ESCO Technologies Inc. Aktie

Good day, and thank you for standing by. Welcome to ESCO Technologies Q2 2026 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; and Chris Tucker, Senior Vice President and CFO. I'd now like to turn the conference over to your first speaker today, Kate Lowrey, Vice President of Investor Relations. Kate, you now have the floor.

Thank you. Statements made during this call, which are not strictly historical are forward-looking statements within the meaning of the safe harbor provisions of the federal securities laws. These statements are based on current expectations and assumptions, and actual results may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the company's operations and business environment, including, but not limited to, the risk factors referenced in the company's press release issued today, which will be included as an exhibit to the company's Form 8-K to be filed. We undertake no duty to update or revise 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.escotechnologies.com under the link Investor Relations.

Now I'll turn the call over to Bryan.

Thanks, Kate, and thanks, everyone, for joining today's call. We are pleased to be with you this afternoon to discuss our second quarter results. I'd like to start the call by sincerely thanking all of our employees around the world. Your dedication, collaboration and commitment continue to make the difference, and they were central to delivering another outstanding quarter. In Q2, we continue to see positive momentum across our business platforms as the pace of progress across our end markets continues to build. We had another strong quarter for orders across all 3 segments, and that sustained demand drove backlog to a record level, clear evidence of healthy end markets and the strength of our competitive position.

From an operational perspective, Q2 delivered another strong performance, translating into exceptional results on both the top and bottom line. Revenue strength was broad-based across most of our served markets. We see this quarter as further proof of the power of our strategy and our ability to execute with consistency, delivering sustainable value over time. As we announced in mid-April, we have reached an agreement to acquire Megger Group Limited. This acquisition represents a significant step in our portfolio transition, and I wanted to give you a quick update on what's been transpiring since the announcement.

We have begun the regulatory filings process in the required countries. And while the timing of this process can be uncertain, our current expectation is that it should be completed in a time frame that results in closing the deal in the first quarter of fiscal 2027. In addition, I want to let you know that we have already established internal teams with Megger, Doble and ESCO staff working together to better understand key aspects of the integration process. We expect that this early preparation and planning will be beneficial in setting out steps for a smooth and orderly integration of Doble and Megger with a focus on realizing identified synergies once the transaction is complete. Adding Megger to the ESCO portfolio creates a scaled utility solutions platform and strengthens our position as a trusted partner to utilities worldwide. This acquisition marks another meaningful step in enhancing our portfolio, and we remain confident in the long-term outlook for our target markets. With durable demand drivers firmly in place, we are excited about the opportunities ahead.

Chris will run you through all of the financial details for the second quarter. But before that, I want to give you a few comments on each segment. We recently completed our annual strategic planning process with our subsidiary businesses. As part of these meetings, we assess each of our end markets and our strategies to deliver above-market growth. My comments will focus on the current order strength that we are seeing as well as some of the longer-term dynamics across our served markets.

Starting with Aerospace and Defense. In Q2, we continue to see order strength on U.S. and U.K. Navy programs, both from the maritime business and organically at Globe, where we entered $24 million of Virginia Class orders in the quarter for Block V.2 and Block VI content. In addition, we are seeing broad order strength on commercial aerospace programs. As we have mentioned previously, commercial aerospace orders were a little soft last year as the OEMs work through some internal issues. So it is nice to see the rebound in order strength here. We continue to see a positive long-term outlook across our A&D end markets, supported by strong demand visibility and multiyear program backlogs. In commercial aerospace, demand continues to outpace production, sustaining historically high OEM backlogs. Annual deliveries are expected to increase from approximately 1,400 aircraft in 2025 to more than 2,000 per year by 2028 and beyond.

While we view industry forecasts with an appropriate conservatism, we believe that the OEMs are on a recovery path, and we are already seeing order momentum tied to early progress in raising building rates. In defense aero, elevated geopolitical uncertainty is supporting higher budgets and new program starts. The F-47 NGAD program represents a meaningful long-cycle growth opportunity, and we have achieved strong early wins to secure attractive shipset content. In naval markets, both the U.S. and U.K. remain committed to submarine modernization and fleet expansion with increasing build rates and new platform development continuing to be key priorities.

Turning to the Utility Solutions Group. We delivered another strong quarter of orders led by services, off-line test equipment and condition monitoring that supported double-digit revenue growth. These results were partially offset by lower renewables demand as developers continue to prioritize project completions ahead of tax credit sunsets later this summer. Looking ahead, we are encouraged by the outlook for utility solutions. Approximately 85% of segment activity is tied to utility capital spending, which we expect to remain elevated as electric utilities invest to meet rising electricity demand. This demand is placing increasing strain on an aging infrastructure, accelerating the need to maintain, expand and modernize the electric grid. Our diagnostic measurement, testing and monitoring solutions help utilities improve reliability and performance across both new and legacy assets. Our condition monitoring equipment and high-voltage test solutions are becoming increasingly important for utilities and OEMs that manufacture transformers and switchgear as they navigate the challenges of maintaining and expanding the grid. Overall, we remain bullish on the longer-term opportunity in the utility end market.

Finally, I'll touch on the Test business, which carried its great start to the year into the second quarter. Orders were strong in the quarter, driven by EMC test and measurement in the U.S. and Europe. Filter orders for government-funded data centers and multiple industrial shielding projects. Over the longer term, we are seeing broad-based strength across most of test end markets and expect mid-single-digit organic revenue growth over our planning horizon. Demand is being supported by a favorable regulatory and standards environment, rising requirements for electromagnetic compatibility and shielding performance across mission-critical applications. Compliance testing and evolving standards continue to drive increased test frequency and expanded certification requirements. We see sustained demand across EMC and microwave applications, health care, industrial shielding and EMP filters serving utilities and secure data centers. We are optimistic about Test's continued opportunities to drive growth and margin expansion over time.

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

Thanks, Bryan. Everyone can follow along on the chart presentation. We will start on Page 3, which shows the financial highlights for the second quarter. The bar charts across the top of this page clearly show that the second quarter was another great set of results for ESCO. The key theme with ESCO's financial results right now is that the core company performance on an organic basis is quite strong, and the ESCO Maritime acquisition is adding significantly to that strong base company performance. It's been a powerful combination driving our results since the closing of the Maritime deal in April of 2025.

Getting to the numbers, we start with orders, which increased 42% Organic order growth was double digit for all 3 business platforms with overall organic order growth of 22%. Maritime added $53 million of orders or 20 points of additional growth. On the sales side, reported growth was 33.5%, which was comprised of 13% organic growth and $48 million of sales from Maritime. On the profitability side, we saw adjusted EBIT margins improved by 370 basis points to 21.7% and adjusted earnings per share increased by 63% to $1.91 per share.

Next, we will go through the segment highlights, starting with Aerospace and Defense on Page 4. A great quarter across all metrics, starting with orders, which came in at nearly $184 million compared to $96.5 million in the prior year quarter. Organic orders increased by 35% with strong growth from the commercial aerospace and Navy businesses. As stated previously, Maritime added $53 million of orders in the quarter, which brought reported order growth to just over 90%. Sales in the quarter were $150 million with organic growth of 14%. The strong organic growth was driven by strength from commercial and defense aerospace as well as the Navy business. So really nice performance from all parts of the core Aerospace and Defense platform. On the profitability side, we had good improvement to 28.6% adjusted EBIT margins, an increase of 160 basis points. Adjusted EBIT and adjusted EBITDA dollars increased by 78% and 72%, respectively. Margin increases were due to positive impacts from leveraging sales growth and increased prices.

Next, we go to Chart 5 and the Utility Solutions Group. Orders here were up 10% in the second quarter, and that was driven by strong performance at Doble, where orders grew by 20%. We did see weak orders performance at NRG, where the renewables markets continue to be very soft. Sales in the quarter were up a modest 3%. Doble sales growth of 11% was somewhat offset by declines in NRG. Doble continues to see good end market activity across a number of product lines serving the regulated utility customer base. Adjusted EBIT dollars in the quarter were up nearly 11% with volume, price and mix benefits at Doble more than offsetting margin drops at NRG.

Next, we have the Test business on Page 6. This business had another terrific quarter with orders up 21% and sales up more than 27%. This business is seeing robust market activity centered around U.S. test and measurement and power filter demand. Adjusted EBIT margins improved nicely, increasing to 15.4%, which represents an increase of 300 basis points from last year's second quarter as the business continues to nicely leverage sales growth.

Next is Chart 7, where we have year-to-date highlights. The first 6 months have been very strong for ESCO as we make progress towards another record year. Order strength has been significant with 30% organic growth year-to-date. All 3 businesses have delivered double-digit organic growth with aerospace and defense leading the way. Sales have also been strong with 12% year-to-date organic growth, led by Test at 27% and Aerospace and Defense at 14%. Adjusted EBIT margins were up 370 basis points year-to-date as all 3 businesses have delivered improved margins.

Going to Chart 8, we have cash flow highlights for the first 6 months. Operating cash flow is up significantly at nearly $135 million compared to $46 million in the prior year. A key driver has been increased advanced payments on large Navy contracts. Capital spending is down slightly compared to last year, and there's a $10 million use of cash on the acquisition line related to working capital and tax settlements for the Maritime deal. EBITDA leverage is low at 0.4x, and we are positioned well for the debt requirements that will come with the Megger deal, which is currently expected to close in the first quarter of fiscal 2027.

Our last chart is # 9, where we have updated 2026 guidance. With another strong quarter, we are increasing full year 2026 guidance. We now expect full year adjusted earnings per share of $8 to $8.25 per share. This represents an increase of 33% to 37% compared to fiscal 2025. This is a substantial increase from our original November guide, and you can see from the bar graphs at the bottom of the page, we expect 2026 to be another record year and a nice continuation of the growth trend ESCO has delivered since fiscal 2021.

