Good day, and welcome to ESCO Technologies Second Quarter Earnings Conference Call. Today's call is being recorded. With us today are Vic Richey, Chairman and Chief Executive Officer; Chris Tucker, Vice President and Chief Financial Officer. And now to present the forward-looking statement, I would now turn the call over to Kate Lowrey, Vice President of Investor Relations. 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 the 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. During today's call, we will be referring to a slide presentation that is currently available on the Investor Relations section of our website. Within the call, the charts are located in the download tab at the top right corner. Now, I'll turn the call over to Vic.

Thanks, Kate, and thanks, everybody, for joining today's call. I'd like to start off with a welcome to our new Board member, Jan Hess. We just finished up our Board meeting late last week and are really thrilled to be adding Jan to our Board. She brings a very broad skill set with decades of experience and leadership roles at Teledyne, a diversified industrial company. We're focused on technology development to meet customer needs and drive growth while bringing great perspective to our Board. She also has experience across many industries, including several of our core markets. Her knowledge and leadership will be a great asset for ESCO, and we're happy to have her on the team. I'd like to thank the entire Board for their ongoing support and commitment to ASCO. Now let's switch to discussion of the second quarter. Overall, we saw the business continue to build momentum. All 3 businesses delivered organic sales growth in the quarter. With consolidated revenue growth of over 23% in the quarter, it's clear that we have nice top line momentum. We also had another great quarter of order growth, with a 34% increase in orders compared to last year's second quarter. Our backlogs continue to grow with an increase of over $75 million since the fiscal year started. The backlog at the end of March was a new record for ESCO, so we feel good about the outlook for the balance of fiscal '22 and expect good momentum as we head into '23. Chris will get into some of the financial details in a few minutes, but I'll start off with some top-level commentary about each of the business segments. Starting with A&D, where the quarter was a bit mixed. We continue to monitor the commercial aerospace business closely, and we're…

Thanks, Vic. So I'll go through the financial results now. We're going to do that with the slide deck this time. We created a slide deck that you should be able to see on the webcast, and you can also access from the Investor Relations section of our website, as Kate mentioned earlier. Starting first on Chart #3. You can see on all the significant measures, we had nice double-digit growth. First, with orders, 34% increase this quarter versus the quarter a year ago. The book-to-bill of 1.15x was very strong and driven really by broad strength across the business. And we finished with record backlog at $671 million as of the end of March. Sales increased by 23.5%. That was built up with 16.5% organic growth and then acquisitions, adding another 7 points of growth. So, again, we saw nice sales growth and really good strength from utilities, commercial aerospace and also in the test group. On the adjusted EBIT dollars we were up 17%. We did see the margins drop a little bit. We'll go through that segment by segment. But fundamentally, we had A&D down a little bit and then good improvements from Test and USG. And then, if you look at the GAAP EPS, you can see, we were at $0.59 a year ago in the quarter. On an adjusted basis, that came down to $0.56. You'll recall that a year ago, we had a gain as we resolved the Watertown building. And so that gain was put out of the numbers a year ago. This year, we had $0.01 for various different adjustments. So that gets you to $0.65 this year versus $0.56 a year ago or a growth of 16%. If we go to the next chart, we'll have a little look at cash…

Thanks, Chris. Since I touched on quite a few of my thoughts early in my commentary, I'll just offer 2 more comments before we move into Q&A.We feel good about the start to 2022, and we're excited about the forecast we have out there. Lots of growth coming as we move into third quarter and beyond. We recently had our planning meetings with all the businesses. All the subsidiary teams have great product development programs that they're pursuing to deliver growth over the 3-year planning horizon. The end markets we serve continue to recover and exhibit good growth characteristics over the short to medium term. Our portfolio is well positioned as we move forward. There continues to be uncertainty in the economy as the pandemic continues to evolve. But as always, we'll focus on serving customers well or managing our profitability and balance sheet to deliver higher returns for the shareholders. To close out the opening commentary, I'd just like to thank all of our employees for the tremendous efforts so far this year. We all know how challenging an operating environment is. There are lots of challenges to run an efficient operation right now. Supply chains continue to be unpredictable and getting certain operations fully staffed is also challenging. In spite of all that, our teams have -- for that, I'm very grateful. I just want to extend a big thank you to the entire ESCO team. So with that, I think we're ready for Q&A.

