Good day, and welcome to the ESCO first quarter 2015 conference call. Today's call is being recorded. With us today are Vic Richey, Chairman and CEO; Gary Muenster, Vice President and CFO. And now, to present the forward-looking statements, I would like to turn the call over to Kate Lowrey, Director of Investor Relations. Please go ahead.

Thank you. Statements made during this call regarding the 2015 and beyond EPS, EBIT, tax rate future growth, profitability and revenue, margin, sales, market share, product development, acquisitions, capital allocation strategy, corporate costs, and other statements which are not strictly historical, are forward-looking statements within the meaning on 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, whether as a result of new information, future events, or otherwise. 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 a press release issued today and found on the company's website at www.escotechnologies.com, under the link Investor Relations. Now I'd like to turn the call over to Vic.

Thanks, Kate, and good afternoon. Before I give my perspective on the quarter, I’ll let Gary go over a few financial highlights.

Thanks, Vic. Consistent with the theme of the last five or six quarters, and certainly since the sale of Aclara, our financial goals have been well-defined and are as follows: execute on our financial plan, deliver solid earnings results that meet or exceed expectations, position the company for sustainable long term earnings growth, enhance our focus on returns, and follow our capital allocation plan. I think we achieved all of these, given our first quarter results. In November, we expected Q1 EPS to be in the range of $0.28 to $0.33 and I’m pleased to report that we beat the top end of our range by $0.08, as we delivered $0.41 a share. The better than expected tax rate yielded approximately $0.05 of this beat, and was driven by the extension of the research credit for one year. The remainder of the increase in earnings was the result of solid operating performance at Doble and in filtration, along with ongoing and effective cost management across the company. During Q1, the impact of foreign currency exchange rates was immaterial. As a reminder, for comparative purposes, the 2014 results exclude the charges related to the Crissair facility consolidation that we completed last year. I’ll call out a few highlights from the release to allow you to better understand the underlying results. Q1 sales decreased about $4 million from prior year, driven by the nearly $8 million drop in filtration, partially offset by a $4 million or 14% increase in sales at Doble. Test sales were comparable year over year. At the beginning of the year, we had expected lower Q1 filtration sales and communicated this in our November guidance. Filtration sales were expected to decrease from the following: lower space sales at VACCO related to the SLS program, lower KAZ probe cover…

Thanks, Gary. As a reminder, the three-year outlook we communicated at our investor day last September included growing our top line 10% and increasing EPS 15% on a compound basis. Over the past five months, and considering our solid start to the year, our order strength, and our M&A outlook, we believe these goals are reasonable and remain achievable. I’m pleased to welcome Enoserv to the ESCO and Doble families, and I believe their future growth opportunities are well-defined and tangible. Enoserv’s multiple software platforms complement and expand Doble’s solutions in power relay protection. Enoserv also expands Doble’s position as not only a leading test set manufacturer and service provider, but now a market leader in the very important software space for power providers and users. We continue to explore additional acquisition opportunities with a primary focus on adding capabilities and solutions to USG and Fluid Flow. Across the company, our core business continues to present us with long term organic growth opportunities, and when supplemented with our M&A strategy, create an exciting outlook for ESCO over the next several years. In filtration, we remain bullish on our underlying growth and profitability, driven by last year’s aerospace program wins, coupled with having some sizable programs such as the A350 moving toward production. The test business remains solid, both from a top and bottom line perspective, as the outlook contains several additional projects, such as the automobile chamber win in China, which are expected to deliver solid profitability in 2015 and beyond. The [NP] market continues to provide enthusiasm as we’re bidding on a number of opportunities, both domestically and internationally. At Doble, we made significant investments over the past few years, which were necessary to accelerate their growth, both domestically with new products and solutions, as well as internationally, by entering new markets. I think we’re seeing the results of that investment being realized this year and expect it to continue in the future. We are well-positioned for solid organic growth and have the capacity both from a financial and management bandwidth perspective to augment our growth with appropriate acquisitions. We look forward to an exciting and successful remainder of the year. So, to wrap up, I’m very pleased with our Q1 results. I’m comfortable that our three-year financial goals remain on track. I’m optimistic about our growth prospects both short term and longer term. Our priorities remain simple and straightforward: execute and deliver our commitments in the core business, maintain our focus on new product development, support an organic growth, and supplement our existing plan with accretive acquisitions around our core business. And I’d be glad to take any questions you have.

