ESCO Technologies Q3 Earnings Call Highlights

Key Points

• Strong third-quarter performance: Sales rose 14% year over year, adjusted EPS increased 37.5% to $2.20, and adjusted EBIT margin expanded to 22%. Record backlog reached $1.54 billion, supported by a 1.21 book-to-bill ratio.
• Aerospace, defense and test demand remained robust: Aerospace & Defense sales grew 23%, while test orders surged 42% on industrial shielding and EMI-filter demand. Utility Solutions orders also rose 20%, led by a 30% increase at Doble, though weaker renewable markets pressured NRG.
• Outlook improved: ESCO raised fiscal 2026 adjusted EPS guidance to $8.30–$8.40, representing 38%–39% growth. The company still expects to close its Megger acquisition in the first quarter of fiscal 2027, pending regulatory approvals.

ESCO Technologies NYSE: ESE reported third-quarter fiscal 2026 results marked by organic sales growth, higher profitability and record backlog, as demand remained strong across its aerospace and defense, utility solutions and test businesses.

The company posted a consolidated book-to-bill ratio of 1.21 during the quarter, with each operating segment exceeding 1.0. Backlog reached a record $1.54 billion, including a $1.1 billion backlog in Aerospace & Defense. Reported sales increased 14% from a year earlier, including 8% organic growth and $23 million of incremental sales from the Maritime acquisition.

Adjusted EBIT margin rose 90 basis points to 22%, while adjusted earnings per share increased 37.5% to $2.20. Operating cash flow for the first nine months of the fiscal year totaled more than $193 million, up from $88 million in the prior-year period, aided by increased advance payments on large Navy contracts.

Aerospace and Defense Growth Continues

Aerospace & Defense sales rose 23% to $168 million, including 9% organic growth. Chris Tucker, ESCO’s senior vice president and CFO, said organic growth reflected 10% increases in both commercial aerospace and defense activity and the Navy business.

The segment’s adjusted EBIT margin increased 120 basis points to 30%, supported by sales leverage and pricing. Its book-to-bill ratio was 1.16, with particular strength in aircraft components.

President and CEO Bryan Sayler said the commercial aerospace outlook remains supported by a global aircraft backlog of approximately 18,000 aircraft, alongside estimated unmet demand for another 5,000 aircraft. He also cited increased emphasis on defense spending, security and supply-chain resilience among aerospace customers.

On naval markets, Sayler pointed to a recent Navy award to prime contractors for the remaining nine Block VI Virginia-class submarines and the next five Columbia-class submarines. ESCO is already under contract with prime contractors for its related content, he said, adding that the action increased management’s confidence in the long-term outlook for submarine programs.

During the question-and-answer session, Sayler said defense growth was being driven principally by programs of record, particularly submarine programs. The company’s aftermarket business continues to expand at roughly the same rate as the broader business and represents about 30% of that business, he said.

Utility Orders Led by Doble, While NRG Remains Soft

Utility Solutions Group orders increased 20% in the third quarter, driven by a 30% increase at Doble. Sales for the segment rose 8%, as Doble sales climbed 17% on demand across product lines serving regulated utility customers.

Sayler said utilities are investing in maintenance, diagnostics, reliability and commissioning tools as power demand rises and grids expand to support data centers, electric vehicles, industrial electrification, heat pumps and other sources of load growth.

Doble’s order strength was broad-based, according to Sayler. Condition-monitoring orders increased 67%, aided by large high-voltage cable-monitoring orders, while services orders rose 13%, protection orders increased 23% and offline testing orders gained 13%. The company also secured a large cybersecurity-client renewal.

However, NRG, ESCO’s renewables-focused diagnostics business, continued to face weak order trends amid softer renewable-energy markets. Utility Solutions adjusted EBIT margin declined 130 basis points in the quarter. Tucker said modest margin improvement at Doble was more than offset by weaker profitability at NRG, as well as unfavorable product mix and timing of certain expenses.

Sayler said NRG has taken costs out of its business and is beginning to see sequential growth, though he expects another year-over-year decline in the fiscal fourth quarter due to difficult comparisons. He said management expects the business to return to growth in fiscal 2027 from a lower base, with growth potentially reaching the high single digits, though it is not expected to return to fiscal 2025 levels immediately.

Test Orders Rise 42%

ESCO’s test business recorded a 42% increase in orders, driven by industrial shielding projects and electromagnetic interference, or EMI, filters. Sales increased 5%, while adjusted EBIT margin improved 50 basis points to 16.4% as volume leverage more than offset inflationary pressures.

Sayler said industrial shielding orders involved secure shielded rooms in the United States and Europe. EMI filters were ordered for commercial and government data centers. He noted that not every data center requires electromagnetic pulse protection, but facilities housing government data, utility systems or other critical infrastructure may have such requirements.

The company said test-market activity remains robust in U.S. and European electromagnetic compatibility test and measurement markets, as well as in U.S. power-filter demand.

Megger Closing Expected in Fiscal 2027 First Quarter

ESCO continues to expect its acquisition of Megger to close in the first quarter of fiscal 2027, subject to completion of required regulatory filings in multiple countries. Sayler said the regulatory process was proceeding smoothly and according to expectations.

Teams from ESCO and Megger are working on integration planning before closing. Sayler said initial priorities will include reviewing the combined footprint and manufacturing sites, harmonizing product lines, developing a go-to-market strategy and establishing a combined identity for the enterprise. The company expects the transaction to expand its scale in utility solutions and support anticipated synergies.

Tucker said ESCO’s EBITDA leverage stood at 0.2 times at the end of the period, leaving the company positioned for the debt associated with the acquisition. He said ESCO currently expects the cost of debt for the transaction to be about 6% and anticipates that its November guidance update would include Megger if the transaction closes on the planned timeline.

Full-Year Outlook Raised

For fiscal 2026, ESCO raised its adjusted EPS guidance to a range of $8.30 to $8.40, representing growth of 38% to 39% from fiscal 2025.

Tucker said the company expects underlying full-year sales growth of approximately 8% to 10% in Aerospace & Defense, 10% to 12% in test, and 4% to 6% in Utility Solutions. Doble is expected to maintain low-double-digit growth through the fiscal fourth quarter, he added.

For the first nine months of fiscal 2026, ESCO reported 19% organic order growth and 11% organic sales growth. Adjusted EBIT margin increased 250 basis points year to date, while adjusted EPS rose 55%.

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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