Participants

Kate Lowrey; Vice President - Investor Relations; ESCO Technologies Inc

Bryan Sayler; President, Chief Executive Officer, Director; ESCO Technologies Inc

Christopher Tucker; Chief Financial Officer, Senior Vice President; ESCO Technologies Inc

Thomas Moll; Analyst; Stephens Inc

Jonathan Tanwanteng; Analyst; CJS Securities Inc

Joshua Sullivan; Analyst; The Benchmark Company LLC

Presentation

Operator

Good day, and thank you for standing by. Welcome to the first-quarter 2025 ESCO Technologies earnings conference call. (Operator Instructions)
Please be advised that today's conference is being recorded. On the call today, we have Bryan Sayler, President and CEO; Chris Tucker, Senior Vice President and CFO.
And now I would 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 an exhibit to the Form 8-K to be filed.
We undertake no duty to update or revise any forward-looking statements, except as may be required by applicable laws or regulations. In addition, during this call, the company may discuss some non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to the most comparable GAAP measures can be found in the press release issued today and found on the company's website at www.escotechnologies.com under the link, Investor Relations.
Now, I'll turn the call over to Bryan.

Bryan Sayler

Thanks, Kate, and thanks, everyone, for joining today's call. Our year got off to a great start in Q1 with continued momentum across our served markets and strong execution by our teams, driving positive results across our businesses.
Before getting into details about the business, I do want to take a moment and say thank you to our employees for their ongoing efforts. Our company consists of over 3,000 team members. And our success is not possible without their dedication and commitment to our customers around the world. I appreciate everyone's efforts, which are clearly paying off.
I also want to mention our Southern California-based employees who have experienced some unsettling moments over the past month with the major wildfires in the area. While none of our people suffered injury or catastrophic losses, we did have some folks experience evacuation orders and general disruption. We remain focused on supporting our employees as needed, and we appreciate their ability to work through these challenging conditions.
Chris will run you through all of the financial details for the quarter. But before we get to that, I want to give you a few comments on each of our segments.
Starting with Aerospace and Defense. We remain very positive regarding the long-term outlooks for these markets. Production rates across both our Navy and Aerospace end markets continue to ramp up to meet customer demand.
Overall, A&D delivered 20% revenue growth and margin improvement in the quarter. Navy sales were particularly strong as they were up $13 million, or 56% over the prior year. Fundamentally, our customers in the commercial aerospace and Navy markets continue to ramp up production, and we are focused on supporting those efforts. Underlying demand in both of these areas is very strong, and we think the outlook remains quite positive for 2025 and beyond.
Before jumping to the next business, I do want to quickly address the status of the SM&P acquisition and previously announced strategic review of our space business at VACCO.
On the SM&P deal, as previously discussed, the closing of the transaction is subject to regulatory approval in the US and the United Kingdom. The US closing conditions have been met, and we're now in the final stages of the UK government assessment. We've had good dialogue with the UK regulators, and we're hopeful that this process will be concluded in the near term. Our current expectation would be to close the transaction in the remaining months of fiscal Q2 or in early Q3.
Regarding the strategic review at VACCO, first of all, business performance has improved as we've effectively dealt with the challenges from fixed price development contracts. Order input is very good and outlook for the business is improving. The company operates two distinct but related product lines today, space and defense. As this review has evolved, we have determined that splitting these two product lines into two separate businesses is not feasible.
As a result, we are now in the process of evaluating whether to retain or sell the entire VACCO business. This process is moving along well, and we anticipate being able to provide a more definitive path forward by our next earnings announcement in May.
Switching businesses now, let's talk about the Utility Group, which had an outstanding quarter.
Our core utility business at Doble delivered double-digit orders and revenue growth and significant margin expansion as they continue to see end market strength related to utilities needing to maintain and extend the life of their existing assets.
NRG's revenue was lower in Q1, as we saw some moderation on renewable projects coming off of record revenue in 2024. The market conditions across the utility landscape are somewhat dynamic right now, but we feel strongly that ESCO is well positioned for the long term. We are seeing strong investments from the utilities, while the renewables markets have drifted a bit, given the uncertain status of tax incentives put in place by the prior administration.
We would expect any softness on renewables to be more than offset by our regulated utilities business on the Doble side. The dynamics driving overall power demand remain in place. And as that demand is satisfied, we expect it to result in a positive growth story for ESCO's Utility Solutions Group.
Finally, I'll touch on the Test business, which had a really strong start to the year, with orders up over 40% and double-digit organic sales growth. As we have discussed in recent quarters, Test has been working through some business cycle challenges related to the next phase in wireless development and a complex environment in China.
The team has taken the right steps here to protect the business for the long term, and we are seeing some good growth beyond that wireless market. So I would say that the business here has stabilized, and we feel good about our trajectory as we move further into 2025.
In summary, 2025 is off to a great start for ESCO with really good performance in all three business segments, which has enabled us to outperform in the quarter and raise our guidance for the full year.
\With that, I'll turn it over to Chris to run you through the financial details of the quarter.