[Operator Instructions]. Our first question comes from John Franzreb with Sidoti & Company.

I'd like to start with the supply chain issues that you had with the contractor in the previous quarter. I'm just curious, you said those might linger into this quarter. Did they -- to what kind of magnitude did they linger?

Yes. What I would say, John, is that we did see those past due backlogs continue to increase. So we talked a little bit last quarter about missing some sales as a result of that. So that overhang is still there. And I think we were able to kind of power through that and still obviously drive to the earnings and sales commitments we have made. But I think, from our perspective, we're watching the supply chain close and kind of expect everybody is working to burn the past dues down as quick as we can. Obviously that's important to keep our customers happy. But we expect that's a challenge we're going to have for probably the balance of the fiscal year. And again, everybody has got plans to get those past dues down, but we did see an increase in the quarter, and we'll continue working down from here.

Yes, I'd just add. I think it's a cost advantage for sure, because you don't know what's going to not show up from one day to the next. And the other thing that -- in addition to this normal supply chain, as you would think about with piece parts, in our Aerospace and Defense Group, we're really challenged on outside processing. Because you know a lot of the products we make, there a lot of other -- you had to send it out, have some processing gone, it comes back. And the lead times on the outside processing have been increased dramatically and it's something that we would typically get back in 2 weeks. It may be taken 12 weeks. And so, it's just -- it's really advanced. But as Chris said, I think the good news is, we've kind of dealt with those challenges. We do a lot of work around pulling some things in. And so, we really do need to get that worked off, but we'll get that done over time for sure. And having that big backlog that we have now is really helpful because you have a little more flexibility to pull things in, if you need to do that.

Right. Right. Great. And just to shift over to Altanova and Phenix, I'm wondering if you've identified any additional revenue synergies or cost saving opportunities as you've kind of got to know the businesses a little bit better?

Yes, I think the biggest opportunities for us there are really doing some cross-selling. So, as I talked about in all the comments, they've done really a lot of really good work to go through in each of the product areas. Look at the products trying to figure out the best characteristic of each of those and then working to make sure that we're selling the right products in the right area. When we made the acquisition, part of our internal review was what type of revenue synergies and other types of synergies we'll be able to get. And I would say, we have a lot of confidence that we're going to be able to achieve those based on the work that's been done so far.

Okay. And just the legacy USG business, can you talk a little bit about the relative strength in the business and how much confidence you have in that persisting through the balance of the year? It seems like a really good come back there at Doble and everything.

Yes, it was. We were really disappointed going into the first quarter. And so, we've really seen a lot of strength here. And so a lot of it is anecdotal, if you will, because we do survey our customers, understand where they're at. People are getting back in the office. The number of people that are saying, yes, [indiscernible] test equipment is probably up 40% from when we last did that. And so, it does seem like -- I don't think it's going to be linear, if you will. I mean, I think -- but I do think that the momentum is there, and we're going to see that throughout the year. And again, the backlog in that business is probably as good as it's ever been. And so, I think just -- we just need to keep the momentum going. I think it's there. We always do this big customer conference every spring. So we did that in person this year for the first time, obviously, in a couple of years. We see attendance was lower than it has been historically, but still pretty robust. And I would say, the people who were there were very engaged, and I think very excited about some of the things we're doing. As we've talked about in some of the earlier calls, we have introduced a number of new products. And I think that's part of what's getting the momentum for us is having some updated products we'll get to the customers.