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

Thanks, Chris. So as you've heard from our commentary, Q2 was another solid quarter, and we're looking at another year of strong revenue and earnings growth. And with record backlog, we continue to feel great about the long-term prospects for ESCO.

That concludes our opening remarks, and we'll now turn it over for the Q&A.

[Operator Instructions] Our first question comes from the line of Tommy Moll of Stephens.

Bryan, on Test, you talked about mid-single-digit sales growth over the planning horizon. I don't think that's different from what you've said previously, but you gave a lot of detail on some of the drivers for that today. And so I'm curious, just given some of the recovery there, is it fair to say you've got increasing conviction and visibility in that outlook? And then just moving to the bottom line there, any change post your planning conference on what the margin aspiration would be for that segment?

Well, thanks, Tommy. Yes, listen, I do think it's a little bit of a change. As you know, we're having a very strong year this year at the business. And we have adjusted -- I think historically, we would have said 3% to 5%. We're probably saying more like 4% to 6% now. And this year, we're going to be well ahead of that. But yes, I would say our outlook for the Test business broadly is improving. And I think what I've said to you all before is that we're driving towards 20% EBITDA margins in that business. And I think after what we've seen this year and what we saw in the 5-year kind of review that we just went through, we think we're going to get there a little quicker than we might have thought before.

And as a follow-up, I wanted to ask on Megger. At the time of the announcement, you framed the accretion as -- I forget the exact word you used, Bryan, but accretive in the first year and significantly accretive in the other years. Two-part question for you today. Are the fair bogeys to assume there something like low single digits on -- just on a percentage basis in the first year going to potentially even low double digits by the third year? And then second part of the question, how would you frame whatever return parameters you use to underwrite the deal, potentially on the ROIC side or some other framework that you used here?

Yes. Thanks for the question. Yes, I think what we said and what we still believe is that on an earnings basis and EPS basis, it's going to be accretive in the first full year, and then it's going to be significantly accretive in the year beyond that. I'm kind of doing math in my head, but it's approximately double-digit accretive in that second year. I'm sorry, the second question was?

Whatever return related underwriting you used on the deal?

Yes. So we -- so our kind of our guiding star there is really making sure that our internal rate of return on the deal is going to be better than our weighted average cost of capital. And so we are going to -- we do see a better than double-digit return on an IRR basis, and we do have a pretty good spread over our weighted average cost of capital.

Our next question comes from the line of Scott Deuschle of Durchell of Deutsche Bank.

Bryan, can you characterize the demand that Doble is just seeing in its condition monitoring business and also characterize the pricing power you have in condition monitoring?

Yes. I would say that overall condition monitoring continues to accelerate. I think I've said to you before that one of the characteristics we're seeing is that increasingly public utilities commissions around North America are allowing the condition monitoring tools to be built into the rate base. And that has served to really accelerate the overall demand there. We are seeing really good demand characteristics. And it would be at the high end of what we are seeing in terms of our product lines in terms of growth. So it's in the double-digit growth category.

Okay. Are orders for condition monitoring systems growing faster than the 20% headline number you put up for Doble's orders this quarter?

No, I don't think so. I would say that that's a year-over-year comparison number. I think we're seeing broad-based growth over our entire product line. And Scott, I think one of the things that we -- one of our thesis here was that the amount of spending was going to be the same, whether it went to renewables or went to regulated utility piece. And so I think a little bit of what you're seeing is the softness that we're seeing over on the renewable side is really coming through as increased spending on the grid sustainment and grid modernization side.

Okay. And last question just on this topic. Like do condition monitoring systems help operators reduce their long-term hiring needs for electricians? And if so, has that become a key part of the value proposition given the shortage of electricians that are out there today?

Well, the answer to the first piece is yes, that the way that condition monitoring operates is it allows you to only send a truck roll when you know there's an issue or something that needs to be responded to. So yes, it does reduce the number of truck rolls. But in the grand scheme of things, I do not believe that, that is the most important financial reason why a utility would want to do this. What the condition monitoring allows them to do is get better real-time data from the grid edge so that as they're operating their system, they're able to -- those peak load conditions, they're able to operate the system more efficiently and they're able to push things a little bit harder than they might if they don't have those grid edge feedback. So I think the bigger value in condition monitoring is they get more life out of existing assets, meaning that they can defer capital investments and expensive replacements, and that allows them to put their investments more into needed areas and into grid expansion.

That's clear and really helpful. Last question, the declines in energy accelerated this quarter by a pretty meaningful amount in both sales and I think orders actually declined by even more. Is there any hard evidence you can point to that this business is actually at a bottom? And is a business that can see a 30% sales decline a business that you want to be in long term?

Yes. Listen, I think that the challenge with renewables is they are pretty volatile, and they're very responsive to a lot of the policy changes that we see in Washington. And I think that's what we're experiencing right now is that the removal or the imminent removal of the tax credits is changing behavior amongst developers. And so I'd like to be -- I'd like to believe that this is a bottom, but I've been around long enough to never call bottoms until I start seeing the trajectory in the other direction. So it's possible it could be a little deeper. And I also think it's possible that this could last a little bit longer.

But listen, long term, renewables are absolutely a piece of the overall grid solution. And we do believe that this is a business that can be profitable and even at a lower level. And so the answer is yes, I think this is a business that we want to be in. It's a business we continue to believe in. And it's a business that we do think is going to return to growth in the second half of '26 or beginning of '27.

Okay. Is the business profitable at this level of sales?

It is. It is profitable. I think the challenge is that on a year-over-year comparison basis, it was very profitable a year ago, and it's not as profitable now, but it's still profitable.

[Operator Instructions] Our next question comes from the line of Jonathan Tanwanteng.

Nice job on the quarter and the increased outlook. I was wondering if you could first talk about the commercial airline demand, particularly in consumables. I know you've seen a pretty strong trailing demand. But as we look forward, you see flights getting canceled, even entire airlines getting canceled in the case of Spirit. I'm just wondering if you see any pressure from that on the consumable bit of your business as you look into the future?

Well, it's pretty early to see any impact from something like an airline going out of business. We -- there has been a fair amount of impact to widebodies coming in and out of the Middle East in terms of overall air traffic. But we have not seen that manifest in a meaningful way in our order patterns. In fact, our orders this quarter were outstanding and really implied significant growth, both on the aftermarket and on the OEM side. We pointed in our prepared remarks to some of the increases we're seeing on the OEM side.

We're pretty excited about what we're seeing from Boeing and others. We do think that they're back on track, and we're prepared to support them at even higher build rates. And I would say we seem to regularly have this discussion about how conservative I am about taking their forecast to heart. I would say that our belief in what's happening there is improving, and we're optimistic about what that means for our business.

Got it. That's helpful. And then just on the revenue guidance, it looks like you didn't change it. And I was wondering what are the moving parts in there, just given the Test has outperformed your expectations by so much? Are you just tracking towards the higher end of the range? Or are there some puts and takes that we should be thinking about in the other segments?

I would say there's a few puts and takes. I mean I think that you noticed the Maritime is slightly under $100 million year-to-date. And kind of the full year guide we had given there before was like $230 million to $245 million. So they're going to be probably at the lower end of that range based on kind of how the first half has gone. Mean, overall, the business is still doing great. Profits are good. Cash is good. Orders are good. They're just seeing a little bit of some delays and slowdowns on some of the U.S. surface ship type programs.

So again, I think that kind of brings it back to the lower end. We're probably a little bit better in Doble than what we had thought a quarter ago. NRG is offsetting that. So we're a little bit worse there. And then we've got a few places in aerospace and defense, mostly on the commercial aircraft side and defense aircraft side where we're a little better. So all these are kind of plus and minus. And yes, we kind of end up in the same place.

Got it. And then last one, if I could sneak one in. Any thoughts on where inflation is going and your ability to push pricing through to your customers? What's built into your forecast today? And what could be the risk there as we go forward?

Yes. We certainly believe that we're able -- I think we've got a demonstrated history of being able to drive price faster than inflation. We certainly keep an eye on that. It's a little bit early right now to call anything on oil prices or anything like that, but we are starting to see some signals there that may require us to kind of go back to customers with some price changes. But you can count on us to be pretty aggressive about the price side.

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

Well, listen, thanks, everyone, for taking our call. I mean I think as you saw, we feel really good about our quarter. We feel really good about our year. And we're looking forward to talking to you again about another great quarter 3 months from now. Take care.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to the Megger Group Limited Acquisition Call. [Operator Instructions] Please be advised that today's conference is being recorded. On the call today is Bryan Sayler, President and CEO, Chris Tucker, Senior Vice President and CFO.

I would like now to turn the conference over to the first speaker today, Kate Lowrey, Vice President of Investor Relations. Kate, you may begin.

Thank you. Statements made during this call regarding management's expectations for Q2 fiscal 2026 revenue, GAAP EPS and adjusted EPS as well as future growth, growth strategy, expectations, beliefs and benefits resulting from the acquisition and other statements, which are not strictly historical, are considered forward-looking statements within the meaning of the safe harbor provisions of the federal securities laws. Investors are cautioned that such statements are only predictions and speak only as of the date of the release, and the company undertakes no duty to update them, except as may be required by applicable laws and regulations. There is no assurance that the acquisition will be consummated, and there are a number of risks and uncertainties that could cause actual results to differ materially from the forward-looking statements made herein.

The results and uncertainties -- risks and uncertainties in connection with such forward-looking statements related to the acquisition include, but are not limited to, the ability and timing to consummate the acquisition, including obtaining the required regulatory approvals and financing to fund the acquisition, ESCO's ability to promptly and effectively integrate the acquired business after the acquisition has closed and ESCO's ability to obtain expected cost savings and synergies of the acquisition, operating costs, customer loss and business disruption, including difficulties maintaining relationships with the employees, customers or suppliers of the acquired business that may be greater than expected following the consummation of the acquisition and other risks and uncertainties described in Item 1A, Risk Factors, of ESCO's annual report on Form 10-K for the fiscal year ended September 30, 2025.