Christopher Tucker

Thank you, Bryan. Everyone can follow along on the chart presentation. We will start on page 3, where we will discuss the change to adjusted earnings per share reporting.
As stated in the earnings release, our adjusted earnings per share will now reflect an add-back of all acquisition-related amortization. The table at the bottom of the page shows the impact, which was $0.14 in the prior year first quarter and $0.15 in this year's first quarter.
The bar graph to the right shows that on the new basis, we achieved $1.07 of adjusted EPS in the quarter, which was nearly 41% above last year's first quarter. The $1.07 per share would compare to a range provided back in November of $0.83 to $0.90 per share. So we were able to come in nicely ahead of plan during the quarter.
Moving on to chart 4. We have the overall financial highlights of the first quarter. Orders were down in the quarter as we experienced some large Navy orders during the prior year first quarter. But overall, our book-to-bill was 111%, and we finished the quarter with backlog of $907 million, a record amount.
Sales in the quarter were up 13%, which was all organic. Additionally, adjusted EBIT margins increased by 250 basis points to 15.3%. Importantly, during the first quarter, we saw all three reporting segments deliver sales growth and adjusted EBIT margin improvement.
Lastly, and as noted on the prior chart, adjusted earnings per share increased by 41% during the first quarter.
Next, we will go through the segment highlights, starting with Aerospace and Defense. Orders were down in the quarter, this is where we had the large Navy orders a year ago, which created a tough comparison. However, book-to-bill was still above 100%, and the business continues to enjoy record backlog levels of over $600 million.
The sales performance in the quarter was terrific with nearly 21% growth. The growth was led by commercial aerospace and Navy. Margins were good with adjusted EBIT margins up 130 basis points and adjusted EBIT dollars up nearly 30% as we saw good leverage on the growth, offset by some unfavorable mix.
Next, on chart 6 is the Utility Solutions Group. We also posted a great quarter here. Orders growth was strong at over 16%, with both Doble and NRG delivering double-digit order growth.
On the sales side, growth was 4%, which was driven by 12% growth at Doble. Sales were down at NRG, where the business has seen some moderation over the last few quarters. Profitability was very strong for this business as we leverage the growth at Doble and also experienced favorable product mix, which helped drive the adjusted EBIT margins to 23.6% in the quarter.
Next, we will cover Test, where we saw a nice start to the year, especially when comparing to the challenging results we had last year in the first quarter. Order growth was excellent at over 40%, and it was pretty broad-based with EMC, Test and Measurement, A&D, medical, and industrial shielding all fueling the increase.
Sales were up over 13% as we saw nice growth from the US and European markets as well as good performance at MPE. Margins rebounded nicely as volume growth and benefits from last year's cost reductions efforts drove the first quarter adjusted EBIT margins to 10.6%.
Next is chart 8, where we have the cash flow highlights. The year got off to a strong start on operating cash flow, which was $34 million compared to $9 million in the prior year.
Cash collections were strong in the quarter, and that was the main driver of the improved cash performance. Capital spending was $2.6 million less than last year, and we had 0 acquisition spend during this year's first quarter.
So we delivered big improvement in free cash flow and saw our debt-to-EBITDA leverage ratio drop to 0.4x. The next chart will discuss our full year earnings guidance.
First, on chart 9, where we show the impact of the acquisition amortization on full year and quarterly numbers from last year.
You can see in the first table that our guidance in November was $4.70 to $4.90 per share and adding back the full year impact of acquisition amortization of $0.60 per share, the old guidance becomes $5.30 to $5.50 per share.
Operationally, we are increasing the guidance by $0.25 per share at the low and high end of the ranges for an updated range of $5.55 to $5.75 per share. Second quarter guidance is for $1.20 to $1.30 per share, and the bottom of the table on this page is for your reference and shows the acquisition amortization impact by quarter for FY24.
My last chart discusses the fiscal 2025 guidance. You can see our sales guidance is unchanged at 6% to 8% growth. And with our increased earnings per share guide, we are now targeting 16% to 21% growth in adjusted EPS when compared to 2024.
The graphs at the bottom of the page show growth trends since 2021, which have been strong. We also want to be clear here, this guidance excludes the impact of the pending SM&P acquisition, and it also excludes the impact of the strategic review process at VACCO. Both of these items could have significant impacts on our outlook, and we will provide updates on those items and their impacts when the timing is more certain.
That concludes the financial portion of the call. And now I'll turn it back over to Bryan.

