ESCO Technologies Q2 Earnings Call Highlights

Key Points

• ESCO Technologies beat expectations in fiscal Q2, with orders up 42%, sales up 33.5%, adjusted EPS up 63% to $1.91, and adjusted EBIT margin expanding to 21.7%. The company also raised its full-year fiscal 2026 adjusted EPS outlook to $8.00 to $8.25.
• Backlog and demand momentum were strong across all three segments, led by Aerospace and Defense and Test, while the newly acquired ESCO Maritime contributed materially to growth. Management said the company ended the quarter with a record backlog and sees continued strength in commercial aerospace, Navy programs and condition monitoring.
• Utility Solutions remained mixed, as Doble benefited from stronger utility spending but NRG continued to face weakness in renewables markets. ESCO said the planned Megger acquisition is still expected to close in fiscal 2027 and should be accretive to earnings once completed.

ESCO Technologies NYSE: ESE reported strong fiscal second-quarter results and raised its full-year earnings outlook, citing broad-based order momentum, record backlog and gains from its ESCO Maritime acquisition.

President and CEO Bryan Sayler said the company saw “positive momentum across our business platforms” during the quarter, with order strength across all three segments. He said sustained demand pushed backlog to a record level, reflecting “healthy end markets and the strength of our competitive position.”

Senior Vice President and CFO Chris Tucker said second-quarter orders rose 42%, including 22% organic order growth. ESCO Maritime, acquired in April 2025, added $53 million of orders, representing 20 percentage points of additional growth. Sales increased 33.5%, including 13% organic growth and $48 million of sales from Maritime.

Adjusted EBIT margin improved 370 basis points to 21.7%, while adjusted earnings per share rose 63% to $1.91, Tucker said.

Company Raises 2026 Earnings Outlook

ESCO raised its fiscal 2026 adjusted earnings per share guidance to a range of $8.00 to $8.25. Tucker said that would represent an increase of 33% to 37% compared with fiscal 2025 and would mark another record year for the company.

For the first six months of fiscal 2026, Tucker said organic orders rose 30%, with double-digit organic growth across all three business platforms. Year-to-date sales increased 12% organically, led by 27% growth in Test and 14% growth in Aerospace and Defense. Adjusted EBIT margins improved 370 basis points year to date.

Operating cash flow for the first half was nearly $135 million, compared with $46 million in the prior-year period. Tucker attributed the improvement in part to increased advance payments on large Navy contracts. He said EBITDA leverage remained low at 0.4 times, positioning the company for debt needs tied to the pending Megger transaction.

Aerospace and Defense Posts Strong Order Growth

In Aerospace and Defense, orders totaled nearly $184 million, up from $96.5 million in the prior-year quarter. Organic orders rose 35%, led by commercial aerospace and Navy programs. Maritime contributed $53 million of orders, bringing reported order growth to just over 90%.

Segment sales were $150 million, including 14% organic growth. Tucker said commercial aerospace, defense aerospace and Navy programs all contributed to the performance. Adjusted EBIT margin rose 160 basis points to 28.6%, reflecting sales leverage and increased prices.

Sayler said the company continued to see order strength in U.S. and U.K. Navy programs, including $24 million of Virginia-class submarine orders at Globe for Block V.2 and Block VI content. He also said commercial aerospace orders have rebounded after being “a little soft” last year as OEMs worked through internal issues.

Looking ahead, Sayler said commercial aerospace demand continues to exceed production, supporting high OEM backlogs. He cited expectations for annual aircraft deliveries to rise from about 1,400 in 2025 to more than 2,000 per year by 2028 and beyond, while noting the company views industry forecasts conservatively.

Utility Solutions Lifted by Doble, Offset by Renewables Weakness

Utility Solutions Group orders rose 10% in the quarter, driven by a 20% increase at Doble. Sales increased 3%, as 11% sales growth at Doble was partly offset by declines at NRG, where renewables markets remained soft. Adjusted EBIT dollars rose nearly 11%, with volume, price and mix benefits at Doble more than offsetting lower margins at NRG.

