. We still feel great about the renewable energy business.

Bryan Sayler: We are happy to provide an update on a lot of the exciting things that are happening here at ESCO. We are pleased with the third quarter results and are particularly excited about the continued momentum across all of our business platforms. Order growth in the quarter was substantial and we have record backlog of nearly $890 million as of June 30th. This is an important indicator of the continuing strength of our end markets and our formidable competitive positions.

Bryan Sayler: You'll recall that the third quarter of June last year was an all-time record orders level for our renewables business.

Bryan Sayler: So that business did see an orders reduction compared to last year's third quarter, but the absolute level of orders at NRG in the third quarter, 2024, was still the second highest on record.

Bryan Sayler: And our core utility market business from Doble delivered significant order growth in the quarter and continues to see lots of opportunities for future growth. Finally, I'll touch on the test business. As we discussed last quarter, we got off to a tough start this year for the test business with significant revenue and profitability declines in Q1.

Bryan Sayler: We still feel great about the renewables business and our core utility market business from Doble delivered significant orders growth in the quarter and continues to see lots of opportunities for future growth.

Bryan Sayler: Before talking about the businesses, I want to briefly highlight some additions to our Board of Directors. We are fortunate to bring two highly capable individuals with deep backgrounds in the utility industry onto our board. These additions to the Board will become effective upon approval of the Federal Energy Regulatory Commission.

Bryan Sayler: It's never fun to go through these kinds of business cycles, but the test team has responded and continues to manage well through this business cycle. Importantly, we continue to see nice sequential improvements here in both sales and margins. The business delivered adjusted EBIT margins of 16.6% in the quarter, which on a historical basis is very good. It's a real testament to the hard work by the team and shows that the margin benefits anticipated from the MPE acquisition are coming through.

Bryan Sayler: It's never fun to go through these kinds of business cycles, but the test team has responded and continues to manage well through this business cycle.

Bryan Sayler: Importantly, we continue to see nice sequential improvements here in both sales and margins.

Chris: The business delivered adjusted EBIT margins of 16.6% in the quarter, which on a historical basis is very good.

Bryan Sayler: It's a real testament to the hard work by the team and shows that the margin benefits anticipated from the MPE acquisition are coming through.

Chris: As we have stated before, this business has broad test and measurement capabilities that will apply to a number of end markets, and we certainly expect growth to return in 2025 and beyond.

Bryan Sayler: With that, I'll turn it over to Chris to run you through the financial details of the quarter.

Chris: Thanks, Bryan. Everyone can follow along on the chart presentation. We will start on page 3 where we will have overall financial highlights of the quarter.

Bryan Sayler: First is Penny McClain Conner. Penny is an operating executive with Ever Source Energy, a utility holding company based in New England where she currently serves as executive vice president of customer experience and energy strategy. Penny is a registered licensed professional engineer and has held several positions with increasing responsibility in the utility industry since 1986. In that time, she has worked for Tampa Electric, Duke Energy Corporation and Ever Source.

Chris: The top of the chart looks good here with all the bars moving in the right direction, starting on the upper left side of the chart.

Bryan Sayler: We are also adding David Campbell to the Board. David is currently president, CEO and chair of Evergie Incorporated, a public utility holding company headquartered in Kansas City, Missouri. David has held several executive positions at a number of electric and integrated energy companies in Texas as well as an independent energy resource and investment company. Prior to that, David worked for nine years at McKinsey and company, the last four of which he served as a partner.

Chris Tucker: The order growth in the quarter was tremendous at 46%, as all three segments had book-to-bill ratios of over 1.1, which resulted in a record backlog of $889 million.

Bryan Sayler: You can see that order growth in the quarter was tremendous at 46%, as all three segments had book-to-bill ratios of over 1.1, which resulted in a record backlog of $889 million.

Bryan Sayler: We are thrilled to bring Penny and David onto the Board. Both have deep utility industry insight and it goes without saying how important that will be for us at ESCO as we continue to grow our utility solutions group. Penny and David attended our board meetings last week and it's clear that they will be great contributors. We have a diverse set of industry and business experiences on our board and their guidance, insight and governance are key to ESCO success.

Chris Tucker: Next are sales, which were up 5%, comprised of 4% or more.

Bryan Sayler: On behalf of the entire board, I'm happy to extend the warm welcome to Penny and David.

Chris Tucker: 4% organic growth and a one-point contribution from the MPE acquisition.

Bryan Sayler: Next is sales, which were up 5%, comprised of a 4% organic growth and a 1-point contribution from the MPE acquisition.

Chris Tucker: Adjusted EBIT was up 50 basis points in the quarter, and adjusted EPS improved by over 6%.

Chris Tucker: by over 6%.

Bryan Sayler: Adjusted EBIT was up 50 basis points in the quarter and adjusted EPS improved by over 6%.

Bryan Sayler: Chris will run you through all of the financial details for the third quarter, but before that I want to give you a few comments on each segment. Starting with aerospace and defense, we continue to have a strong outlook here. As you saw in the release, we finished the quarter with record backlog driven driven by significant order increases. The order growth was driven by continued strength from commercial and military aerospace, as well as the continued strength of our Navy orders at VACO and Globe.

Chris Tucker: Moving to the next chart, we will cover the A and D segment. You can see this segment was a key driver of overall order growth with an increase of 79%. We were up against a lower count from last year's third quarter, but we still saw...

Bryan Sayler: Moving to the next chart we will cover the A&D segment.

Bryan Sayler: You can see this segment was a key driver of overall order growth with an increase of 79%.

Chris Tucker: brought excellent order intake on the Navy side, with VACO bringing in over 40 million Navy orders during the third quarter. Additionally, Commercial and Defense Aerospace orders continue to deliver strong growth at both PTI and CRISPR.

Bryan Sayler: We were up against a lower count from last year's third quarter, but still saw excellent order intake on the Navy side, with VACO bringing in over 40 million of Navy orders during the third quarter.