Now I'll turn the call over to Bryan.

Thanks, Kate, and thanks, everyone, for joining the call today for this exciting transaction. To get started, I want to thank the many team members on both sides of this transaction who have worked diligently through a rigorous process to get us to this point. We're excited to be here today to provide insight on this proposed acquisition. ESCO and our Board of Directors feel strongly that this transaction meets all of our stated M&A objectives and will create shareholder value by adding scale and meaningfully expanding our product portfolio serving utility customers worldwide.

I'm very happy to welcome the great team at Megger to ESCO. I can tell you that Megger has been close to the top of our list of M&A targets for the better part of a decade, and I am very proud to be bringing it into our portfolio. Megger is one of very few scaled global platforms in electrical test and measurement with a 130-year history and brand heritage and deep customer relationships with utilities and industrial operators worldwide. Assets of this quality, scale and strategic fit rarely come to the market.

We strongly believe in the compatibility of our cultures and the strategic fit with our overall portfolio, the Utility Solutions segment and Doble in particular. These are two highly complementary brands across multiple fronts, products, services and geographic exposure and combining them creates a strong global franchise, providing key products and services to a customer base that very much needs partners like Doble and Megger to help them get the most from their assets in the coming decades. We have a chart presentation available on our website to accompany our remarks, and I'll get started with Slide #3.

Adding Megger to the ESCO portfolio expands our capabilities as a valued partner to utilities worldwide. Megger is a leading provider of electrical test, monitoring and software solutions with integrated offerings that span the full utility maintenance life cycle. They have a long track record of serving blue-chip customers and delivering strong financial performance. Adding Megger expands our technology portfolio, serving markets with secular tailwinds and creates meaningful synergy opportunities and positions us to accelerate growth in our Utility Solutions segment. This combination provides complementary Utility Solutions capabilities when paired with our existing Doble business and adds important scale to a core ESCO business.

Let's move to the next chart, and I'll take you through the deal metrics. The purchase price is USD 2.35 billion for the business, consisting of a little more than $900 billion in -- excuse me, million, $900 million in cash and ESCO equity valued at approximately $1.4 billion. The cash portion will be funded through existing cash on hand and incremental debt with committed financing in place. The transaction will represent a multiple of approximately 14x the 2026 expected synergized EBITDA.

Upon closing of the transaction, TBG will have nomination rights for one seat on ESCO's Board of Directors and will own approximately 16% of the company. This deal aligns with the ESCO strategic planning process that we have discussed with you in the past as it continues our shift towards high-growth end markets, adding complementary technologies and capabilities that increase our scale and product breadth in serving the global utility market.

We expect to realize approximately $60 million in cost synergies by the end of year 3 and for the deal to be accretive to adjusted earnings per share in the first 12 months. Megger is expected to be accretive to USG revenue growth rates and highly accretive to adjusted earnings per share in year 2 and beyond.

Cash consideration will be funded through cash on hand and incremental debt with committed financing in place. We expect our leverage ratio to be 2.5x EBITDA or less when we -- when the deal closes, and we expect to be able to delever to less than 2x within the first 12 months. Post closing, we expect capital allocation to be focused on debt paydown as we focus on executing the integration of Megger and Doble. The transaction is subject to regulatory approval in both the U.S. and internationally, and we anticipate a closing date in the first quarter of our fiscal 2027.

Let's go to Slide 5 and talk a little bit more about the business. Megger has a 130-year history as a market leader providing electric test and measurement equipment. They are a global utility solution provider with a strong presence in Europe and the U.K. and will meaningfully expand our geographic reach. They operate out of seven primary manufacturing facilities and have expected 2026 revenue of $590 million. They offer a wide variety of products, software and services that are nicely complementary to Doble's product and service offerings.

Let's move to Slide #6. This slide highlights the complementary nature of the offerings that Doble and Megger provide to their global utility customers. The addition of Megger will broaden our portfolio of low-voltage battery, cable, water leak detection and circuit breaker testing, along with adding to our software and training product offerings. Our Doble business nicely complements Megger with its strong offerings in condition monitoring, power system simulation and services.

As highlighted on Slide #7, Megger and Doble together will serve the full utility maintenance life cycle from reactive to predictive maintenance. The companies have an extensive and complementary core test and measurement products. Doble has highly valued condition monitoring product line, while Megger's recent acquisition of IPS offers an integrated software solution for asset life cycle management, grid operations support and protection and asset testing that can be tailored to meet the needs of utilities worldwide. These are very important needs for utility customers and ESCO will now be well positioned to support our customers with our diverse capabilities in a holistic and value-added manner.

Let's go to Slide #8. As mentioned earlier, we expect to realize approximately $60 million in cost synergies over the initial 3 years post close, which would result in a 300 basis points of adjusted EBITDA margin expansion. Our expectation is that these savings will primarily be driven by optimizing our manufacturing footprint and the potential for in-sourcing some of Doble's products, leveraging our direct material spending and engineering expertise and the potential to synergize R&D, go-to-market and overhead expenditures in SG&A.

Let's go over to Slide #9. This slide shows the evolution of our revenue profile related to our recent portfolio moves. The middle pie chart reflects the impact of the sale of VACCO and a full year of maritime revenue on the business in 2026, which has resulted in the A&D segment currently comprising approximately 50% of our overall portfolio, with USG being 30% and Test 20%.

In the third pie chart, you can see the pro forma impact of adding in $590 million related to Megger's expected 2026 revenue. The addition of Megger would increase USG revenue to slightly over half of the company's revenue with A&D at roughly 1/3 and Test would decline to 14%. The Megger acquisition represents the next step in our portfolio transition, increasing our scale in the utility solutions market. Going forward, 85% of our revenue will be serving the A&D and utility markets where we have differentiated products with leading market positions, serving industries with long-term secular growth drivers.

Let's go to Slide #10. This slide highlights our positioning in the A&D and USG markets after the transformative portfolio moves that we've made over the last 2 years. On the USG side, utilities face electric demand that is forecasted to double by 2050, with similar growth expected globally driven by AI infrastructure build-out, heat pumps, reshoring, EV charging and the electrification of everything. Our diagnostic solutions help utilities push more power through the existing grid, where the average age of large power transformers exceeds 40 years. In addition, we are well positioned to support utilities as they invest in renewable generation and the infrastructure needed to connect it, along with the digital transformation required to improve efficiency, reliability and sustainability.

In A&D, commercial aerospace OEMs are committed to increasing their build rates to meet the long-term demand of airlines and geopolitical tensions are driving higher defense budgets, benefiting military aerospace and naval spending. Submarine programs are a top priority in the U.S., and the Navy is completing a multiyear submarine procurement effort intended to strengthen the supplier base as it ramps up build rates. In the U.K., the government is developing its next-generation fast attack submarine in support of the AUKUS program. We are well positioned to serve the growing unmanned underwater vehicle market as customers address heightened maritime security concerns.

Let's go to Slide #11 and discuss how the transaction meets our stated M&A goals. We've taken a thoughtful and deliberate approach to ESCO's enterprise strategy in recent years, focusing on acquisitions that strengthen our technology-led leadership in our preferred end markets. We target businesses that are complementary to our core operations with proven financial performance and predictable revenue streams in attractive high-growth end markets. The acquisition of Megger clearly fits these criteria, a differentiated business with a long track record of solid financial performance while serving the asset maintenance needs of utilities worldwide.

Moving on to the final slide. The addition of Megger is another exciting step forward as we execute our plan to supplement organic growth with strategic M&A. Our Utility Solutions businesses are well positioned to benefit from increased investment in utility infrastructure as global electricity demand drives upgrades and the expansion of an aging grid. This acquisition supports our strategic objectives while maintaining a reasonable leverage profile. In summary, ESCO will be strengthened by the steps we're taking to grow our portfolio and increase exposure to end markets with compelling long-term growth.

With that, we'll open up the phones for a Q&A session.

[Operator Instructions] And our first question will come from Scott Deuschle with Deutsche Bank.

Bryan, can you say what Megger's revenue and EBITDA was in calendar 2025?

Chris, you got that right there?

Yes. So it's actually not quite calendar. Their fiscal year-end is November 30. So that's kind of the numbers we're using on that basis right now. They were around -- just below $540 million of revenue and like, I'd say, high teens EBITDA.

Okay. And would you expect their growth rate to be higher than that 6% to 8% you're guiding Doble for in calendar '26?

Yes. We would say that they're probably more in the 7% to 9% range. They've got really good exposure internationally and a couple of parts of the market that -- where they'll complement Doble nicely.

Okay. And then, Bryan, can you give us a sense as to what percentage of Doble's products could potentially be manufactured inside Megger's facilities? And does Megger have spare manufacturing capacity to take on those products?

Yes. That's one of the things we're really excited about is Megger does have really outstanding manufacturing capabilities right up from the board, SMT lines, et cetera, both in Europe and in the U.S. And they have plenty of additional capacity. Most of Doble's products with the exception of our DGA analyzers, most of those products are made by third-party contract manufacturers. So we're going to have a substantial opportunity there.

Okay. And sorry to ask so many questions. But Chris, what share price will the $1.4 billion equity component be priced at? Is it based on the share price when the deal closes or something else?

No, it's -- we used a VWAP mechanism. So we're going to issue just over 5 million shares at around $280 per share. So that's kind of how that's going to work.

Okay. And then last question, if you could just characterize the cadence of the cost synergies, that $60 million. Is it relatively linear across the 3 years or more weighted to the year 3?