Sayler said roughly 85% of the segment’s activity is tied to utility capital spending, which he expects to remain elevated as electric utilities invest to meet rising electricity demand and modernize an aging grid. He said diagnostic measurement, testing and monitoring products are helping utilities improve reliability and performance across both new and legacy assets.

During the question-and-answer session, Sayler said condition monitoring demand continues to accelerate, aided by public utility commissions in North America increasingly allowing those tools to be built into the rate base. He described condition monitoring as a double-digit growth category for ESCO.

Sayler said condition monitoring can reduce truck rolls by helping utilities identify when an issue requires a response. However, he said the bigger value is providing real-time data from the grid edge, helping operators run systems more efficiently during peak load conditions and extend the life of existing assets.

NRG continued to face pressure from weak renewables demand. Sayler said developers are changing behavior ahead of the expected removal of certain tax credits. He declined to call a bottom in the market, saying the downturn could go “a little deeper” or last longer, but added that ESCO still believes renewables are part of the long-term grid solution. He said the NRG business remains profitable and could return to growth in the second half of 2026 or early 2027.

Test Segment Outperforms as Demand Broadens

The Test segment delivered what Tucker called “another terrific quarter,” with orders up 21% and sales up more than 27%. Demand was centered on U.S. test and measurement and power filters, including filter orders for government-funded data centers and industrial shielding projects. Adjusted EBIT margin improved 300 basis points to 15.4% as the business leveraged higher sales.

Sayler said Test continues to benefit from demand tied to electromagnetic compatibility testing, shielding performance, healthcare, industrial shielding and EMP filters for utilities and secure data centers. He said the company now views the segment’s longer-term organic revenue growth outlook as closer to 4% to 6%, compared with a prior 3% to 5% range.

Sayler also said ESCO is still targeting 20% EBITDA margins in Test, adding that after the company’s recent five-year strategic review, management believes the segment can reach that level faster than previously expected.

Megger Deal Expected to Close in Fiscal 2027

Sayler provided an update on ESCO’s planned acquisition of Megger Group Limited, which was announced in April. He said the company has begun regulatory filings in required countries and currently expects the transaction to close in the first quarter of fiscal 2027, though the timing remains uncertain.

Internal teams from Megger, Doble and ESCO have started planning for integration, Sayler said. He said the acquisition would create a scaled utility solutions platform and strengthen ESCO’s position as a partner to utilities globally.

In response to an analyst question, Sayler said the transaction is expected to be accretive to EPS in the first full year and “approximately double digit accretive” in the second year. He said ESCO underwrote the deal with an expected internal rate of return above its weighted average cost of capital.

Management said full-year revenue guidance was unchanged, reflecting puts and takes across the portfolio. Tucker said Maritime is likely to come in near the lower end of its previously discussed $230 million to $245 million annual sales range due to delays and slowdowns on some U.S. surface ship programs. He said Doble is performing better than expected, NRG is weaker, and parts of Aerospace and Defense are modestly stronger.

Sayler also addressed inflation and pricing, saying ESCO has a demonstrated history of driving price faster than inflation. He said the company is monitoring signals, including oil prices, that could require additional pricing discussions with customers.

About ESCO Technologies NYSE: ESE

ESCO Technologies Inc is a diversified manufacturer of engineered products and systems designed to meet customers' critical performance requirements in the test, measurement, control, and filtration of data, fluids, and gases. The company serves a wide range of end markets, including commercial aerospace, defense, industrial, medical, and communication network sectors. ESCO's solutions are tailored to environments where reliability, precision and regulatory compliance are paramount.

Operating through multiple business segments, ESCO Technologies delivers test and measurement instruments such as RF and microwave components, signal distribution systems, and integrated test enclosures that support defense and aerospace programs.

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