Bryan Sayler: Additionally, the Commercial and Defense Aerospace Orders continue to deliver strong growth at both PTI and CRISAIR.

Chris Tucker: and Chrysler. On the sales side, there was an increase of nearly 11 percent.

Chris Tucker: with growth led by Navy and Aerospace. Adjusted EBIT margins for the quarter came in at 18.7%, which was a decline of $220 billion.

Bryan Sayler: On the sales side, there was an increase of nearly 11% with growth led by Navy and Aerospace.

Bryan Sayler: Adjusted EBIT margins for the quarter came in at 18.7%, which was a decline of 220 basis points.

Chris Tucker: We saw additional margin declines in the quarter from the VACO space business with additional profitability challenges on developmental contracts. This cost us approximately $2 million against the guidance that was provided last quarter. Additionally, we had an unfavorable mix in the quarter at PTI driven by timing of sales on different OEM and aftermarket platforms. Moving on to Chart 5, we will cover the utility solutions group, where

Bryan Sayler: We saw additional margin declines in the quarter from the VACO space business with additional profitability challenges on developmental contracts.

Bryan Sayler: this cost us approximately two million dollars against a guidance that was provided last quarter

Bryan Sayler: Additionally, we had unfavorable mix in the quarter at PTI driven by timing of sales on different OEM and aftermarket platforms.

Chris Tucker: Quarters increased by 17% during the quarter. The growth was driven by Doble, which delivered a 30% increase as customers continued...

Bryan Sayler: Moving on to chart 5, we will cover the utility solutions group, where orders increased by 17% during the quarter.

Chris Tucker: Customers continue to request significant service work and do more testing as they maximize the uptime of existing assets while continuing to struggle with lead times on new equipment like transformers. Orders for NRG decreased by $4 million, but as mentioned by Bryan, we were up against a very tough comparison to last year's record third quarter amount. Sales for the quarter were essentially flat, as growth rates moderated after many quarters of double-digit growth. However, adjusted EBIT margins for the segment increased by 180 basis points with favorable mix.

Bryan Sayler: The growth was driven by Doble, which delivered a 30% increase as customers continue to request significant service work and do more testing as they maximize uptime of existing assets while continuing to struggle with lead times on new equipment like transformers.

Bryan Sayler: Orders for NRG decreased by 4 million, but as mentioned by Bryan, we were up against a very tough comparison to last year's record third quarter amount.

Speaker Change: Sales for the quarter were essentially flat, as growth rates moderated after many quarters of double-digit growth.

Chris Tucker: a favorable mix from the service business and favorable price impacts more than offsetting inflationary pressures.

Chris Tucker: Next is Chart 6, where we'll cover the test business. Orders increased by more than 40% in the quarter for tests. This was great to see after weakness through the first six months of the year.

Speaker Change: Next is chart 6, where we'll cover the test business.

Speaker Change: Orders increased by more than 40% in the quarter for tests. This was great to see after a weakness through the first six months of the year.

Chris Tucker: Sales in the quarter were down 5% on an organic basis, with MPE adding 6 points of growth.

Speaker Change: Strong U.S. bookings drove the growth.

Bryan Sayler: Sales in the quarter were down 5% on an organic basis, with MPE adding 6 points of growth.

Bryan Sayler: Sales grew sequentially compared to the second quarter, which is an important trend as the business works towards recovery.

Bryan Sayler: Margins in the quarter were up by 100 basis points as we saw a favorable margin impact from the MPE acquisition and cost reduction savings offsetting volume deleverage and unfavorable mix.

Chris Tucker: Moving on from the segment details to the next chart, we have our year-to-date order and P&L highlights on chart number 7. Really strong performance year-to-date, with orders up nearly 22%. The growth has been led by sizable orders in the Navy businesses, as well as continued strength from commercial and defense aerospace markets. Sales year-to-date are up 6.6%, with AMD up 13.5% and Utility Solutions up 8.5%, which were slightly offset by an 8.9% drop at test. Margins have improved nicely, with increases from both Aerospace and Defense and the Utility Solutions Group, while we have seen test margins drop on lower volume through the first nine months of the year.

Bryan Sayler: Before moving on, I do want to address the space business at VACO. As you saw in the release, we will be reviewing strategic alternatives for this business. Just to frame it up for you a bit, our VACO subsidiary is comprised of two key businesses, space and Navy. The space business has a 70 year legacy in this market and continues to be a key supplier on many manned space flight and government satellite missions.

Bryan Sayler: Moving on from the segment details to the next chart, we have our year-to-date order and P&L highlights on chart number seven.

Bryan Sayler: Really strong performance year-to-date with orders up nearly 22%. The growth has been led by sizable orders in the Navy businesses, as well as continued strength from commercial and defense aerospace markets.

Bryan Sayler: Sales year-to-date are up 6.6%, with AMD up 13.5%, and Utility Solutions up 8.5%, which were slightly offset by an 8.9% drop at test.

Bryan Sayler: Margins have improved nicely, with increases from both Aerospace and Defense and the Utility Solutions Group, while we have seen test margins drop on lower volume through the first nine months of the year.

Chris Tucker: Next is chart 8, where we have the cash flow highlights. We see an increase of $26.3 million in operating cash flow compared to the first nine months of last year. We have also increased capital spending so far this year-to-date, mostly related to capacity increases across the A&E business. You can also see on the chart that we have increased acquisition spend this year driven by the MPE transaction. We had a small number of share repurchases during the third quarter, and year-to-date, we have spent $8 million compared to $12.5 million.

Bryan Sayler: Next is chart 8 where we have the cash flow highlights.

Bryan Sayler: You see here an increase of $26.3 million of increased operating cash flow compared to the first nine months of last year.

Bryan Sayler: We also have increased capital spending so far year-to-date, mostly related to capacity increases across the A&E businesses.