Bryan Sayler

Thanks, Chris. So as you heard, we're off to a great start for the year. We're excited about the ability to increase our full year outlook, and we're excited about some of the portfolio moves that are being actively worked on.
ESCO's future remains bright, and we continue to see a path for value creation and enhancement as we move forward. The impacts of this are starting to come through in our results, and we're confident that there's more to come.
Before we go to questions, I would like to take a moment to recognize one of our long-term directors, Lee Olivier, who retired this week. Lee served ESCO's shareholders for over 10 years on the Board and applied his decades of experience in electric utilities as our principal strategic adviser, as we built out our Utility Solutions business over the past decade.
Over those years, I personally benefited from Lee's industry knowledge, his business acumen and his encouraging and upbeat disposition. On behalf of ESCO's Board and our shareholders, we wish Lee all the best in a long and healthy retirement as he continues his quest to catch every kind of fish there is. Lee, you will be missed.
With that, we're done with the prepared remarks, and we can turn it over to Q&A.

Question and Answer Session

Operator

(Operator Instructions) Tommy Moll, Stephens.

Thomas Moll

Good afternoon. Thanks for taking my questions. Bryan, I wanted to start on Doble. Revenue was up double digits, but your book-to-bill this quarter was still well north of 1. So any context you could give? Was there some calendar year-end tailwind here? Are there some drivers that are maybe more durable? Just any kind of context would be helpful.

Bryan Sayler

Well, I think the fact that we took up our full year guidance probably is a tell that we think this is not a onetime event. This is -- we're heading in the right direction here. What we would say about utilities generally is that they are really making a lot of capital investments right now, anticipating broad increases in electricity demand that are driven by multiple different aspects and reshoring, electric vehicles, electrification of home heating, data centers, AI.
I mean there's just a wide range of things driving broad-based energy demand. And we're benefiting as they need to make investments in maintaining and maximizing the throughput of their existing assets and making investments in generation, transmission, and distribution.

Thomas Moll

Thank you, Bryan. Second question I wanted to ask is really a two-part on the guidance for the full year. On the revenue side, you reaffirmed the range and then raised on EPS. And so the two parts here.
One is where are you getting the better than previously expected margin from if you had to pick one or two places? And then in terms of the revenue, you updated us on the total company, but just at the segment level versus your prior outlook, is there anything you might want to call out? I was thinking in particular utility, maybe some increased headwinds there on the NRG side, but I'll let you do the talking there.