[Operator instructions.] And we have a question from Jon Tanwanteng of CJS Securities.

You had an almost 30% margin in Doble. Can you give us more color on what drove that specifically, and is any part of that strength sustainable at all?

Yeah, there’s a couple of things really. It’s really more mix than anything else. As we called out, the F-Series, which is one of the more profitable products we had coming out, an outsized number of those which we delivered in the first quarter, also some of the service contracts that we have also carry a higher than normal profitability. So those are the two big things that drove it. We’ll see that from time to time based on the mix of the business. As Gary mentioned, we’re going to return to more normal levels in the second quarter, but obviously, as we’re trying to grow the business, and invest in the business, we’re looking to invest in places that do have higher levels of margin, certainly something like Enoserv will help us in that regard as well, because it not only has a pretty decent profit margin, but also a good bit of that is recurring business, where we’re getting that every year from the same customer. So don’t anticipate having the same level every quarter, obviously, but what really drives that is the mix that we have in the business.

And then can you talk a little bit more about Enoserv? Is it expected to be accretive? And two, how does it mesh with those businesses, and what are the revenue margin opportunities?

The margins I think are going to be consistent with what we see at Doble on an average basis, kind of the mid-20s type thing. It will probably be a push this first year, because of the professional fees and the banker fees, and those kind of things, but certainly going into next year, we anticipate it to be accretive. As far as it working in with the Doble business, what they really bring to the party is a couple of test suite softwares that interface with the Doble business hardware and software already they’re rolling into their ARMS product, as well as I think it was an opportunity to sell more of our hardware as a result of having more robust software.

And then just a quick question on the test business, you pushed out a couple of projects to March, I believe. Did that push anything else out into June? Or do you expect it all to be caught up?

It should get caught up, but there’s some chance. As we’ve talked about before, part of the problem with that business is these things will move from quarter to quarter, but we think the majority of that will get back into the quarter, but some of it may slip into the third quarter as well.

And our next question comes from Jim Giannakouros from Oppenheimer.

Just a follow-on on the test business. I get that it’s lumpy, but the orders, even excluding that $10 million order you got in China, pretty stellar. Is there any other big order in there, in your Q1 orders?

I’d say the next biggest order was we had a big shielding order from Finland. I think it was about $5 million, and then the next biggest order was probably $1.5 million. So I would just say that was really good performance or really good orders for the quarter, because we did have the one and then the finished shielding order, but other than that, there was nothing out of the ordinary, no other very large order.

Carrying that out forward, what we like about that is hopefully, when you start talking about an aggregation of $1 million and $1.5 million orders, that you get a little bit more of a smoothing effect over the next three to five quarters, instead of the big, lumpy one-offs that hit five or six in a quarter and go away. So we’re really pleased to see the number of “small” orders, small being a million, and $750,000 to $1.2 million, is it’s really impressive to see that level of volume hit this early in the year.

Can you help us from a magnitude perspective? Can you size the slippage that you saw in Q1? And then maybe if you can just kind of walk us through how we think about the related revenue recognition of what you in backlog, in test. Admittedly, it is lumpy, but just trying to get a feel for how 2015, from your perspective, should map out.

I’d say it was about $5 million on the top line that was in the baseline, that moved to Q2. And to clarify, Vic mentioned it, a lot of that catches up, but what we also look at is at the end of that quarter, there’s projects that are expected to complete in March that most likely aren’t these same ones. And so it’s kind of just you’re trying to throw a dart at a board that’s moving in 400 projects all over the world. And so we’ve always tried to talk about an annual view here, and we do our best to try to track down the quarters. But if you peg $5 million coming from Q1 into Q2, that moves you up into Q2 expectations of $45 million to $48 million kind of revenue. And I’d put $2 million of risk on the back end of that just because projects that we have today, scheduled to complete in March, if they slip a week into April, they’re a third quarter thing. So it’s really kind of a $5 million band around the quarters, is kind of how it seems to have stabilized itself over the last five or six quarters.