Bryan Sayler: You can also see on the chart that we have increased acquisition spend this year driven by the MPE transaction.

Bryan Sayler: We had a small number of share repurchases during the third quarter, and year-to-date we have spent $8 million compared to $12.4 million in the prior year.

Chris Tucker: Compared to $12.4 million in the prior year,

Chris Tucker: Last is chart nine, where we have the updated guidance for 2024. Our sales outlook for growth is 7-8% for the year and adjusted earnings per share of $4.10.

Bryan Sayler: Last is chart 9 where we have the updated guidance for 2024.

Speaker Change: Our sales outlook for growth is 7 to 8 percent for the year and adjusted earnings per share of $4.10 to $4.20.

Chris Tucker: $4.10 to $4.20.

Chris Tucker: The Adjusted EPS Outlook excludes any impact of further profitability erosion at the VACO space business. As mentioned in the press release, we currently estimate these additional profitability challenges could be worth $5 to $7 million at the EBIT line, but we have excluded them from the current outlook and will plan to quantify these impacts at year end. The midpoint of the 410 to 420 adjusted EPS range represents 12% growth compared to the prior year.

Speaker Change: The adjusted EPS outlook excludes any impact of further profitability erosion at the VACO space business.

Speaker Change: The midpoint of the 410 to 420 adjusted EPS range represents 12% growth compared to prior year and would also represent a 3-year compound annual growth rate of 17%.

Chris Tucker: and would also represent a three-year compound annual growth rate of 17%.

Bryan Sayler: Pazesco looks to close out another record year. That concludes the financial update. Now I'll turn it back over to Bryan. Thanks, Chris.

Speaker Change: A strong record of growth as ESCO looks to close out another record year.

Speaker Change: That concludes the financial update and now I'll turn it back over to Bryan.

Bryan Sayler: Thanks Chris. As you heard, we've had another good quarter and we're looking at another year of double-digit earnings growth with record backlogs. We continue to feel great about the long-term prospects for ESCO.

Speaker Change: Before going into the Q&A, I want to give a quick update on the signature management and power acquisition that we announced back in July .

Speaker Change: We have completed all of the required regulatory filings in both the United States and the United Kingdom.

Speaker Change: The timing on those processes can be uncertain, so we'll have to wait and see what happens. But we've been through this before and continue to believe that we can close the deal in the first quarter of fiscal 2025.

Bryan Sayler: This is a very exciting deal for ESCO as we bring on a talented group of employees, a key set of technologies, and the ability to expand the way that we serve the Navy market in both the U.S. and the U.K.

Speaker Change: So that concludes the opening remarks and we can start the Q&A now.

Speaker Change: Our first question comes to the line of Tommy Moll with Stevens Incorporated. Your line is now open.

Tommy Moll: Good afternoon, and thank you for taking my questions. Hi Tommy.

Tommy Moll: Good afternoon and thank you for taking my questions.

Speaker Change: Bye, Tommy.

Speaker Change: Bryan, a strong quarter on Navy orders once again and my question is does this show the realization of the upsized ship set content you discussed?

Speaker Change: Tommy Nell, the orders we got in the prior quarter are mostly Navy spares and other pieces.

Bryan Sayler: The business has a great legacy, a tremendous group of committed employees and a great set of technologies. The space business will continue to have a bright future in these NASA-centric missions. For ESCO, this business has sales of approximately $55 million.

Bryan Sayler: We first need to decide how a carve-out from the Navy business would work and second, we need to decide if it has enough scale as part of ESCO or whether it would be better suited as part of a different enterprise that's more broadly focused on space. We are undertaking this review process now and will make further comments when the review is completed or when we have determined that a disclosure is required or deemed appropriate.

Speaker Change: We are still anticipating the larger orders that we've been talking about. Unfortunately, I can't make any news on that, but I'd say we're getting close.

Bryan Sayler: Next up is our utility group where the outlook continues to be bullish. The sales growth here was a bit more modest in the third quarter, but order growth was significant and backlogs are at healthy levels. You'll recall that the third quarter of June last year was an all-time record orders level for our renewables business.

Tommy Moll: And that leads me to my follow-up here, Bryan. I am fully aware that this is not the quarter to give formal guidance for 2025, but I'm just doing some simple math here. Your cumulative orders year-to-date across A&D, I'm getting to something like a 50% increase year-over-year. Now the timing of that record backlog unlocking, we obviously can't see from our side, but is there any reasonable scenario where that segment doesn't grow revenue double digits next year?

Speaker Change: okca

Bryan Sayler: So that business did see an order's reduction compared to last year's third quarter, but the absolute level of orders at NRG in the third quarter, 2024, was still the second highest on record. We still feel great about the renewables business and our core utility market business from double delivered significant orders growth in the quarter and continues to see lots of opportunities for future growth.

Speaker Change: And then that leads me to my follow-up here, Bryan. Fully aware that this is not the quarter to give formal guidance for 2025, but I'm just doing some simple math here.

Speaker Change: Your cumulative orders here to date across A&D, I'm getting to something like a 50% increase year over year.

Bryan Sayler: And just to be clear, you're talking specifically about the Navy. I was, well, yeah.

Bryan Sayler: Importantly, we continue to see nice sequential improvements here in both sales and margins. The business delivered adjusted EBIT margins of 16.6% in the quarter, which on a historical basis is very good. It's a real testament to the hard work by the team and shows that the margin benefits anticipated from the MPE acquisition are coming through.

Tommy Moll: I was, well, yeah, I shifted there. That was at the A&E segment level, is what I was describing.

Speaker Change: Just to be clear, you're talking specifically about the Navy piece.

Speaker Change: I was well yeah I shifted there that was at the A&E segment level is what I was describing gotcha

Bryan Sayler: You're right; it's too early to give guidance, but I don't think your math is off in any significant way.

Speaker Change: um

Speaker Change: You're right, it's too early to give guidance, but I don't think your math is off in any significant way.