Christopher Tucker

Yeah. I would say, essentially, Tommy, if you look at the first quarter, where obviously, we had a pretty nice beat. On the margin side, we did have some good margin upside in the quarter at A&D. We are starting to get into some of that past due backlog and see that move a little better. And so that flowed through.
And then also on the utility side, you mentioned Doble. We had particularly good mix there in the quarter on some of the kind of legacy protection testing and off-line testing product sales. Those are kind of some of our highest margin things, and we had good results there. And I think fundamentally, as we looked out the balance of the year, we still feel good about how we had those loaded in.
We didn't think anything that happened in the first quarter should reduce those out quarters. And so you kind of see that first quarter performance flowing through.
On the sales side, yes, I mean, we're pretty consistent. You're right. I think if we see any upside on the Doble side from a sales perspective, we would say we might see a little softness on the renewable side that would offset it from a revenue perspective.
But again, from an EBIT side, we're in good shape there. And again, maybe a little bit of upside to the year just because of the first quarter performance. So that's really kind of how I would frame all that up.
I think the sales outlook for Test remains consistent. It really firmed up, I would say, nicely in the first quarter because the orders at Test were so good. So that made us feel good about the outlook for the rest of the year there. And then A&D, again, I think we're plugging along pretty well there and feel good about that outlook as well.

Thomas Moll

Thanks, Chris. I'll turn it back.

Operator

(Operator Instrucitons) Jon Tanwanteng, CJS Securities.

Jonathan Tanwanteng

Hi, thank you for taking my question. Bryan, you mentioned that you were seeing improving demand at VACCO. I was wondering if you could delineate if you're seeing that in Space or Navy. I'm guessing it was Navy, but I don't know if you have the same thing going on in space.

Bryan Sayler

Yeah, a little bit more in Navy than space. I mean you're probably aware that there's a large amount of procurement going on the submarine front. We definitely are starting to see our share of that in line with what we've talked about in the past. And -- but there is some space business coming through for us.
So the business is really doing well. As I said in my comments, we're kind of past the fixed price development contracts problems, and the outlook is definitely improving there.

Jonathan Tanwanteng

Okay. Great. And then can you just characterize the strong test orders in the quarter? Was it broad-based? Was there more of any one sector stronger than the other or maybe there are large projects in there? It's kind of unusual to see that strong of a Q1 order pattern, I think.

Bryan Sayler

Yeah. I would say it was very broad-based with the exception of wireless. We got good orders in Europe. We got good orders in the US. We even saw a turnaround and some improvement in China.
A lot of electromagnetic compatibility testing, which, as you know, kind of is a regulatory-driven piece. We've got a lot of wireless -- excuse me, not wireless, medical activity. And we're starting to see a resumption of the EMP filters that are typically going to data centers. So we got a couple of those.
And we saw an investment in a large EMP-protected control center for a utility in the US. So I would say aerospace and defense is coming through for us as the electronic warfare stuff kind of drives a little bit of activity there, so pretty broad-based. The wireless thing is kind of trundling along, I think, at a pretty sustainable level, but that's not likely to improve substantially until we get a little bit of clarity about where the 6G technology is going to head.

Jonathan Tanwanteng

Okay. Great. Thank you. And then just any update on the M&A environment? Are you hands full with closing SM&P? Or is there other stuff in the pipeline? And is it actionable?

Bryan Sayler

Yeah. I would say we are strongly prioritizing closure of SM&P and then our strategic review at VACCO. But we still have the capacity to look at other opportunities, and we're seeing some interesting things there. But I would not say that anything is imminent. So my guess is that you would probably see us close out those first two actions before you see any new action that manifests itself.

Jonathan Tanwanteng

Understood. Thank you.

Operator

Tommy Moll, Stephens.

Thomas Moll

Hello, again. Bryan, we'll wait until May to get the full update on VACCO. But if you're able to give us any insight, quantitative or qualitative what the implication would be if you pulled VACCO out of your A&D segment on the margin?

Bryan Sayler

It would be strongly accretive to margins for the A&D and for ESCO.

Thomas Moll

Okay. That points us in the right direction. And then maybe a follow-up question for Chris here. You made a comment about working through some of the past dues in A&D. If you could give us a sense of what inning you're in there? Any implications for working capital going forward would be helpful. Thanks.