Yes. We've modeled it linear at $20 million a year through the first 3. I do think we've obviously got to continue to do integration planning. We've done a lot of work already to get comfortable with the numbers. And we feel like we're going to be able to get after this pretty quick. So it's potential -- it could come in a little faster, but we thought it prudent to model at $20 million a year, and that's what we did.

[Operator Instructions] The next question will come from Jon Tanwanteng with CJS Securities.

Congrats on the deal as well as the stronger Q2 results. I was wondering if you could talk a little bit more about Megger's end market breakdown. Maybe what portion of their business is directly tied to utilities and grids, what portion isn't? And then maybe break out any kind of end markets of note like data center and what those pieces are growing at?

Yes. So they -- so broadly speaking, we would describe it as electrical. They do have a substantial amount that's in utility, but they do have exposure to data center. I think I got some numbers from them that were in the millions of dollars of direct to data center and then a lot of supporting activities, which would be similar to kind of what Doble is doing.

One of the benefits of this transaction is it does give us a lot of exposure to areas that Doble has not historically had a presence, and that would be more in the like C&I type electrical work. They do a lot more in distribution than Doble has historically; a lot of high-voltage cable testing, which is entirely in addition to what Doble does today. So yes, it's a very complementary type of transaction, and they do have exposure to some higher-growth areas that Doble hasn't quite had in the past.

Okay. Great. And did you mention the expected time to close and if there's any potential antitrust issues that we should be aware of?

We don't expect there to be any real risk there, but those things can be time consuming. So we've got it estimated at about 6 months. There are a number of jurisdictions that we have to go to. Not very much risk about that process. But as you know, those things can be time consuming. So we've got it kind of -- we're thinking that we'll be closing in our first quarter, which would be in that October to December time frame.

Got it. And then you have a defined target for cost synergies, but maybe can you talk about revenue synergies, whether that's cross-selling, regional access or things like cross-pollination of best practices and business models?

Well, I want to be clear that we have not modeled any kind of volume or revenue synergy as part of this deal. But I think we do think that given the diversity of these two businesses and the excellence of the engineering teams on both sides, we do think there will be a lot of opportunities to combine products, create new solutions and ultimately grow the business at a rate that's faster than the two businesses are growing independently. But I want to restate, we have not included any kind of revenue synergies as part of our model.

And the next question is going to come from Josh Sullivan with JonesTrading.

So just in the presentation, you talked a bit about Megger's software and analytics offering. Can you just highlight what they're currently doing there and maybe what portion of the business that is? And then as you have the datasets from both Megger and Doble, what could that look like as far as a product offering and maybe what you can bring to customers.

Yes. Well, that's a great question, Josh. It's one of the more exciting aspects of this deal. Last year, Megger completed the acquisition of a business that's called IPS. And IPS is a really exciting business. And what the intent there is to broadly utilize advanced analytics and make those available to utilities. I think you know that we've had this incredible Doble database that we've been trying to figure out how to really deploy in this kind of modern software world. And we think that kind of taking the IPS tools and talent and applying it with a lot of the core data stuff that comes out of our condition monitoring tools and our traditional test database, we think that's going to be a real powerful combination and it's going to give us the ability to do things for our customers that they, first of all, need and really aren't able to get anywhere else.

And the next question will come from Jon Tanwanteng with CJS Securities.

I was just wondering if you could give us any color on what you expect the incremental debt portion to be and what the market looks like for interest rates on that.

Yes. So we've got a bridge facility in place now to kind of backstop the deal, and we're going to now be working to secure a term loan A and a term loan B to be like the permanent financing in place for that. We're partnered with some lending institutions and feel good about our ability to do that. We've modeled, Jon, a 6.5% interest cost. I think where we sit today, we would expect to be able to do better than that. And so that's kind of how we're looking at it right now.

Okay. Great. And then does it make sense to explore any opportunities to reduce leverage more quickly, maybe some portfolio management or maybe pieces that aren't core within Megger or any other parts of the business?

Well, listen, that's -- it's always one of the tools in our toolbox, but that's not something -- given the leverage profile here at 2.5 or less, we don't feel like we're compelled to do anything like that. And listen, we'll be talking with our Board, but I would not anticipate that in the near term.

And the next question will come from Scott Deuschle with Deutsche Bank.

Sorry to ask a question on the quarter. But Chris, can you characterize what drove the EPS beat in the quarter relative to your guidance?

Yes. I would say that generally, we've had another good quarter. I would say, kind of in line or better performance and probably a little bit of upside at A&D and Test kind of driving that favorability. I don't want to say much more than that. I mean we'll get into the details here in a few weeks, but it's a good quarter across the board. Yes.

I am showing no further questions in the queue at this time. I would now like to turn the call back over to Bryan for closing remarks.

Well, thanks, everyone, for listening to this call. We're obviously very excited about this transaction. It will mean a lot for shareholders. It's going to mean a lot for our industry. And I think we're going to be able, as I said earlier, to use the diverse capabilities of these two businesses to create even better solutions that are going to really help power the world. So looking forward to talking to you in a few weeks on our earnings call. Thanks for tuning in today.

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

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

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

Thank you. Statements made during this call, which are not strictly historical are forward-looking statements within the meaning of the safe harbor provisions of the federal securities laws. These statements are based on current expectations and assumptions, and actual results may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the company's operations and business environment, including, but not limited to the risk factors referenced in the company's press release issued today, which will be included as an exhibit to the company's Form 8-K to be filed. We undertake no duty to update or revise these forward-looking statements, except as may be required by applicable laws or regulations.

In addition, during this call, the company may discuss some non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to the most comparable GAAP measures can be found in the press release issued today and found on the company's website at www.escotechnologies.com under the link Investor Relations.

Now I'll turn the call over to Bryan.

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

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

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

Let's start with Aerospace & Defense. As I mentioned, we're seeing tremendous order strength on both U.S. and U.K. Navy programs from the Maritime business and from our organic baby business. In addition, sales were up 76% in the quarter driven by the addition of Maritime and double-digit organic growth across our Navy and aerospace programs. The growth story here remains intact, driven by increasing build rates for commercial aerospace OEMs and sizable investments from our defense customers as they refresh and expand their capabilities. Overall, we're seeing the benefits of our A&D segment sharper focus on the Aerospace and Navy markets where the long-term outlook remains quite positive.

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

Overall, we remain quite excited about the outlook for our utilities business. The majority of the activity here is driven by utility capital spending focused on grid reliability and capacity increases, and we continue to see those forecasts grow. ESCO's capabilities have a clear role to play in assisting utilities to meet growing electricity demand, and we remain bullish on the long-term prospects for growth here. As we have discussed previously, the renewables market is recalibrating right now as U.S. developers focus on completing current projects in order to satisfy the safe harbor provisions related to tax credits, which expire in July. This has slowed domestic renewables investments in the near term but we continue to believe that longer term, renewables will play a vital wall as a cost competitive source of generation as utilities work to meet the increasing demand for electric power.

Finally, I'll touch on the Test business, which had a robust start to the year with orders up 17% over the prior year and revenue up 27%. This business had a nice year of recovery at 2025 and it's great to see that momentum continue with significant growth during the first quarter. This is a technology-driven business with broad capabilities to serve customers across the RF test and measurement in industrial shielding markets. The team here is executing very well, and we're excited at the outlook for test continues to improve. Overall, our Q1 results got us off to a great start for the year. With record backlog and continuing strength across our businesses, we are raising our full year sales and earnings guidance.

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

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

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

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

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

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

Next, we'll go to Chart 5 in the Utility Solutions Group. Orders here were up 10% in the first quarter, driven by strong performance at Doble, where orders grew by 15%. Backlog finished at nearly $155 million, up 8% since September 30. Sales in the quarter were up a modest 1%. Doble sales growth of 6% was mostly offset by declines in NRG. Doble continues to see good end-market activity across a number of product lines serving the regulated utility customer base, while NRG continues to see near-term market weakness as the renewable activity resets. Adjusted EBIT dollars were down just over 4% with price increases and sales volume leverage at Doble, unable to offset margin drops in NRG.

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

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

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

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

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

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

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

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

[Operator Instructions] The first question today will come from the line of Tommy Moll of Stephens.

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

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

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

I think the other big story here is that we really did see pretty robust return to orders from our aerospace OEMs. 2025 was kind of a year that was a little soft on the order side as build rates were kind of stable and there seemed to be a lot of management of inventory going on in the supply chain, but we think that they're kind of through that. We're really encouraged to see Boeing and the other OEM is kind of getting their build rates up. And we're starting to see that come through on our order book.

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

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

Yes. Tommy, this is Chris. I would say that we do expect that the first quarter is going to be the strongest growth. And we would expect to still see solid growth through the year, but maybe kind of taper down a little bit. And then when we get to Q4, we have kind of lower growth overall. Again, I think that's a function of the comps a little bit. So we still see a high single-digit outlook there in the core business, but understanding it's a little bit front-end loaded.

And the next question will be coming from the line of John Tanwanteng of CJS.

If you could start, what's driving the strength in Test? And how did that change so quickly in the span of 90 days?

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

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

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

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

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

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

So please remember, John, that for -- after the inflation Reduction Act was put in place, that whole market kind of got turbocharged for 2 or 3 years. And now they're kind of getting off that sugar high from all those tax incentives, and it's going to take a couple more months to kind of get back into the pocket and really making good decisions. The renewables business will have a big role to play because it is very cost-effective, relatively easy to deploy and the assets are available. And those are all characteristics that utilities are looking for.

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

Yes. I would say it's in line kind of since we've owned the company, we closed the deal at the end of April. And so these were kind of the expectations were that this order would come in. As far as how that layers in, I would say we would get a little revenue starting in the fourth quarter, and then you'll start to see it kind of kick in more in '27 and '28. So these are long-term contracts and programs that really kind of help solidify the outlook for '27 and beyond, I would say. So that's kind of how we're thinking about them and really not much of a revenue impact this year, although there will be a little bit towards the end of the year.