Yes. And I would just add. I mean, I think, as Vic said, as we talk to the team there, they do feel like sentiment is starting to improve a little bit. Some of the external forecasts they track as well on overall utility usage continue to increase. So, I think there just seems to be a little bit better of kind of overall outlook for demand, and we kind of see that in some of the customer activity and interactions right now. So, as you mentioned, John, I mean it's -- and as Vic said, it's maybe not going to be perfectly linear, but we're hopeful to get to kind of a more stable, steady growth output as opposed to kind of a lot of the up and down we've seen over -- really through the whole pandemic.

Great. I'll get back in the queue.

[Operator Instructions]. Our next question comes from Jon Tanwanteng with CJS Securities.

My first one is on, maybe just to dig a little deeper to Doble. I was wondering if the demand you're seeing so far has sustained into Q3. I think you suggested you might have number one and number two, is it some of that pent-up demand where they're just catching up to where they needed to be? Or is that more just a resumption of the demand you saw pre-pandemic?

I didn't hear your first question, I'll answer your second one. I do think it's more just returning to normal. I'm not sure there's a huge amount of pent-up demand. I mean, with the test equipment, there's some discretionary nature to it, but it does seem like you're seeing back to where it was prior to the pandemic. So I think it's more something that's sustainable. I mean, if there were too much pent-up demand, I'd be concerned because that would be kind of a bubble, and we see this more as a recovery to the norm.

Got it. And the first part was just, have you seen that sustained through Q3 so far?

Honestly, we don't even have our first month yet, but -- so it's hard for us to comment on kind of what we've seen in April so far. The only thing I would point out, Jon, is that we had -- we are seeing some pretty big orders right now too for some of our like lease renewals. And we mentioned in the press release that we had one of the big DUC orders, which is the billable security offering. Those are great programs for us, but those are also kind of like they can be multimillion-dollar type orders that sit in backlog for a while. You're not going to execute those things over anywhere from a year to all the way up to 5 years. So we did see some pretty big of those in the quarter, which helped drive the orders. And again, that's a positive thing, but I just wanted to give you some of that color on what happened in the quarter.

Got it. That's helpful. My next question, just -- on the ability to meet those orders. I think you mentioned in the past quarter and maybe even before that, the Doble had some issues. Acquiring electronic parts, we know China has had lengthening lockdown. I'm just wondering if you're able to actually meet that demand that you have now.

Yes, we'll be okay. I mean, like I mentioned earlier, we may be delivering slightly different mix of products than what we had anticipated. But they're working through these issues, but they're not any significant, but they work hard on finding things in a great market and through reps and things like that. So you can find there's just a lot more work than he used to do.

Yes. And I would say, when we disclosed last quarter, Jon, I think we said $5 million to $8 million that we had missed because of some of the past due backlogs. Doble was part of that. And their number inside of that build up did get bigger here in the second quarter. So they still have -- and they're used to kind of having 0 past due. Typically their stuff kind of comes in and goes out from an order perspective with a lot of their boxes they sell. So they are definitely still seeing some supplier issues with the chips and other things that they need. But again, a lot of other demand obviously that allow them to have such a strong top line, but no doubt the supply chain is still kind of holding us back there slightly.

Okay. Great. Understood. And then, my last question, just -- could you talk about your preference for share repurchases now versus potentially more M&A at this point?

Well, I think we always would prefer to make good acquisitions, and we'll continue to look for things there. I mean, I think we are a little more aggressive than we have historically on the stock. Because we didn't really even kind of clean up our dilution for a number of years. And so we certainly want to do that. It's something we talk about every quarter. It really is kind of based on what we see from opportunities for acquisitions. And so, we review that on an ongoing basis. So, if we aren't able to achieve some of those things, and we'll look at being more aggressive on the buyback side.

How does the pipeline look now?

Pretty good. I mean, it seems like over the past few months has picked up a bit, some interesting properties out there. So nothing that's going to close this week. But there's a number of things that we're working on.

Okay. Thank you, guys. I'll go back in queue.

Thank you. I'm currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Richey for any closing comments.

Okay. I appreciate everybody's participation, and we'll end the call now. And thanks for dialing in. We look forward to talking to you in our next call.

Ladies and gentlemen, thank you for your participation. You may now disconnect. Everyone, have a wonderful day.