Christopher Tucker

Yeah. I think I would say that it's really kind of two main businesses there right now on the commercial aircraft side, which is our PTI and Crissair businesses. I would say we're probably to the fifth or sixth inning there, if I tried to kind of put it in that framework. And I do think we're already starting to see some benefits from working capital there come through the numbers. You saw the good cash in the quarter.
We did have an inventory build in the quarter, but it was less than what we had in the first quarter last year. And it really wasn't in aerospace and defense. That inventory build was kind of elsewhere in the company. So I think -- and you saw us liquidate receivables from the strong fourth quarter.
So I think you're starting to see the benefits there. Obviously, we're highly focused on continuing to drive high cash flow conversion. And it was nice to start off the first quarter that way because normally, we don't always see that in the first quarter.
But anyway, back to your original question, yeah. we're getting towards the mid- to late innings, hopefully, on the past dues, and it's nice to see the good progress there.

Thomas Moll

Thank you, I'll turn it back.

Operator

Jon Tanwanteng, CJS Securities.

Jonathan Tanwanteng

Just a quick follow-up for me. Could you provide an update on SM&P, the performance of the business and kind of what you're seeing there? I think when you announced the agreement to acquire it a while back, you had been pretty excited about the revenue opportunities. I'm wondering if those are playing out as expected and kind of what the expectation is today.

Bryan Sayler

Yes. I would say that we're told that 2024 performance was in line with expectations and their commitments. We can't get into much more detail than that. But we're pretty optimistic about where they stand. We have a pretty good idea of what's going on with the Navy and the major -- indirectly with the major shipbuilders, and we -- that's all encouraging stuff as well.

Jonathan Tanwanteng

Okay, great. Thank you.

Operator

Josh Sullivan, Benchmark.

Joshua Sullivan

Hey, good evening. Just curious what you guys have been seeing as far as Boeing strike coming to a resolution. And I mean, if you don't want to talk specifically about a customer, just generally what you're seeing in the OEM supply chain as we look at a re-ramp here in '25 and beyond?

Bryan Sayler

Well, if you're in the aircraft business, you can't not talk about Boeing. So we're comfortable talking about it. Listen, we're happy that they were able to get the strike resolved. We did see them begin the process of kind of doing a little bit of rescheduling of their backlog.
We have -- two of our businesses are really tied directly to that OEM work. The third business is closer to the production piece, and we've already started to see a little bit of recovery there. We were able to kind of manage around that pretty effectively in Q1, got some good aftermarket activity. So we feel pretty good about that.
We are -- I guess the way our forecast lays out is we're pretty modest about build rates from Boeing this year. We're still going to see good growth overall in our business. And we're counting on Boeing getting into growing their build rate second half of this calendar year and starting to get into next year. That's really going to begin to drive a lot of positive things for our aircraft businesses.

Joshua Sullivan

Got it. And then maybe just one on the defense side. Just with the larger sub builds contracts still in negotiation, what does the pull look like through the supply chain at this point from your perspective?

Bryan Sayler

I'm sorry, what does the what look like?

Joshua Sullivan

Just on the general pull on submarines and service ships.

Bryan Sayler

Yeah. I mean, it's generally positive. I mean they're -- listen, it's taken them longer to get up to the desired build rates that Congress has set for them, but they're definitely making steady workman-like progress on that. We're continuing -- that business for us is continuing to grow. We have seen -- over the last year, we've seen some expansion of our ship set content there, which has been favorable for us.
We -- as far as the contracting goes, there's been a little bit of a slowdown there. Some of that might be Congress related, some of that might be Navy related, some of that might be shipbuilder related, but they are -- no change in the overall commitment from an orders perspective, but the timing has kind of shifted out by a quarter or so.

Operator

I'm showing no further questions at this time. I would now like to turn it back to Bryan Sayler for closing remarks.

Bryan Sayler

All right. Well, listen, everyone, thanks for taking some time to hear from ESCO. We're -- we continue to be excited about the outlook and look forward to talking to you in May about another good quarter.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.