I think one good thing is you get more and more backlog. Going into this quarter, we got the largest backlog that we’ve had in that business, so that gives us a little more comfort that the year, in that business, is going to turn out like we [unintelligible].

On the profitability, just one last question on test, is that 13 or low teen level still what you’re eyeing for 2015 longer term? Or has that shifted at all?

That’s certainly still our target, for sure.

And I guess same question for filtration. It definitely came in lower than I had anticipated, and I believe that your comments last quarter led us to believe that profitability should stay in that high teens, maybe even knocking up against 20% in filtration. Has that changed given the puts and takes in that segment?

Our expectations are still very solid for the filtration business, and maybe we just didn’t do a good job of explaining it last quarter. But you know, we had a couple of things that we were fighting in this first quarter, but I think we identified those. And TEQ packaging had the one line shut down for the whole quarter, so that was impacting the margin. And then the other thing that was maybe a little unexpected was with the move into Crissair, consolidation of Crissair and Canyon, we thought we’d be able to get all of the signoffs from the customers, because what we have to do, in these aerospace programs, is if you change a facility, you have to send the customer all the information about their parts, and they have to sign off and say, “Okay, you’re good to produce it in the new facility.” We thought we’d gotten all of those done in the first quarter. Some of those have slipped into the second quarter, as a result of the customer just not getting them signed off. It’s not an issue of them not going to do it, it’s just one of these administrative things that they didn’t get around to, so some of those now had slipped into the first quarter. But in fact Gary and I were both just out there last week, and all of those approvals from the customers now are in hand, so that will all be a catch up in the second quarter.

And our next question comes from Kevin Maczka of BB&T Capital Markets.

To piggyback on that filtration question, you expect the volume to be up significantly as we go from Q1 into Q2. Vic, is it these customer approvals that you now have that allows you to do that? Or is there something else going on, either in the [unintelligible] or in the TEQ program or something else that drives volumes up significantly in Q2?

Again, we’ll have the line at TEQ pack up and running. In fact, it actually started two weeks early, so that went well. As we mentioned, we’ve got orders in advance of that. We do have all those approvals done now. I think there’s just some additional volume at VACCO as well.

Just to kind of put posts around that, if you remember the KAZ issue at TEQ was $3 million basically. And it’s kind of just we’re down and now we’re up, because the line was completed. So if you look at the TEQ business alone, it’s $2.5 million to $3 million up sequentially. And then to put posts around the Crissair thing that we were talking about on the first article test thing, that was a couple of million, and now we’re fully rationalized in the facility, so we’re blowing and going there. So that’s expected to be up $4 million or $5 million sequentially to Vic’s point, on the space business. That’s why I tried to highlight the additional orders that we booked in Q1, not related to SLS. Those will be shipping in the Q2, so we expect a $2 million increase at VACCO. So when you bring all that together, we’re pretty confident that we can do a $10 million sequential increase in filtration Q1 to Q2, and then you obviously absorb all the overhead now that KAZ is back up and running, we’re not getting killed by the “idle” facility while they’re retooling. So when you pull $10 million of incremental revenue through that business, you’ll see a significant step change in their EBIT contribution.

Gary, if I can go back to Doble, and I understand this was an exceptional quarter. The margin’s nearly 30%, and that won’t always be that way, and it sounds like you had very favorable mix on the [debt] series project and in the services. But could you just help me understand, if you’re thinking it normalizes for all of the first half down as low as 20, or the low 20s, anyway, how do we get all the way down there? Can you maybe size the F-series as a service?