Coming from the line of Tommy Moll of Stephens.

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

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

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

And we have a follow-up question from the line of John Tanwanteng of CJS.

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

Yes. I'd say it's pretty broad-based. But a couple of highlights there. You would have seen in the 2025 reconciliation bill that they put a lot of money out there. They're buying 21 of the F-15 EX fighters. That's a platform that we have a lot of content on. There's a lot going on with regard to the sixth-generation fighter platform, the F-47, and that's been a positive story for us. So yes, there's a lot of good things going on. But I would say, yes, the traditional kind of F-35 missile programs, all those things are all kind of coming through for us.

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

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

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

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

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

Good day, and thank you for standing by. Welcome to the Fourth Quarter 2025 ESCO Technologies Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. On the call today, we have Bryan Sayler, President and CEO; Christopher Tucker, Senior Vice President and CFO. And now I'd like to turn the conference over to our first speaker today, Kate Lowry, Vice President of Investor Relations. Kate, you now have the floor.

Thank you. Statements made during this call, which are not strictly historical are forward-looking statements within the meaning of the safe harbor provisions of the federal securities laws. These statements are based on current expectations and assumptions, and actual results may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the company's operations and business environment, including but not limited to the risk factors referenced in the company's press release issued today, which will be included as an exhibit to the company's Form 8-K to be filed. We undertake no duty to update or revise these forward-looking statements, except as may be required by applicable laws or regulations.

In addition, during this call, the company may discuss some non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to the most comparable GAAP measures can be found in the press release issued today and found on the company's website at www.escotechnologies.com under the link Investor Relations. Now I'll turn the call over to Bryan.

Thanks, Kate, and thanks, everyone, for joining today's call. We are pleased to meet with you this afternoon to discuss our fourth quarter results. And by any measurement, we finished the year strong and closed out another great year at ESCO. Q4 was the first full quarter to include the Maritime business which had impressive performance, leading to a significant impact on our top and bottom line results. But in addition to Maritime's contribution, we delivered 8% organic sales growth in the quarter. This top line sales growth, combined with 100 basis points of adjusted EBIT margin expansion at the bottom line to drive a 30% year-over-year increase in adjusted earnings per share from continuing operations to a record $2.32 per share. 2025 was a truly transformative year for ESCO. The successful acquisition of Maritime and the divestiture of VACCO were both title steps in the evolution of our portfolio. We now have an expanded presence in the Navy market, offering a broader suite of products across both U.S. and U.K. platforms. With our exit from the space market, our A&D segment now has a sharper focus on serving the aerospace and Navy end markets, both of which present durable long-term growth opportunities.

Our exceptional financial results this year are a testament to the dedication and expertise of our global team. I want to extend my sincere thanks to everyone at ESCO for their hard work and dedication throughout the year. Their commitment enabled us to deliver outstanding operating performance during a period of significant change. Chris will take us through all of the financial details of the quarter. But before we do that, I want to give you a few comments on each of our segments. Let's start with Aerospace and Defense. We remain positive regarding the long-term outlook for both the aircraft and Navy markets. We see fundamental drivers across both of these markets and expect increasing production rates to drive growth going forward. We continue to see positive momentum on the Navy side as in addition to contribution from Maritime, organic sales were up 53% in the quarter and 24% year-over-year. Our U.S. and U.K. customer bases are highly focused on increasing build rates for submarines, and we see the benefits from this in our sales and our order rates.

We continue to be very pleased with the Maritime acquisition, which has started up 2026 very well, already booking over $200 million in orders in the first month of the new fiscal year. We've been anticipating these orders, and it's been a really nice way to start off the new year. In Aerospace, revenue was up over 10% in the quarter and 14% year-over-year. It's been good to see Boeing successfully ramp up production and to get approval to take 737 build rates up to 42 per month. As we all know, the end market demand is there and their customers really need more planes. We remain positive on the long-term outlook in the aircraft end markets.

Switching over to the Utility Solutions group which had a solid quarter, highlighted by record orders of over $100 million and a 29% adjusted EBIT margin. Sales growth was a little lower this quarter due to policy headwinds in the renewables market, but Doble's revenue was up over 7% over the prior year. As we have discussed previously, there are many factors driving the increase in electricity demand and utilities need to both maintain and expand the grid. On the Doble side, revenue will vary from quarter-to-quarter, but the long-term growth drivers remain firmly in place. The renewables market is recalibrating right now as developers focus on completing current projects as tax credit subset under the new legislation. This has slowed growth domestically in the near term, but we continue to believe that longer term, renewables are a cost competitive source of generation and we think that long term, utilities will favor a mix of generation sources, and that renewables will continue to have a vital role to play as utilities work to meet increasing demand for electric power.

Finally, I'll touch on the Test business, which had a really nice fourth quarter with 10% revenue growth and a high teens EBIT margin. For the year, it was great to see a rebound in orders, which were up 25% over the prior year. One of the strengths of our test business is the diversity of the end markets that it serves. And with the exception of wireless, we are now back to seeing strong activity across all of our test and measurement and shielding industrial markets. The key takeaway here is that the test business has stabilized and we feel good about their trajectory as we move into 2026.

In summary, we're excited about the future as we continue to see robust growth drivers across our core aerospace Navy and electric power markets, supported by record backlog, a strong balance sheet and entrenched positions in our served markets, we are well positioned to deliver continued value for our shareholders. With that, I'll turn it over to Chris, who will run you through all of the financial details for the quarter.

Thanks, Bryan. Everyone can follow along on the chart presentation. We will start on Page 3, which shows the financial highlights for the quarter. The bar chart on Page 3 illustrates that this was a strong quarter for ESCO. You'll see as we go through the results, our recurring theme of the Maritime acquisition having a sizable impact but also seeing strong underlying performance from core operations. beginning with orders, which increased by 30% on a reported basis and delivered organic growth of 13%. Sales for the quarter were $353 million, which represented 29% growth and organic growth came in at 8%. So for orders and sales, you can see, it was a great quarter.

Moving to profitability. Adjusted EBIT improved by 100 basis points to 23.9%, and adjusted earnings per share increased by 30% to $2.32. Next, we will go through the segment highlights, starting with aerospace and defense on Chart 4. Orders were quite good with growth of 60% on a reported basis and organic growth of 12%. In total, we delivered $142 million of orders, which led to ending backlog of just over $800 million, a good indicator of future growth for the business. Sales for A&D in the quarter came in at just over $170 million or growth of 72% on a reported basis, and organic growth was 13%. Organic growth was driven by growth in the commercial aerospace and Navy end markets. Adjusted EBITDA dollars grew by nearly 63% in the quarter and margins came in at 28.6%. Margins were down slightly from last year's record level in Q4 as we saw slight dilution from the Maritime acquisition and core margins down 80 basis points compared to last year's fourth quarter.

Moving to the next chart, we have the Utility Solutions Group, which once again saw good order activity and delivered 17% growth compared to last year's fourth quarter. The order growth was driven by Doble, which saw strength across the business. Backlog Sweet Utility Group ended at just over $143 million, which represents growth of 20% compared to prior year-end. Sales growth was more muted with 2% growth in the quarter. Once again, the growth came from Doble, which was up 7%, while NRG was down 20%. Bryan mentioned this in his comments, but we continue to see the renewables market scuffle a bit throughout 2025. Margins were very good for the utility business in the quarter with adjusted EBIT dollars increasing 12% and and adjusted EBIT margins expanding by 270 basis points to 29.1%. This is a great performance as price increases, favorable mix and good cost containment all contributed to the margin result.

Moving to Chart 6, we have the test business. Order activity here was solid with growth of 6%. This business ended the year with $187 million of backlog, so it's been a nice year of recovery here and great to see the backlog up nearly 20% compared to September of last year. Sales growth was strong in the quarter with a 10% increase to $72 million. Adjusted EBIT margins came in at 17.5%, a reduction compared to last year's record quarter as unfavorable mix and inflation were more than offset by leverage on the sales growth.

Next is Chart 7, where we show full year results for continuing operations. The Danaher is impressive with strong double-digit performance on all key metrics demonstrating the strength of our core portfolio and the clear benefits of the Maritime acquisition. You can see the note at the bottom, highlighting that we have achieved record performance in 2025 on all key metrics. Orders finished in excess of $1.5 billion, growth of over 56%. Organic order growth was 11% with double-digit organic order growth from the utility and test businesses. Reported sales increased 19% to nearly $1.1 billion, with A&D and Test both delivering double-digit organic sales growth. On the profitability side, adjusted EBIT margin improvement was significant with 20.3%, representing an increase of 180 basis points. All 3 businesses delivered increased adjusted EBIT margins in 2025. This led to adjusted earnings per share of $6.03, representing growth of 26%.

Next is Chart 8 with our cash flow highlights. ESCO had a breakout year in operating cash flow delivering just over $200 million from continuing operations, which compares to nearly $122 million in the prior year. Earnings growth and good working capital performance drove the 2025 increase. The teams across ESCO have focused sharply on working capital improvement, and we are starting to see nice benefits from that activity in our operating cash flow results. Capital spending increased to just over $36 million in 2025 as we saw modest increases from all 3 segments. We finished the year with an EBITDA to net debt ratio of 0.56x, and as we saw strong cash generation and also proceeds from the VACCO divestiture facilitate a large debt paydown during the fourth quarter.