Speaker Change: Sure.

Bryan Sayler: As we have stated before, this business has broad test and measurement capabilities that will apply to a number of end markets and we certainly expect growth to return in 2025 and beyond.

Bryan Sayler: Yeah, I would say that the way you want to think about that is on the commercial and military aircraft side, generally we're quoting something like a little bit less than a year of lead time out of those factories. And so, generally speaking, the aircraft backlogs will be cleared in about a year. The Navy backlog does go out a little bit further. I would say what we have in place right now is probably looking at 18 months to two years.

Speaker Change: Yeah, I would say that, you know, the way you want to think about that is on the commercial and military aircraft side, you're generally we're quoting something like

Christopher Tucker: with that. I'll turn it over to Chris to run you through the financial details of the court. Thanks, Bryan. Everyone can follow along on the chart presentation. We will start on page three where we'll have overall financial highlights of the quarter. The top of the chart looks good here with all the bars moving in the right direction. Starting on the upper left side of the chart, you can see the order growth in the quarter was tremendous.

Speaker Change: A little bit less than a year of lead time out of those factories.

Speaker Change: And so, generally speaking, the...

Speaker Change: The aircraft backlogs will convert in about a year.

Speaker Change: The Navy backlogs do go out a little bit further.

Speaker Change: I would say what we have in place right now.

Speaker Change: is probably looking at 18 months to two years.

Speaker Change: These larger orders that I've been, you know, describing will...

Speaker Change: The award will go out for multiple additional years, so what we're seeing is a steady ramp rate of production for the Navy, and I think that that's certainly on that double-digit path.

Christopher Tucker: At 46 percent, as all three segments had booked to bill ratios of over 1.1, which resulted in a record backlog of 889 million. Next is sales, which were up 5 percent, comprised of a 4 percent organic growth and a 1 point contribution from the MPE acquisition. Adjusted even was up 50 basis points in the quarter and adjusted EPS improved by over 6 percent.

Christopher Tucker: Moving to the next chart, we will cover the A and D segment. You can see the segment was a key driver of overall order growth with an increase of 79 percent. We were up against a lower count from last year's third quarter, but still saw excellent order intake on the Navy side with VACO bringing in over 40 million of Navy orders during the third quarter. Additionally, the commercial and defense aerospace orders continue to deliver strong growth at both PTI and Cricer.

Tommy Moll: Thank you, Bryan. I'll turn it back.

Christopher Tucker: On the sales side, there was an increase of nearly 11 percent with growth led by Navy and aerospace. Adjusted the EBIT margins for the quarter came in at 18.7 percent, which was a decline of 220 basis points. We saw additional margin declines in the quarter from the VACO space business with additional profitability challenges on developmental contracts. This cost us approximately $2 million against a guidance that was provided last quarter.

Speaker Change: Thank you, Bryan. I'll turn it back.

Speaker Change: Thank you. As a reminder, if you'd like to ask a question, please press star 1 1 on your telephone and wait for your name to be announced.

Speaker Change: Our next question comes to the line of John Tanwanteng with CJF Securities. Your line is now open.

Bryan Sayler: Yeah, John, I would say we're probably not going to disclose that specifically, and honestly, we're still working on some of the

Bryan Sayler: I'm working on some of the carving out around that, but I would tell you it's certainly below segment averages overall.

John Tanwanteng: Okay, great. And the number that you're excluding from Q4, just in terms of the profitability erosion, is that the expected EBIT in the segment for Q4?

Speaker Change: Okay, great. And the number that you're excluding from Q4, just in terms of the profitability erosion, is that the expected EBIT in the segment for Q4?

Bryan Sayler: It would be a potential delta, you know, of negative EBIT beyond kind of what's in that guidance of 410 to 420.

Speaker Change: It would be a potential delta, you know, of negative EBIT beyond kind of what's in that guidance of 410 to 420.

Bryan Sayler: And that's a risk item. We don't know that that's going to happen. We just wanted to make sure we clearly identified the kind of downside there.

Speaker Change: And that's a risk item. We don't know that that's going to happen. We just wanted to make sure we clearly identified the kind of downside there.

John Tanwanteng: Okay, can you tell us a little bit more about what's going on in the program that is having this additional cost and the nature of it?

Speaker Change: Okay, can you tell us a little bit more about what's going on in the program that is having this additional cost and the nature of it?

Bryan Sayler: Yeah, so I think that we're still on the same path that we've been talking about for the last few quarters. We have a small number of firm-fixed price development programs that we are working through. And, you know, first of all, we're not taking new programs like that, so there are a finite number of programs. And what's happening is that, you know, we've accepted some requirements that are a little more challenging than normal.

Speaker Change: I think that we're still on the same path that we've been talking about for the last few quarters. We have a small number of firm-fixed price.

John Tanwanteng: development programs that we are working through and so first of all we're not taking new programs like that so it's a finite

Speaker Change: a number of programs.

Speaker Change: And what's happening is that we've accepted some requirements that are a little more challenging than normal.

Bryan Sayler: And so, as we go into the test stand, you know, if the products are – when they perform as expected, you know, we're going to be fine. But if we do have additional, you know, go-backs, it could cost additional money in terms of both, you know, engineering time and fabrication and test time. And so that's what we've tried to do is put a kind of a bottom end on what that would look like.

John Tanwanteng: And so, as we go into the test stand, you know, if the products are when they perform as expected, you know, we're going to be fine. But if we do have additional, you know, go-backs, it could cost additional money in terms of both.

John Tanwanteng: Engineering time and fabrication and test time. And so that's what we've tried to do is put a kind of a bottom end on what that would look like.

John Tanwanteng: Got it. Okay, that's helpful. Thank you.

Speaker Change: Got it. Okay, that's helpful. Thank you. And then you, you brought on two new, you know, directors from from the energy space or utility space. I'm just wondering...