I’d say in the quarter, we sell this every year, and you don’t sell it every month, though. So in the quarter, we had three customers that basically stepped up their buy, because we were looking at raising the prices after January 1, so that was part of it. So just to put total dollars around it, that was about $4 million of revenue on the F-series, and we had planned about $2 million. And I don’t really want to get into specific margins for obvious reasons, with competitors and customers and that sort of thing, but it’s well above the company average, at Doble. So if you step down about $3 million of that $4 million out of the quarter, and then obviously on the Doble ARMS at SoCal Edison, we had all the software put in, all that, and obviously you don’t install software every quarter. So that’s worth about a million dollars on revenue, that pulls out, and again, because that’s software, it’s high margin. The other thing, from the cost side, this is when we have our big Doble conference in the quarter, up in Boston, where we have about 1,200 customers come. And obviously, we take the expense on that, which is about $1 million. So you get a little bit of cost headwind, which hits every second quarter, but obviously sequentially, it wasn’t there in Q1. So a combination of lower F-series, lower software, with the Doble ARMS on the SCE project, and then some costs going in the other way. So you’ll see a step down there, and then if you just add the two together. I don’t think Kevin you should think about it as 20%. I think keep it in the 23% or 24%. So, obviously, the step down on 29% needs to be in the high teens, and I think because of the cost of the conference, and then I think we have opportunities to do a little better than that relative to the plan. So that’s kind of how the year shapes out. So from the six-month perspective, when we talk three months from now, it will be at or above your historical view of the margins that are contributed there.

So just to be clear, your guidance is unchanged for the year at 24, but you’re saying we may even see the high teens in Q2?

Potentially, yes.

And then finally, just from me, the corporate costs will be higher on the deal in Q2. Can you give some numbers there, and do you expect that to continue to stay elevated as you pursue other deals?

Yeah, that’s a little bit of an unknown, but obviously, the costs associated with closing Enoserv will hit in the second quarter. I kind of hope we do have some additional corporate costs, because that means we’ve got good opportunities to pursue acquisitions. But I think it will go back to a more normalized rate, like maybe we saw in some of the normal quarters last year, take the first two quarters and kind of average those out. I think that’s more what you’re going to see. There’s nothing in sight that’s going to have a big impact one way or the other on the corporate cost, so it really will depend on opportunities that present themselves from an acquisition perspective.

Kevin, the way the model lays out, other than if we are successful with another acquisition, the step up in Q2 obviously involves a bank fee. We used a banker to keep it exclusive, and then obviously the professional fees at close. So it will step up. The costs will step up in Q2 for that one-time bank fee, then again, based on the model, we don’t predict when an acquisition will close. So it will step back down in Q3 unless we drop another deal in. So what you anticipate with this step up in Q2 is not the plan for the rest of the year absent the one-off transaction.

So, normal has been $6 or so million, and what, we’ll see an extra couple million in Q2, just one-time?

I wouldn’t say a couple of million. I’d say in the low $1 million, $1.5 million maybe, then step it back down to the six two, six three level, for kind of just the normal hunting and fishing stuff we do.

And our next question comes from Sean Hannan of Needham & Company.

Can you talk a little bit about the backlog in a little bit more detail? How do you expect this to materialize in the coming quarters? I think there’s been some detail you’ve provided, so now just to see if we can kind of summarize all of that. And then to what extent should we expect a pullback in margins in the near term, based on that mix I think we alluded to, or talked about, Doble coming down a little bit? So just trying to also get a summary viewpoint of how that transpires Q2 and moving forward based on, especially as we look at other aspects of bookings, such as testing’s so strong, and how that kind of plays into the whole scenario.

I think as you look at our backlog, just kind of from a macro perspective, it’s kind of consistent with what it’s been historically as far as how it’s going to play out. The only difference I would say is we’ve always carried some level of the [submarine] orders at VACCO. There’s a good bit of that, which we’ll deliver over the next several years rather than all this year. And then test business, really everything that we have in backlog now should deliver this year, except for the automotive chamber. We may get a little bit of that at the end of the year. We may not. That’s a little bit unclear this far out, for a project that size. So that’s another one which at least the vast majority would deliver in 2016. But other than that, I would say it’s pretty typical. You know, Doble’s [unintelligible] a book-to-bill business, what they bring in they send out within the year. The test business, I mentioned everything other than the one project will probably be delivered this year, the vast majority of it, and then the filtration business, with the exception of what we have at VACCO, that will deliver this year as well.

And then within the test business, I think there was a lot of kind of early, smaller expectations, but optimism around developments for [EMP]. I think you start to see some momentum there. I think we’ve also got to assess that maybe that’s perhaps paused a little bit. Just wanted to see if we can get a perspective around what you’re viewpoints are, the development of that marketplace and your play within that.