Our last chart is #9, which contains our fiscal 2026 guidance. We are expecting to show another strong year financially, which reported sales growth in the range of 16% to 20%. This is comprised of 6% to 8% organic growth from our A&D businesses and Maritime revenue in the range of $230 million to $245 million. For the utility group, we expect growth of 4% to 6%, which includes Doble growing in a range of 6% to 8% and partially offset by NRG. For test, we expect top line growth to be in the range of 3% to 5%. Additionally, we expect nice improvements from adjusted EBIT and adjusted EBITDA margins to drive overall adjusted earnings per share to a range of $7.50 to $7.80, which would represent growth of 24% to 29%. The bar chart at the bottom here show a real nice trend for ESCO on sales and adjusted earnings per share growth.

The 4-year compound annual sales growth through 2025 is 16%, and the adjusted earnings per share CAGR is 27.5%. The company has delivered very well, and we feel strongly that 2026 will continue these great trends. That completes the financial summary, and now I'll turn it back over to Bryan.

Thanks, Chris. So as you've heard from our commentary, FY '25 was a great year, and ESCO's future remains bright as we continue to see a path for value creation enhancement as we move forward. With that, we are finished with our prepared remarks, and we'll turn it over to Q&A.

[Operator Instructions] Our first question comes from the line of Tommy Moll with Stephens.

This is Zack on for Tommy. Could you please give context on how we should think about growth rates and margin trends at the segment level going forward?

Yes. So if you look at the guide we had in there, I mean, we've got the A&D business on a core basis, growing in that 6% to 8% range, and then we've got the maritime addition on top of there, then we've got -- we've got what we have for [indiscernible] and then 3 to 5 for test we would expect margin improvement from all 3 of the segments next year. So I would say, generally, we see 26 as kind of on trend with how we've communicated where the businesses all have been kind of running for the last couple of years and kind of where we are in the cycle.

Awesome. And then can you please give an update on the integration of SMP? Obviously, there was a delay getting the deal closed. But since the close, are you tracking ahead or behind what you had planned?

Yes, I'd say that in terms of the cultural integration and financial integration, operations and all that stuff, I think we're on plan, maybe it's a little bit ahead of plan. I would say things are going very, very well on that front. In terms of financial results, I would say that the Maritime business is ahead of what we originally communicated when the deal was announced. We had some I would say we're prudent and gave the advertised plan, a little bit of a haircut. And as we've gotten through the regulatory approval and into the business, what we found is that they're actually performing at or above their originally advertised plan. So that's been a very welcome result. Since then, we've had some real positive new order activity in the fourth quarter and then just here in the early innings of the first quarter of '26. So yes, we would say that everything is going great here and probably better than we had expected.

Our next question comes from the line of Jon Tanwanteng with CJS.

Really nice quarter and outlook. A really great job there. I was wondering if you could expand on the previous comment, just I think you said something about $200 million in Escamaritime orders. what programs were associated with, number one? And how are you, number, thinking about growth going forward for that business that you've acquired?

Yes. So the $200 million, it was more than $200 million, but it came in, in the first quarter. So Jon, it's in the U.K. And so we're operating under a little bit of a different security scheme there. So we're not going to be able to give precise details on programs and contests and things like that. But suffice it to say that these are U.K. submarine related programs.

Okay. Great. Can you disclose what time frame those are supposed to revenue over?

Yes, those will run out for over 2 years, Jon. So we'll start to book a little bit of revenue in, let's say, the second, third quarter and then we kind of start to ramp it a little bit in the fourth and then it would run out through '27 and beyond. So it's -- those are long-term programs.

Got it. And then just on the aerospace side, are you expecting any headwinds from just the capital slides you've been seeing with the shutdowns in the TSA executed ATCs? Or is that not really significant for you, number one? And number two, as you look into '26 that 6% to 8% growth rate, can you just tell us maybe what the underlying assumptions are, especially with the build rates that the OEM is going up as much as I think they're forecasting.

Sure, sure. Yes. So on the shutdown, we really didn't see any impact from the shutdown and certainly not in the aircraft manufacturing or MRO space. So we are thinking that we are thinking that, that's moved forward without any delay. Overall, I think you asked about the 6% to 8% at Doble. And what we're seeing there is that we're seeing continued strong spending from the utilities that are really focused on grid infrastructure. It's less about the AI piece, it's way more about the reliability and maintaining their existing aging assets. And so that spending is really up. We had a record fourth quarter of orders and here in the early part of the first quarter, it looks like that trend is continuing. So we feel pretty good about the Doble business. I think the challenge here is that the renewable side of the business is definitely seeing a little bit of a challenge as we move forward.

Got it. I think I might have misspoke. I was referring to the 6% to 8% in [indiscernible]?

For aircraft, yes.

Yes.

So that wasn't -- what's happening there is we're seeing really good growth in the build rates for the -- for the various platforms that we're on and I would say from our perspective, in particular, we're seeing growth on -- we're seeing growth of 37%. And then we are seeing broad-based growth. We are seeing some military content that's coming through to our benefit. There's more [indiscernible], some of the newer generation platforms. So all of that stuff is really working to our benefit in the aircraft business. SP-2 Thank you.

[Operator Instructions] We have a follow-up question from the line of Jon with CJS.

I was just wondering if you could expand on the energy business a little bit. Just do you see an inflection point at some point? Or is there might be further downside as companies digest what the new policy a little bit.

Well, I think it's -- yes, so our assessment as follows. I don't think it's a big secret that the inflation Reduction Act in 2022 really kind of turbocharge that entire industry. And so we were seeing 25% to 30% growth rates in '23, '24. And then with the new administration coming in, they kind of certainly got a different perspective and then with the One Big Beautiful Bill, the tax credits that we're driving a lot of that activity are set to expire, I think, mid next year. So what we're seeing from the developers there is really kind of a focus right now on trying to get everything that they currently have under construction qualified for those tax credits. So the fundamentals of renewable energy relative to other forms of energy are still pretty positive from a cost and availability perspective -- but right now, the focus is really on those existing programs.

So what we think is going to happen is there's going to be a downstroke for the industry broadly this year -- and that beginning, let's say, call it, this time next year, I think we would begin to see a little bit of a turn back to what I would call normal growth, so that would be high single digit growth. It's really driven by the fact that we just need a lot more generation that people are going to be able to get built out of natural gas, given all the constraints in that industry. and the solar, in particular, pretty affordable. I think domestically, terrestrial win, it's going to be very challenged in the current environment. But internationally, it's still a pretty thriving business. And Jon, remember, we did not have any exposure in our business to any of the offshore wind stuff or any of the rooftop solar. And that's a lot of carnage in those spaces today. So listen, we think our business right now is very well managed. We've been able to maintain margins. And we believe even though our top line is down a little bit, we think we're taking market share in a down market. And so we're going to be well positioned to kind of take advantage of that normalized growth when it returns to '27.

Got it. And then last one for me. Just any thoughts on capital allocation from here. Looks like you're generating really solid cash flow. It looks like you'll have the debt from Maritime payoff in about a year. What are your priorities at this point?

Yes. We're -- so listen, we've been successful with the acquisition of divestiture and put ourselves right back in a position where we've got a tremendous balance sheet and a lot of firepower. So we are very active in the M&A space. I don't have anything to announce. But I would say that the M&A market has significantly improved in the last half of the year. There's definitely a lot of very attractive assets that either are coming to market or are rumored to be coming to market here in the early next year. So we're looking at those things carefully. Now I want to be clear that we're going to continue to be pretty disciplined about this stuff. We really are most interested in businesses that would fit squarely into our aerospace, our Navy or our utility end markets. And the reason for that is because we assess that those markets have -- first of all, we understand them, but second of all, we assess that those markets have very durable, long-term secular growth characteristics that provide us a really good opportunity to really grow up a business like that added to our portfolio. That's kind of our focus. We've got the balance sheet to go do it, and we're starting to build that pipeline up again.

Ladies and gentlemen, I am showing no further questions in the queue. I would now like to turn the call back over to Bryan for closing remarks.

Well, thanks, everyone. Again, a really tremendous year transformational one more shout out to all the employees of ESCO who really have made this possible. It's been a lot of work. But our team is good at their jobs, and we've been very, very successful and will continue to be in the years to come. So thanks a lot.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Q3 2025 ESCO Technologies Earnings Conference Call. With us today are Bryan Sayler, President and CEO; Chris Tucker, Senior VP and CFO; and Kate Lowrey, Vice President of Investor Relations. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Kate Lowrey. Please go ahead.

Thank you. Statements made during this call, which are not strictly historical, are forward-looking statements within the meaning of the safe harbor provisions of the federal securities laws. These statements are based on current expectations and assumptions, and actual results may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the company's operations and business environment, including, but not limited to, the risk factors referenced in the company's press release issued today, which will be included as an exhibit to the company's Form 8-K to be filed. We undertake no duty to update or revise 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 their most comparable GAAP measures can be found in the press release issued today and found on the company's website at www.escotechnologies.com under the link Investor Relations.

Now I'll turn the call over to Bryan.

Thanks, Kate, and thanks, everyone, for joining today's call. The past few months have been a transformative period for ESCO. Early in the third quarter, we completed the Maritime acquisition, and after the close of the third quarter, we finalized the VACCO divestiture. The completion of these key transactions marks an important step forward in the execution of our portfolio strategy. With the addition of Maritime's signature and power management solutions, we now have a meaningfully larger presence in the Navy market.

Maritime broadens our product offerings and adds significant U.S. and U.K. naval platform content. With the exit of the space market, our Aerospace & Defense segment now has a clearer focus on serving the aircraft and Navy end markets, both of which we believe have durable long-term growth drivers in place. This period of transition has involved an extraordinary level of hard work from our team members related to closing these deals and integrating Maritime into the ESCO portfolio and business system.

In addition to supporting these efforts, our team was also busy managing day-to-day operations and delivered another outstanding quarter for ESCO. I want to personally acknowledge and thank our dedicated employees whose hard work is what makes this possible.