Speaker Change: Is that prelude to just a bigger focus on that on that segment just given the power demands that we're seeing?

Speaker Change: and growth that we're seeing in the next couple of years from all these EVs and data centers.

John Tanwanteng: And then you brought on two new directors from the energy space or utility space. I'm just wondering, is that prelude to just a bigger focus on that segment, just given the power demands that we're seeing, you know, and growth that we're seeing in the next couple years from all these, you know, EVs and data centers and everything that's going on? Yeah.

Speaker Change: Go to Beadaholique.com for all of your beading supply needs!

Speaker Change: Yeah, so listen, our board has a really wide range of experiences, and we've had a couple of board members that have retired over the last year or two, so as the nominating governance committee was kind of going through and determining where do we have strengths and where do we have gaps,

Bryan Sayler: Yeah, so listen, you know, our board has a really wide range of experience. And, you know, we've had a couple of board members that have retired over the last year or two. So as the nominating governance committee was kind of going through and determining, you know, where do we have strengths? And where do we have gaps?

Bryan Sayler: One of the things that we identified is that the big area of focus for us is going to be aerospace and defense. We've got really good coverage there. We've got three directors that have worked on all sides of that, both at the big primes on the government side and at tier one suppliers. So we feel really good about our coverage on the A&D side, but we've only got one independent director on the utility side, and he's done a great job.

Speaker Change: So, we feel really good about our coverage on the...

John Tanwanteng: The A&D side, but we've only got one independent director on the utility side, and he's done a great job. He's kind of been instrumental in helping us build that segment out over the last seven or eight years.

Bryan Sayler: He's kind of been instrumental in helping us build that segment out over the last seven or eight years. But we felt like bringing on two new board members from that segment would be appropriate. And one of the characteristics of that is that folks out of that segment come with a broader set of cybersecurity skills and things like that that we also found to be quite valuable.

John Tanwanteng: But we felt like that bringing on two new board members from that segment would be appropriate. And one of the characteristics of that is that folks out of that segment come with a broader set of cyber security skills and things like that that we also found to be quite valuable.

John Tanwanteng: Understood, thank you. I'll jump back in the queue.

Speaker Change: Understood. Thank you. I'll jump back in queue.

Operator: I'm showing no further questions at this time and would now like to turn the call back to Bryan Sayler for closing remarks.

Speaker Change: Thank you.

Speaker Change: I'm showing no further questions at this time and would now like to turn the call back to Bryan Sayler for closing remarks.

Bryan Sayler: Did John Tanwanteng jump back in for questions? Oh, I see he did. Now we're seeing one on the screen, yeah.

Speaker Change: What is it?

Speaker Change: Did John Tanwanteng jump back in for questions? Oh, I see he did. Yeah, we're seeing one on the screen.

Operator: Yes, John, your line is now open again.

John Tanwanteng: Great, thanks. I was just wondering if you could talk about the test business and the incremental approval you're expecting to see next quarter. You had some pretty good jumps from Q1 to Q2 and Q2 to Q3, but what kind of, what degree of recovery do we think you can see in those markets as we go forward?

Christopher Tucker: Additionally, we had unfavorable mix in the quarter at PTI driven by timing on of sales on different OEM and after market platforms. Moving on to chart 5, we will cover the utility solutions group where orders increased by 17 percent during the quarter. The growth was driven by Doble, which delivered a 30 percent increase. As customers continue to request significant service work and do more testing as they maximize uptime of existing assets while continuing to struggle with lead times on new equipment like transformers.

John Tanwanteng: Yes, John , your line is now open again. Great, thanks. I was just wondering if you could talk about the test business and the incremental improvement you're expecting to see next quarter. I mean you had some pretty good jumps from Q1 to Q2 and Q2 to Q3, but what kind of, what degree of recovery do we think you can you can see in that?

Christopher Tucker: Orders for NRG decreased by 4 million, but as mentioned by Brian, we were up against the very tough comparison to last year's record third quarter amount. Sales for the quarter were essentially flat as growth rates moderated after many quarters of double-digit growth. Adjusted EBIT margins for the segment increased by 180 basis points with favorable mix from the service business and favorable price impacts more than offsetting inflationary pressures.

Bryan Sayler: Yeah, listen, I think that as we've communicated a couple of times, the big downstrokes here were in China, and on the wireless side, we've kind of absorbed that now. The good news is we're seeing good growth out of the balance of the business, particularly in the U.S., particularly in our medical and EMP businesses, and the team has done a really good job of kind of taking costs out of the business and really refocusing on marginal returns.

Speaker Change: in those markets as we go forward.

Speaker Change: Yeah, listen, I think that

Speaker Change: You know, as we've communicated a couple of times, the big downstrokes here were in China.

Speaker Change: And on the wireless side, we've kind of absorbed that now.

Speaker Change: The good news is we're seeing good growth out of the balance of the business, particularly in the U.S., particularly in our medical sector.

Speaker Change: in our EMP businesses.

Speaker Change: And the team has done a really good job of kind of taking cost out of the business and really refocusing on marginal returns.

Bryan Sayler: So in terms of expectations, what you should see is continued sequential growth for both revenue and margin, so I would kind of use that 16.5% as kind of your starting point and move up from there. Got it. Thanks, guys.

Speaker Change: So in terms of expectations, what you should see is continued sequential growth for both revenue and margin. So I would kind of use that 60.5% as kind of your starting point and move up from there.

Speaker Change: Got it. Thanks, guys.

John Tanwanteng: Thanks, John .

John Tanwanteng: Thank you.

Operator: Our next question comes from the line of Tommy Moll with Stevens. Your line is now open.

Speaker Change: Our next question comes from the line of Tommy Moll with Stevens. Your line is now open.

Tommy Moll: Hi, I figured I'd throw in a follow-up on your guidance for the full year EPS. You took a little bit out. And I'm just curious, was all of that Delta?

Tommy Moll: I figured I'd throw in a follow-up on your guidance for the full-year EPS.