I’m very happy with our position in it, first of all. I do think that the jobs have been [unintelligible]. We’ve been able to get the vast majority of particularly the higher end projects. I was just in Asia two weeks ago with our [unintelligible] Asian team, which included Japan, Taiwan, Korea, India. And there’s a lot of interest there. It’s not turning into orders as quickly as you ever hope, but we think there’s a great opportunity there, particularly in Korea. We have entered a number of projects there. Finland, I mentioned as well. So I think the opportunity is there, and it’s just going to be a matter of how quickly it materializes. But we feel like we’re very well positioned for it. I think we’ve got the right people pushing it, and it’s just a matter of the uptake of the industry. But I think at some point, that’s going to accelerate. We just saw an article today where the U.S. is looking at all their nuclear plants and whether those need to be EMP shielded, and apparently that’s getting a lot of attention. So obviously, we’re going to continue to chase that as well. So it’s one of those things you never hope for an incident, but if there ever is an incident, then I think we’ll have a hard time keeping up with the business. But in the interim, it’s a matter of us pushing it pretty hard. But there is a lot of interest, there’s a lot of opportunities we’re bidding. We’ve been brought in on a consulting basis on a number of places that are looking to do this, or at least evaluating that. And obviously, if you enter the consulting side first, you get a better opportunity to actually win the business, if it does go to tender.

And then last question here, do we have any further insight at this point in terms of within your Doble business, and specifically within Saudi Arabia, in terms of follow on projects beyond what you were initially engaged for for those first thousand transformers? Any further developments or viewpoints around how that may materialize there?

Well, a couple of things. We’ve got people in country now talking about the follow on contract, and we’ve talked all along that it’s going to be hopefully a multiyear deal. And we don’t have a contract there yet, but we are in discussions about that. Additionally, the best thing is the contract is going very well. The customer is happy. They’re getting what they wanted. We’re making decent money on it, and so I don’t anticipate there would be any reason for it not to go forward. Obviously, with the price of oil being down, that’s always a concern, but my view is this is pretty low down the food chain, if you will, and it’s going to save them money. So this is a place where, for a relatively small investment, they’re really improving the efficiency of their grid, which is something they need to do, and something that’s going to save them money. So we feel good about what’s going on over there. I think we’ve mentioned we entered an order with another utility in Saudi Arabia for a little over a million dollars. Both of those are getting a lot of interest around the Middle East, so we think this should be kind of a nice entry point for us that we’ll be able to exploit with a number of other utilities in the area.

Your next question comes from Ben Hearnsberger of Stephens.

I wanted to dig back into the Doble margin. So, last year, first half you did 24% margins, and this year, you’re kind of guiding to flattish margins, despite the fact that we’ve got some higher margin revenue rolling through with the Saudi contract. Could you just help me understand the puts and takes, maybe the mix last year versus the mix this year, and why the conservatism around the margin guidance in Doble?

I think one thing that happened last year is always kind of you never know what’s going to happen. We had this lease program where we leased these things on a yearly basis. On occasion, a customer will say, “Hey, I want to buy mine out.” And so I think we had that, I think it was in the first quarter of last year, where a customer came to us and said, “We want to buy that out.” While it wasn’t a huge contract, I don’t want to say it was all profit, but it was basically all profit. So you on occasion have those, which certainly helps your margin. We’ve not projected that that’s going to happen this year. There’s always that opportunity, but we haven’t projected that, because nobody’s come to us to date and said that’s something they’re looking to do. I’d say that’s probably the biggest difference.

And then maybe at a higher level, the five large platforms in filtration relative to three months ago, or the last call, are those expected to ramp kind of according to your initial expectations? Or has anything changed in the last three months with regard to those?

No, nothing’s changed. I’d say that the kind of plans that we’ve had with our customers have remained very consistent. In fact, as I’ve mentioned, we were just out there and real time update on those, and they all feel really good. So I don’t anticipate any change in those rollouts.

What about engineering expenses ahead of those? Are they running higher than maybe you expected? Or lower? Or no change?