In addition, I would like to take one more opportunity to welcome our new ESCO Maritime teammates in both the U.S. and the U.K. As we've now had a number of interactions with the Maritime team, it is clear that they are a strong group that is dedicated to a very important mission, which is aligned with ESCO and our core values. We are thrilled to welcome them to the team. I would also like to thank the Maritime staff for their hard work in supporting the ongoing integration, which does require considerable time and focus from across the organization.

As I know we are all aware, the macroeconomic picture has been somewhat complicated this year with evolving trade policies and geopolitical uncertainty in the headlines. It's difficult to know exactly how these impacts will play out, but we are monitoring these changing dynamics closely and believe our teams have done a good job of managing the risks and opportunities to this point. While there have been some additional costs, we have been able to mitigate the impacts and deliver exceptional operating results. Going forward, we are in good shape in this regard and are confident in our ability to manage any potential future risks associated with tariffs during the balance of the year.

Chris will run you through all of the financial details for the quarter, but before we get to that, I wanted to give you a few comments on each of the segments. Let's start with Aerospace & Defense. We remain very positive regarding the long-term outlook for the aerospace and Navy markets. Production rates across both end markets need to increase to meet underlying customer and market demand. We see fundamental drivers for additional commercial and defense aircraft and expect increasing production rates to drive growth going forward. Overall, our aerospace revenue was up almost 20% in the quarter and is up 15% on a year-to-date basis.

On the Navy side, we've been talking for a while about the procurement process for the next 17 Virginia and Columbia Class submarines. It's taken a little bit longer than expected, but it was great to see those orders begin to flow through during Q3 with Globe booking over $80 million in orders during the quarter for Block V.2 and Block VI on the Virginia Class platform, along with orders for initial content on the next 3 Columbia Class boats. By any measure, the A&D segment has had an exceptional quarter, achieving double-digit organic growth, a 560 basis point increase in margin and ending the period with record backlog.

Switching businesses now. Let's discuss the utility group, which had a bit of a flattish quarter from a sales and margin perspective but did experience strong orders. If you look at the year-to-date results, the story remains quite positive, and we are confident that the long-term demand drivers remain intact. Numerous factors are contributing to the growing demand for electricity, including data centers, artificial intelligence, electrification of transportation, heat pumps, reshoring activities and more. Expanding the grid will be a long-term and complicated endeavor, and during that process, increased electricity demand, coupled with an aging infrastructure and extreme weather events will make maintaining utility assets more important than ever.

Doble will continue to be a critical partner supporting the utilities as they both maintain and expand the grid. Order growth in the quarter was strong, which points to continued sales momentum in the quarters to come. The U.S. renewables market continues to recalibrate right now in the wake of the Big Beautiful Bill. Our team is managing well through some uncertainty, and we remain confident that renewables will continue to have an important role to play in energy markets worldwide and in the U.S. over the long term.

Finally, I'll touch on the Test business, which had another strong revenue quarter with 21% growth over the prior year. Year-to-date, the revenue is up by 15%, and it's great to see continuing strength in their test and measurement, industrial shielding and services sales this year. Their margins improved by 350 basis points sequentially but were down a bit year-over-year. The team has taken the right steps to reduce costs over the past several quarters and has done a great job driving the segment EBIT margin back into the mid-teens. Overall, the Test business has stabilized, and we feel good about the trajectory there moving forward.

Overall, we are optimistic about our market positions across each of our segments and expect to outperform industry growth. Accordingly, we are again raising our full year guidance, which reflects over 20% adjusted EPS growth compared to the prior year.

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

Thanks, Bryan. Everyone can follow along on the chart presentation. We will start on Page 3, which shows the financial highlights for the quarter.

Before jumping into the numbers, I do want to point out that we are looking at everything on a continuing operations basis. Now that VACCO has been sold, it has been classified as a discontinued operation in our financial statements, so the commentary will exclude any P&L impacts for discontinued operations.

Now turning to the numbers. You can see that, by all measures, ESCO delivered a great quarter. Orders showed a significant increase in the quarter. We will go through segment details coming up, but a big driver of the reported increase relates to the acquired backlog at Maritime. Excluding that, we still had good orders performance with a 1.3 book-to-bill ratio. We ended Q3 with backlog of nearly $1.2 billion, a new record for ESCO. Sales performance was also strong with growth in the quarter of nearly 27% on a reported basis and 11% on an organic basis, which excludes the impact of the Maritime acquisition.

Adjusted EBIT margins increased from 19.3% last year to 21.1% in this year's third quarter. Lastly, adjusted earnings per share increased by 25% to $1.60 per share. I would also point out on the bottom right of the chart that we did have a sizable amount of add-backs for adjusted earnings. This was driven by the Maritime acquisition, where we had significant costs related to closing of the deal as well as inventory step-up charges, stamp duties in the U.K. and an increase in acquisition-related amortization.

Next, we will go through the segment highlights, starting with Aerospace & Defense. Orders increased significantly, but you can see that $364 million of this related to the backlog acquired at Maritime. Beyond that, Maritime delivered another $50 million of orders in the 2 months they were owned by ESCO. On an organic basis, orders were also quite strong with Globe receiving large Virginia and Columbia Class orders. Backlog for A&D finished at $832 million.

From a sales perspective, growth was up 56% on a reported basis and 14% organically. You can see the Maritime impact was significant, but the core business also performed very well. This translated nicely to margins, which increased over 500 basis points with positive contributions from across this set of businesses. The margin increase was due to favorable impacts from price, mix and leverage on the growth.

Moving on to Chart 5, we have the Utility Solutions Group. Orders momentum remained healthy with growth of 5.5% in the quarter. This was driven by Doble, where orders increased nearly 7%, while NRG orders in the quarter were flat. On the sales side, growth was a bit more muted with only 2% growth. This lower growth was also driven by Doble, where timing of shipments resulted in lower revenue growth in the third quarter. We see this as a temporary issue and expect to return to higher growth in the fourth quarter.

As you can see on the chart, backlogs are healthy and have increased nearly 15% compared to prior year-end. On the margin story -- on the margin front, the story is similar to sales with the margin drop in the quarter driven by Doble. On a year-to-date basis, the Utility Solutions Group has delivered adjusted EBIT margins that are 130 basis points ahead of last year's first 9 months. So while we have seen some weakness from NRG in the year, the Doble performance has been strong, and we feel good about the full year outlook there.

Next, we will cover Test, where the team delivered another strong quarter, starting with orders where we did see a decline of nearly 6% in the quarter. We had some tough comparisons to last year but honestly feel good about where the business is trending. Year-to-date orders are up over 30%, and you can see that backlogs are up nearly 24% compared to year-end. So the momentum here has been strong during 2025.

Sales were very good with a 20.7% increase, which drove adjusted EBIT to increase by 15.4%. Margins here were down slightly as we've experienced unfavorable mix and some tariff impacts. Year-to-date margins are up 140 basis points. So 2025 has been a positive step for this business after a couple of tough years in '23 and '24.

Moving to Chart #7, we have year-to-date P&L highlights. As you can see, the results have been terrific through the first 9 months of 2025. Bryan mentioned all the portfolio work earlier, which is very important. This chart shows that the core company has continued to deliver, and we are now starting to see the impacts of the Maritime deal come through. Orders have been great. If you take out the Maritime backlog impact, we have growth of 17%. The sales story is also quite positive with A&D up 12% organically and nearly 28% when Maritime is added in.

Test sales are up 15%, while the US growth -- USG growth is a bit more modest at 4% due to weakness for NRG so far this year. Earnings are up double digits with adjusted EBIT margins increasing by 200 basis points and all 3 segments posting nice margin improvement over the first 3 quarters of the year. Finally, adjusted earnings per share is up over 24%. So by any measure, the company has performed very well year-to-date in 2025.

Next is Chart 8, where we have cash flow highlights. The first 9 months of fiscal 2025 delivered strong operating cash flow results as working capital performance has been favorable compared to the first 9 months of 2024. This is true for continuing operations, and it should be noted that the cash flow for discontinued operations was also quite strong through the first 9 months of fiscal 2025.

Capital spending is up for the first 9 months due to various programs in the A&D and utility businesses. Our strong cash generation and the delay in getting the Maritime deal closed means that our leverage position is in good shape as of June 30 at 1.74x. With the VACCO divestiture getting finalized in July, we expect to have the balance sheet in great shape as we close out the year.

Last, we will discuss updated guidance for the year, which is covered on Chart 9 and 10. Chart 9 is the words that go with Chart 10, so I'll just talk to Slide 10 here. Fundamentally, the guide represents another increase for us. You will remember that last quarter, we still had VACCO in the guidance, and we had included estimates for Maritime as well. Now we need to remove VACCO as that deal has now closed. That reduces sales projections by approximately $125 million and adjusted EPS comes down by approximately $0.50.

For the continuing operations, we are increasing the guide for the year. On the sales side, we are coming up by $20 million at both the low end and the high end of the range. For adjusted earnings per share, we are tightening the range with only 1 quarter to go. So the bottom of the range is coming up by $0.40 and the high end is coming up by $0.25. This adjusted EPS range represents 21% to 24% growth compared to prior year.

The additional sales is delivering nicely to the bottom line, and while we are seeing some tariff impact in the numbers, it is at the low end of our ranges that have been guided previously. So obviously, it is shaping up to be another record year at ESCO, and we are excited to share this updated outlook with you today.

That concludes the financial portion of the call, and now I'll turn it back over to Bryan.

Thanks, Chris. As you heard, the first 9 months of our year have gone really well, and we're excited about our ability to increase our full year outlook. And we're excited about the portfolio moves that I discussed earlier.