Tommy Moll: You took a little bit out, and I'm just curious, was all of that delta explained by the VACO space trends, or were there any other factors driving that, Bryan?

Chris Tucker: Yeah, Tommy, this is Chris. That was, that was the majority of it.

curris: yes timmy this is curris that was that was the majority of it was it was kind of what was embedded in that third quarter knowi mentioned in my comments we took about a two million dollar hit there in third quarter versus what we had

Speaker Change: expected when we gave that guidance at kind of the beginning of the quarter so that flows to the year that's the bigger part of it and then i would say that you the test businesses is a little bit weaker than then whenever we laid out the guidance over the last

Christopher Tucker: Next is chart 6 where we will cover the test business. Orders increased by more than 40 percent in the quarter for tests, which was great to see after weakness through the first six months of the year. Strong US bookings drove the growth. Sales in the quarter were down 5 percent on an organic basis with MPE adding 6 points of growth.

Chris Tucker: is a little bit weaker than whenever we laid out the guidance.

Chris Tucker: ESCO ESCO

Christopher Tucker: Sales grew sequentially compared to a second quarter, which is an important trend as the business works towards recovery. Margin's and the quarter were up by 100 basis points as we saw a favorable margin impact from the MPE acquisition and cost reduction savings offsetting volume B-levels and unfavorable mix.

curris: quarter or so, not a big shift, but we've seen the fourth quarter come down slightly. We still expect some nice sequential improvement there, but just not quite as much as we had baked in before.

Christopher Tucker: Moving on from the segment details to the next chart, we have our year-to-date, order and P&L highlights on chart number seven. Really strong performance year-to-date with orders up nearly 22%, the growth has been led by sizeable orders in the Navy businesses, as well as continued strength from commercial and defense aerospace markets. Sales year-to-date are up 6.6%, with AMD up 13.5%, and utility solutions up 8.5%, which were slightly offset by an 8.9% drop at test.

Tommy Moll: Okay, thank you Chris. And while we're at it, I might as well throw one in on Doble. Hopefully not overstaying my welcome here, but it looks like you were up a little bit, year over year, and there were some puts and takes within the Doble umbrella and so whatever insight you can provide for us there would be helpful and I'm at a higher level I'm curious if we look across the utility and market this quarter it it does seem like there are more puts and takes this time around versus a quarter ago and I don't know if you feel like that may be calendar slash election uncertainty or if the end market may be slowing a bit just any kind of insight you have would be helpful.

Christopher Tucker: Margin has improved nicely with increases from both aerospace and defense and the utility solutions group, while we have seen test Margin's drop on lower volume through the first nine months of the year.

Christopher Tucker: Next is chart eight, where we have the cash flow highlights. You see here an increase of 26.3 million of increased operating cash flow compared to the first nine months of last year. We also have increased capital spending so far year-to-date, mostly related to capacity increases across the AMD businesses.

Speaker Change: And there were some puts and takes within the Doble umbrella. So whatever insight you can provide for us there would be helpful. And at a higher level, I'm curious if we look across the utility and market this quarter.

Christopher Tucker: You can also see on the chart that we have increased acquisition spend this year driven by the MPE transaction. We have a small number of share repurchases during the third quarter, and near-to-date we have spent 8 million dollars compared to 12.4 million in the prior year.

Speaker Change: It does seem like there are more puts and takes this time around versus a quarter ago, and I don't know if you feel like that may be calendar slash election uncertainty, or if the end market may be slowing a bit. Just any kind of insight you have would be helpful.

Chris Tucker: Well, yeah, I don't think there's been more or different puts and takes here. I think that, within the utility solutions group, you have seen some softening on the renewable side compared to the prior year. And I want to restate that the prior year was, you know, an incredibly explosive comparison quarter for both orders and revenue. So, on the renewable side, that came down a little bit. Global was up by a lot.

Speaker Change: Well, yeah, I don't think there's been more or different

Speaker Change: You know, within the utility solutions group, you know, the, you have seen some softening on the renewable side compared to the prior year, and I want to, I want to restate.

Christopher Tucker: Last is chart nine, where we have the updated guidance for 2024. Our sales outlook for growth is 7 to 8% for the year, and adjusted earnings per share of $4.10 to $4.20. The adjusted EPS outlook excludes any impact of further profitability erosion at the VACO space business.

Christopher Tucker: As mentioned in the press release, we currently estimate these additional profitability challenges could be worth $5 to $7 million at the EBIT line, but we have excluded them from the current outlook and will plan to quantify these impacts at year end. The midpoint of the $4.10 to $4.20 adjusted EPS range represents 12% growth compared to prior year, and would also represent a three-year compound annual growth rate of 17%. A strong record of growth as Esco looks to close out another record year.

Speaker Change: The prior year was...

Speaker Change: You know, an incredibly explosive comparison quarter for both, you know, orders and revenue. So on the renewable side, that came down a little bit.

Speaker Change: Global is up by by a lot. And, you know, we're seeing just continued uptake on our services and our hardware as utilities are really

Chris Tucker: And, you know, we're seeing just continued uptake on our services and our hardware as utilities are really pushing hard to maintain their current assets. You know, they're facing big growth in demand, and they're somewhat restrained in their ability to add capacity to their system. So, what they're really focused on across the board is maintaining their current assets. And that really plays right into the wheelhouse for Doble.

Speaker Change: pushing hard to maintain their current assets. You know, they're, they're facing big growth in demand.

Speaker Change: And they're somewhat restrained on their ability to add capacity to their system. So what they're really focused on...

Chris Tucker: So, we've had really good growth. You know, Doble, USG is up eight and a half percent over the prior year. Doble was up seven, and NRG was up 13.7.