No, I’d say that there’s really no change. In fact, the vast majority of that has been completed. The biggest project we had, obviously the A350, we’ve produced like 63 of those already. So it’s not at full scale production, but having that many, and now the plane’s flown, and so we’ve really got the heavy lifting done on that one. There’s always going to be some of the newer projects, and hopefully we’ll win some new projects that will be [unintelligible] recurring engineering [unintelligible] as well. But I would say as far as just the plan that we had going into these projects, and how we were able to execute on them has been consistent with what we’d anticipated.

And then Gary, can you tell us how much buyback authorization you guys have left?

It’s approximately $67 million. Obviously, that’s not what we’re shooting for at this point, but we started out at $100 million a couple of years ago, and we’re bleeding it down. So I think if you put it in the upper 60s, that would be fair.

And then cash from ops, looks like it was kind of flat. Was there some more working capital needs than expected? Or how do you expect that to play out throughout the year in terms of cash flow from op generation?

Obviously, with the step up in sales at the two units that really have inventory, you know, Doble per se doesn’t really push a lot of inventory out the door. They do have the F-series, but a lot of their work, the revenue is driven off the lease pool and the service contracts and things like that, where you don’t have a lot of inventory tied up. But as I mentioned earlier, when you step up the sales expectations in filtration by roughly $10 million and test by $7 million or $8 million, some of that obviously we already have in inventory. But we had a little higher inventory required inventory level to meet the near term demand, and we also had, when you look at last year, where we were in our payables for the fiscal 2014, we came into the year with a little higher level of account trade payables than normal, so we had to make those payments to pay them down. So that was an anomaly this year. When you look at the first quarter, we tend not to generate a whole lot of cash. So we expect that to obviously step up meaningfully in Q2, as we don’t have those same levels of working capital requirements.

And our next question comes from John Quealy of Canaccord.

For this Enoserv acquisition, my understanding, it’s a little bit more of a software business that runs I guess on top of some hardware, including Doble’s and some of Doble’s competitors. Just talk to us a little bit on how this either grabs share or changes the channel a little bit. Just trying to figure out, I know it’s not a big deal, but I think it’s interesting, given it’s more software service centric and it’s, I’d say, changing up a pretty staid channel. So I’m just interested in your thoughts there about how this can benefit ESCO in the channel.

A couple of things, and it’s really all a software business at the end of the day, Enoserv is. And so where they fit is they’re really helping relay tests. They do so on top of our products, as well as some of the competitors. We’re going to continue to sell that to the competitors. There’s been some concern, particularly by our competitors and some of our customers, that they’re going to get shut out from that. That’s not our intent. This has been a good business. But what it does, obviously, it does give us an opportunity where we can go in with a package to a customer or to customers that maybe have Enoserv software, but they don’t have hardware, or they don’t have our hardware, to try to push that. And so certainly, we anticipate not only continuing to sell the software, but maybe helping us strengthen our position in the relay test hardware area as well as incorporate it with our ARMS program project, as well as they’ve got a nice workshop, like we do, with some of our products, so we think even from the customer education and workshop type activity, that we’ll be able to bring that in as well. So I don’t think huge changes for Enoserv itself, but we do see this as an opportunity to provide a better product to our customers and to our future customers in this relay area.

And then just in terms of the M&A funnel, if you will, especially on that utility technology, Doble side, how big is that funnel? How well do you think it matures moving forward? Or do you think there’s other areas to do business in the filtration test space?

As I mentioned earlier, our focus is the utility space and that can be in addition to Doble, like the Enoserv acquisition was. Or it could be a business that could stand next to Doble rather than being part of Doble, but in that utility space that, as we’ve defined, where they’re using technology to kind of automate a lot of what’s going on with any utilities. But then certainly, we will continue to look at aerospace fluid flow as well. So we’re not going to limit ourselves to one or the other. I would say that today we’re not actively looking for additions in our test business, not because we don’t think that’s a great business, because we do, but our focus there is on executing the business as it stands today, and we’re going to focus our acquisition efforts on the other two segments.

And we have no further questions at this time.

Okay, thank you, everybody, for your interest, and I’ll look forward to talking to you on our next call.