ESCO's future remains bright, and we continue to see a path for value creation and enhancement as we move forward. We just wrapped up our Board meetings earlier this week, which gave us a chance to visit our Morgan Schaffer operation, which is part of Doble and USG. This business is located in Montreal and was an ESCO acquisition in 2017 that's focused on condition monitoring of transformers.

It was a really great session with our Board and an opportunity for us to show them the exciting things going on at ESCO, where we're developing exciting technologies on a regular basis that are being deployed to help customers solve real-world problems. We thank the Board for their ongoing support, and we're excited about the many things going on across the ESCO set of businesses.

With that, I think we're done, and we can turn it over for the Q&A.

[Operator Instructions] And our first question comes from the line of Tommy Moll of Stephens.

Bryan, I wanted to start on the A&D orders, in particular for Globe, where you reported some pretty big orders in the quarter. Any update on shipset content? I'm guessing probably nothing changed versus what you've communicated previously. And anything you can tell us just about how that has progressed through the order pipeline? I know you don't want to get in the business of guiding future orders, but just give us some sense of where some of the discussions are for those Virginia and Columbia Class subs.

Yes, I would say no big change from what we have communicated before. On the Globe side, we -- obviously, we have some additional content for Virginia Class and Columbia Class that comes through. On the Maritime side, I don't think we're quite in a position yet to communicate that in detail, and I'll ask for a little bit of patience as we kind of work through our FY '26 planning process. So we'll be in a position to communicate that kind of detail in the future, but I'm not sure we're quite ready for that today.

Sure. On sticking with A&D and here, I'll ask the question on an organic basis, so we can think about ex Maritime, ex the VACCO noise. The margin progression, even peering through both of those changes, looks pretty solid here. And so you called out several of the factors. Specifically, though, on price/cost, I'm just curious for an update there and versus what you would have hoped for some of the incremental margins flowing through, how did the quarter shape up? And how do you feel going forward?

Yes, Tommy, this is Chris. I would say the margins there in the core company were really phenomenal, really good flow-through on kind of the underlying sales growth. I would kind of point out the price first. We're seeing some real good -- mostly on the aircraft component side, we're seeing some very nice price flow-through. Those are efforts that are kind of always ongoing in that business, but sometimes there can be a lag before some of that price flows through just based on working through LTAs and things like that. So we're really seeing some good flow-through there. So that's certainly kind of the top driver.

I would say on the material side, we're frankly in pretty good shape. Generally, the material inflation has probably been a little bit better than what we expected coming into the year. So we've got the price good guy, and we've got less of a material headwind. And so that's been a pretty good equation for us so far this year.

And then the other things I would point to there, we did see some good mix in the quarter. Mix can kind of move you around a little bit quarter-to-quarter. It was favorable this quarter. So that was another kind of boost. So you won't see that every quarter necessarily, but it came through nicely. And then, again, with a good double-digit kind of underlying growth, we had nice leverage on the sales as well. So I would point to all those things as kind of key drivers for us here in the quarter.

Yes. I think we're getting a little bit of traction from some of the early stages of our ESCO operating system implementation as well, and that's really coming through in the A&D numbers for sure.

A little bit might be an understatement, but we'll settle that later, and I'll turn it back for now.

And our next question comes from the line of Jon Tanwanteng from CJS.

I was wondering if you could talk about the increase in the outlook, maybe what businesses or product lines that's coming from. It looks like a pretty small increase in revenue but quite a big increase in the earnings. I was wondering if you could dig a little deeper into that and just tell us where that's all sourcing.

Sure. So I would say that on the revenue side, we're frankly getting pretty big increases as we move through the year from Test. So that business has kind of outperformed. So we're seeing that come through. I would say on the A&D side, we're also getting a little bit of incremental volume, which is helping obviously. And then those are kind of offsetting the NRG business in utility, where we've seen a little bit of a takedown there as we move through the year just because of some of the kind of uncertainty in the renewables market that you heard Bryan talk about earlier.

So those are kind of the -- those are the sales impacts, I would say. You're seeing that flow through at a reasonable rate, let's say, around 30% or so. We've also got -- I mentioned the tariffs would kind of be at the low end of the range we talked about last quarter. So we said $2 million to $4 million last quarter as a tariff impact. We're really going to be more like $2 million, maybe even slightly below $2 million. So a little bit of a pickup there.

And then I would also point out that with the VACCO closure, we've got some pretty big proceeds here in July from that, that helped the interest in the fourth quarter. So that's kind of flowing through as well. So all of those things are what are getting you to kind of that lift you see in the press release there.

Got it. That's very helpful. And then just for modeling purposes, how should we think about the impact of VACCO in '26 as you lap the sale?

Well, listen, I mean, I would say that it's -- if you kind of look through what we're going to file in the numbers now, you'll see kind of VACCO kind of comes out and goes to discontinued operations. So you're going to have kind of the company there and the A&D results without VACCO in it. And then it just becomes a picture of kind of how do you think about the growth for '26 and beyond.

And I think there, Jon, we've kind of talked a lot about kind of the Navy dynamics being strong, kind of high single digits, similar for aircraft components. And then you're going to have kind of -- the kind of partial year to full year impact for Maritime since we only had 5 months this year. So all those things, we think, contribute to a pretty nice outlook for '26. We're not really in a position to kind of give specific guidance around that. But I think where we sit today, honestly, we feel really good about how we're looking going forward.

Okay. Understood. Last one for me. Just on the naval side, you obviously are showing strong orders. I was wondering if the pace of deliveries is going to stay relatively constant. Or are you're seeing a pickup there, either near term or long term as the Navy tries to increase the throughput of all these things?

Well, I think that we believe that it will increase. I think that it's a little hard to answer the question because in our -- as you model our numbers, you've got to mix both the Globe, all of our existing Navy business along with the Maritime side. I think the other thing that you're going to need to start thinking about more is what's happening over in the U.K. in addition to what's happening in the U.S.

So I do think the pace is going to pick up a little bit. We'll be able to provide a better guide on that when we come together in November for the full '26. But listen, we're very upbeat about the Navy progression and what it means for our business.

And we have a follow-up question from Tommy Moll of Stephens.

I had a few more I was hoping we could get through today. On the guidance you provided for earnings per share, Chris, I heard you say that interest is probably a good guide for Q4 just because of the timing of VACCO, a good guide versus what you would have guided to previously. But I'm just putting everything together. It does look like the range you provided is $0.25 to $0.40 increase for the year does assume a better 4Q operationally than what you would have communicated previously. I just want to make sure I'm reading that correctly because there's a lot going on this quarter.

Yes, that's correct. I would say that the fourth quarter has come up from what we communicated last time. Again, I think, obviously, we're 3 months along the road. We had a solid third quarter, as you see. And so the fourth quarter is absolutely higher than what we were -- had baked in last time.

Also wanted to ask on the USG margins. If it's possible to look just at Doble, can you comment on how the margins progressed year-over-year there and if it wasn't what you would hope, maybe what some of the drivers were?

Yes. Listen, I would say that, honestly, the margins in the first and second quarter were probably ahead of where we would have anticipated. So we had really good kind of flow-through and mix in the first 6 months. And so that's why we're trying to kind of not overreact to the third quarter. I would say that, certainly, it was below kind of what we anticipated when the quarter started. But a lot of that was a little bit of sales miss. And I kind of alluded to the timing of some sales here in the third quarter as we closed out the quarter. We just didn't have some things that we anticipated getting out the door and such, so we had a little bit less sales. And so we lost the flow-through from that. I think if we gotten that, we'd be right kind of where we needed to be.

So I would not say that we're concerned or disappointed with the Q3 margins. I mean, I guess I'm sure we'd always like a little bit more. But I think how the business has trended for the first 9 months is honestly quite positive. And we feel like the momentum and the factors that Bryan talked about that are kind of driving the market there, we think those are all still in place. But certainly, as we go quarter-to-quarter, we're going to see some ups and downs. And I think as -- so we're a little shaky there on the utility side, but the A&D folks had a great quarter from a margin perspective. And what I would say, Tommy, is in our model, you're going to see some of that, right? So next quarter, we might see the A&D margins not quite so strong, but then the pickup in utility. So we're going to have those kind of puts and takes a little bit quarter-to-quarter. But generally, long-term picture still looks very good.

Yes. And I'd point out that the orders for Doble were very strong in the quarter, and that points to better things in the next quarter or 2 as we move forward.

Last question, and then I'll turn it back for good today. Bryan, in the news recently, there was reference of a treaty between Britain and the Aussies on nuclear subs. I realize that it may take some time before Maritime sees any benefit here. But if there's anything you can do to frame for us on the outside what -- how impactful that could be or just any observations you had would be appreciated.

Yes. Listen, I think every step in that direction is a positive not just for our business but probably for the mutual defense for the English-speaking world. I think you're aware that there's a review going on in the Defense Department right now of the AUKUS program. That's kind of limited to what happens in the 2030s with regard to earlier-generation Virginia Class submarines that are currently slated to be sold.

We don't think that there's a lot to that. We think that the decision on whether the U.S. will follow through on those sales, that's a decision that could be made several years from now. But I think that the thing we believe about that is it just increases our conviction that the investments we've made in the Royal Navy and the shipbuilding in the U.K., that those investments are going to pay off. And if anything, our belief is that they may pay off sooner.

Now I'd be clear to say that the AUKUS program envisions things that are going to happen in the 8, 10, 12 years from now. So that's a little bit outside of our planning horizon, but it does bolster the commitment that we would see from the shipbuilders in the U.K. to follow through on some of the orders and revenue that we anticipate in the next 3 to 5 years.

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

Well, thanks for taking some time to hear from us today. We're excited that we've been able to complete these large portfolio moves. And I think we're even more excited that the underlying performance of the core business has been really, really strong. And so we really look forward to the things that are in our future, and we look forward to talking to you again next quarter.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.