Speaker Change: across the board is maintaining their current assets and that really plays right into the wheelhouse for Doble. So we've had really good growth, you know Doble

Bryan Sayler: That concludes the financial update, and I'll turn it back over to Brian. Thanks, Chris. As you heard, we've had another good quarter, and we're looking at another year of double-digit earnings growth with record backlogs.

Bryan Sayler: We continue to feel great about the long-term prospects for Esco.

Speaker Change: The USG is up 8.5% over the prior year, DOBLE was up 7% and NRG was up 13.7%.

Chris Tucker: So, our perspective is that that's, you know, that's going to continue. You mentioned the election. You know, we get that question from time to time. It's one of many factors that we think about that could have an impact on our business, you know, technical, regulatory, and economic issues. And we've assessed it, and we frankly don't see a significant benefit or a significant threat to any of ESCO's businesses based on, you know, the outcome of the election. So, you know, the bottom line is we're not rooting for anybody here, and we don't feel vulnerable either way it goes.

Bryan Sayler: Before going into the Q&A, I want to give a quick update on the signature management and power acquisition that we announced back in July. We have completed all of the required regulatory filings in both the United States and the United Kingdom. The timing on those processes can be uncertain, so we'll have to wait and see what happens, but we've been through this before and continue to believe that we can close the deal in the first quarter of fiscal 2025.

Tommy Moll: Thanks.

Speaker Change: the our perspective is is that that's that's going to continue

Bryan Sayler: This is a very exciting deal for ESCO as we bring on a talented group of employees, a key set of technologies and the ability to expand the way that we serve the Navy market in both the US and the UK.

Speaker Change: You know, you mentioned the election, you know, we get that question from time to time.

Operator: So that concludes the opening remarks and we can start the Q&A now. Thank you. As a reminder to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile our Q&A roster.

Speaker Change: We, it's one of many factors that we think about that could have an impact on our business, you know, technical, regulatory, economic issues.

Tommy Moll: Our first question comes in the line of Tommy Moll with Stevens Incorporated. Your line is now open. Good afternoon and thank you for taking my questions.

Tommy Moll: Tommy. Bryan a strong quarter on Navy orders once again and my question is, does this show the realization of the upside ships that content you discussed early in this calendar year 45? That's right around where I had it pegged. Are there additional ships that awards here? Any context you can give us on what you just reported would be helpful. Thank you. Tommy knows the orders we got in the prior quarter are mostly Navy spares and other pieces. We are still anticipating the larger orders that we've been talking about. Unfortunately, I can't make any news on that, but I'd say we're getting close. Okay.

Bryan Sayler: And then that leads me to my my follow up here Brian fully aware that this is not the quarter to give formal guidance for 2025, but I'm just doing some simple math here. Your cumulative orders year to date across AMD. I'm getting to something like a 50% increase year over year. Now the timing of that record backlog unlocking, we obviously can't see from our side, but is there any reasonable scenario where that segment doesn't grow revenue double digits next year?

Speaker Change: And we've assessed it, and we frankly don't see...

Bryan Sayler: And you're just to be clear, you're talking specifically about the Navy peace. I was well, yeah, I shifted there. That was at the AMD segment level is what I was describing gadget. You're right, it's too early to give guidance, but I don't think your math is off in any significant way. Sure. Any context or insight on big pieces of that backlog that may have a more extended timeline to unlock, even if qualitative, not quantitative, just anything you would highlight for us.

Bryan Sayler: It's a pretty big number at this point. Yeah, I would, I would, I would say that, you know, the way you want to think about that is on the commercial and military aircraft side. You're generally work floating something like a little bit less than a year of lead time out of those factories. And so generally speaking, the aircraft backlogs will convert in about a year. The Navy backlogs do go out a little bit further.

Bryan Sayler: I would say what we have in place right now is probably looking out, you know, 18 months to two years. These larger orders that I've been, you know, describing will, the award will go out for multiple additional years. So, you know, what we're seeing is a steady ramp rate of production for the Navy, and I think that that's certainly on that double digit. Thank you, Brian.

Operator: Thank you, Bryan. I'll turn it back and appreciate the time.

Speaker Change: Thank you, Bryan. I'll turn it back and appreciate the time.

Bryan Sayler: At this time, I'm showing no further questions, and we'll turn it back to Bryan Sayler for closer remarks.

Bryan Sayler: Thank you.

Bryan Sayler: At this time, I'm showing no further questions, and we'll turn it back to Bryan Sayler for closer remarks.

Bryan Sayler: All right, thanks everyone. I really appreciate you taking some time. We're excited about what's happening at ESCO, and we'll talk to you next quarter.

Bryan Sayler: Alright, thanks everyone. I really appreciate you taking some time. We're excited about what's happening at ESCO and we'll talk to you next quarter.

Operator: Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.

Speaker Change: Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.

Operator: I'll turn it back. Thank you. As a reminder, if you'd like to ask a question, please press star one on your telephone and wait for your name to be announced.

John Tanwanteng: Our next question comes to the line of John Tanwanteng with CJA Securities. Your line is now open. I thank you for taking my questions. My first one is just on the VACO space business. You gave a revenue number four, but I was wondering on average what the profitability of that business looks like on a normalized basis. Yeah, John, I would say we're probably not going to disclose that specifically and honestly, we're still working on some of the carve-out around that, but I would tell you it's certainly below segment averages overall.

Bryan Sayler: Okay, great. And the number that you're excluding from Q4 just in terms of the profitability erosion, is that the expected EBIT in the segment for Q4? It would be a potential delta of negative EBIT beyond what's in that guidance of 410 to 420. And that's a risk item. We don't know that that's going to happen. We just wanted to make sure we clearly identified the kind of downside there.

Bryan Sayler: Okay, can you tell us a little bit more about what's going on in the program that it's having a traditional cost in the nature of it? Yeah, so I think that we're still on the same path that we've been talking about, you know, for the last few quarters. We have a small number of firm fixed price development programs that we are working through. And so first of all, we're not taking new programs like that, so it's a finite number of programs.

Bryan Sayler: And what's happening is that we've accepted some requirements that are a little more challenging than normal. And so as we go into the test stand, if the products are what may perform as expected, we're going to be fine. But if we do have additional gobacks, it could cost additional money in terms of both engineering time and fabrication and test time. And so what we try to do is put a kind of a bottom end on what that would look like. Got it. Okay, that's helpful.

John Tanwanteng: Thank you.

Bryan Sayler: And then you brought on two new, you know, directors from the energy space or utility space. I'm just wondering, is that prey to just a bigger focus on that segment, just given the power demands that we're seeing, you know, and the growth that we're seeing in the next couple of years from all these EVs and data centers from you going on? Yeah, so listen, you know, our board has, you know, really wide range of experiences.

Bryan Sayler: And, you know, we've had a couple of board members that have retired over the last year or two. So as the nominating governor committee was kind of going through and determining, you know, where do we have strengths? And where do we have gaps? One of the things that we identified as the big area of focus for us is going to be aerospace and defense. We've got really good coverage there. We've got three directors that have worked all sides of that, both at the big primes in the government side and at tier one suppliers.

Bryan Sayler: So we feel really good about our coverage on the A and D side. But we've only got one independent director on the utility side. And he's done a great job. He's kind of an instrumental in helping us build that segment out over the last seven or eight years.

Bryan Sayler: But we felt like that bringing on two new board members from that segment would be appropriate. And one of the characteristics of that is that, you know, folks out of that segment come with, you know, a broader set of cybersecurity skills and things like that that we also found to be quite valuable. Thank you. I'll jump back and keep. Thank you.

Operator: I'm showing no further questions at this time and would now like to turn the call back to Bryan Sayler for closer remarks. Did the John Tanwanteng drop John back in for questions? Oh, I see he did. Now we're seeing what on the screen. Yeah. Yes.

John Tanwanteng: John, your line is now open again. Great. Thank you.

Bryan Sayler: I was just wondering if you could talk about the test business and the incremental approval when you're expecting to see the next quarter. I mean, you had some pretty good jobs from Q1 to Q2 and Q2 to Q3, but what kind of what degree of a coverage do we think you can see in that in those markets as we go forward? Yeah. Listen, I think that, you know, as we communicated a couple times, the big down strokes here were in China and on the wireless side, we've kind of absorbed that now.

Bryan Sayler: The good news is we're seeing good. We're seeing good growth out of the balance of the business, particularly in the US, particularly in our in our medical in our EMP businesses. And and the team has done a really good job of kind of taking cost out of the business and really refocusing on mark on marginal returns. So in terms of expectations, what you should see is continued sequential growth for both revenue and margin. So I would kind of use that 16 and a half percent as kind of your starting point and move up from there. Got it. Thank you. Thanks John. Thank you.

Christopher Tucker: Our next question comes from a line of Tommy mole with Stevens. Your line is now open. Hi, I figured I'd throw in a follow up on your guidance for the full year EPS. You took a little bit out and I'm just curious was all of that delta explained by the VACO space trends or were there any other factors driving up Brian? Yeah, Tommy, this is curious. That was that was the majority of it was was kind of what was embedded in that third quarter.

Christopher Tucker: You know, I mentioned in my comments, we took about a $2 million hit there and third quarter versus what we had expected when we gave that guidance. It's kind of the beginning in the quarter. So that flows to the year. That's the bigger part of it. And then I would say that, you know, the test business is a little bit weaker than than whenever we laid out the guidance over the last.

Christopher Tucker: You know quarter or so, you know, not a big shift, but we've seen the fourth quarter. You know, come down slightly. We still expect some nice sequential improvement there, but just not as quite as much as we had baked in before. Okay.

Bryan Sayler: Thank you, Chris. And while we're at it, I might as well throw one in on double. Hopefully not overstay my welcome here, but it looks like you were up a little bit year over year. And there were some puts and takes within the double umbrella. So whatever insight you can provide for us there would be helpful. And I'm at a higher level. I'm curious if we look across the utility and market this quarter.

Bryan Sayler: It does seem like there are more puts and takes this time around versus a quarter ago. And I don't know if you feel like that may be calendar slash election uncertainty or if the end market may be slowing a bit. Just any kind of insight you have would be helpful.

Bryan Sayler: Well, I don't think there's been more or different puts and takes here. I think that within the utility solutions group, you have seen some softening on the renewable side compared to the prior year. I want to restate. The prior year was an incredibly explosive comparison quarter for both orders and revenue. On the renewable side, that came down a little bit. Global was up by a lot. We're seeing just continued uptake on our services, in our hardware, as utilities are really pushing hard to maintain their current assets.

Bryan Sayler: They're facing big growth in demand and they're somewhat restrained on their ability to add capacity to their system. So what they're really focused on across the board is maintaining their current assets. And that really plays right into the wheelhouse for Doble. So we've had really good growth. Doble USG is up 8.5% over the prior year. Doble was up 7 and NRG was up 13.7. So our perspective is that that's going to continue.

Bryan Sayler: You mentioned the election. We get that question from time to time. It's one of many factors that we think about that could have an impact on our business, technical, regulatory, economic issues. And we've assessed it and we frankly don't see a significant benefit or a significant threat to any of Esco's businesses based on the outcome of the election. So a bottom line is we're not rooting for anybody here and we don't feel vulnerable either way it goes. Thank you, Brian.

Tommy Moll: I'll turn it back and appreciate the time.

Operator: Thank you.

Bryan Sayler: At this time, I'm showing no further questions and we'll turn it back to Brian Sailor for closer remarks. All right. Thanks, everyone. I really appreciate you taking some time.

Bryan Sayler: We're excited about what's happening in Esco and we'll talk to you next quarter.

Operator: Thank you for your participation in today's conference.

Operator: This does conclude the program and you may know what this can happen.

Q3 2024 ESCO Technologies Inc Earnings Call

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