Good day and thank you for standing by. Welcome to the Third Quarter 2024 ESCO Technologies Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is 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 hand the conference over to our 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 happy to provide an update on a lot of the exciting things that are happening here at ESCO. We are pleased with the third quarter results and are particularly excited about the continued momentum across all of our business platforms. Order growth in the quarter was substantial, and we have record backlog of nearly $890 million as of June 30. This is an important indicator of the continuing strength of our end markets and our formidable competitive positions. By talking about the – before talking about the businesses, I want to briefly highlight some additions to our Board of Directors. We are fortunate to bring two highly capable individuals with deep backgrounds in the utility industry onto our Board. These additions to the Board will become effective upon approval of the Federal Energy Regulatory Commission. First is Penni McLean-Conner. Penni is an operating executive with Eversource Energy, a utility holding company based in New England, where she currently serves as Executive Vice President of Customer Experience and Energy Strategy. Penni is a registered licensed professional engineer and has held several positions with increasing responsibility in the utility industry since 1986. In that time, she has worked for Tampa Electric, Duke Energy Corporation and Eversource. We are also adding David Campbell to the Board. David is currently President, CEO and Chair of Evergy Inc., a public utility holding company headquartered in Kansas City, Missouri. David has held several executive positions at a number of electric and integrated energy companies in Texas as well as in independent energy resource and investment company. Prior to that, David worked for nine years at McKinsey & Company, the last four of which he served as a partner. We are thrilled to bring Penni and…

Thanks, Bryan. Everyone can follow along on the chart presentation. We will start on Page 3, where we'll have overall financial highlights of the quarter. The top of the chart looks good here with all the bars moving in the right direction. Starting on the upper left side of the chart, you can see that order growth in the quarter was tremendous at 46% as all three segments had book-to-bill ratios of over 1.1, which resulted in a record backlog of $889 million. Next is sales, which were up 5%, comprised of a 4% organic growth and a 1 point contribution from the MPE acquisition. Adjusted EBIT was up 50 basis points in the quarter and adjusted EPS improved by over 6%. Moving to the next chart, we will cover the A&D segment. You can see this segment was a key driver of overall order growth with an increase of 79%. We were up against a lower comp from last year's third quarter, but still saw excellent order intake on the Navy side with VACCO bringing in over $40 million of Navy orders during the third quarter. Additionally, the commercial and defense aerospace orders continued to deliver strong growth at both PTI and Crissair. On the sales side, there was an increase of nearly 11% with growth led by Navy and Aerospace. Adjusted EBIT margins for the quarter came in at 18.7%, which was a decline of 220 basis points. We saw additional margin declines in the quarter from the VACCO space business with additional profitability challenges on developmental contracts. This cost us approximately $2 million against the guidance that was provided last quarter. Additionally, we had unfavorable mix in the quarter at PTI driven by timing of sales on different OEM and aftermarket platforms. Moving on to Chart 5.…

Thanks, Chris. As you heard, we've had another good quarter, and we're looking at another year of double-digit earnings growth with record backlogs. We continue to feel great about the long-term prospects for ESCO. Before going into the Q&A, I want to give a quick update on the Signature Management & Power acquisition that we announced back in July. We have completed all of the required regulatory filings in both the United States and the United Kingdom. The timing on those processes can be uncertain. So we'll have to wait and see what happens. But we've been through this before and continue to believe that we can close the deal in the first quarter of fiscal 2025. This is a very exciting deal for ESCO as we bring on a talented group of employees, a key set of technologies and the ability to expand the way that we serve the Navy market in both the U.S. and the UK So that concludes the opening remarks, and we can start the Q&A now.

Thank you. [Operator Instructions] Our first question comes from the line of Tommy Moll with Stephens Incorporated. Your line is now open.

Good afternoon and thank you for taking my questions.

Hi, Tommy

Hi, Tommy

Bryan, a strong quarter on Navy orders once again. And my question is, does this show the realization of the upsized shipset content you discussed early in this calendar year, $45 million is right around where I had it pegged. Are there additional shipset awards here? Any context you can give us on what you just reported would be helpful. Thank you.

Tommy, no, the orders we got in the prior quarter are mostly Navy spares and other pieces. We are still anticipating the larger orders that we've been talking about. Unfortunately, I can't make any news on that, but I'd say we're getting close.

Okay. And then that leads me to my follow-up here, Bryan. Fully aware that this is not the quarter to give formal guidance for 2025, but I'm just doing some simple math here. Your cumulative orders year-to-date across A&D, I'm getting to something like a 50% increase year-over-year. Now the timing of that record backlog unlocking, we obviously can't see from our side. But is there any reasonable scenario where that segment doesn't grow revenue double-digits next year?

Just to be clear, you're talking specifically about the Navy piece?

I was – well, yes, I shifted there. That was at the A&D segment level is what I was describing.

Got you. You're right. It's too early to give guidance. But I don't think your math is off in any significant way.

Sure. Any context or insight on big pieces of that backlog that may have a more extended time line to unlock even if qualitative, not quantitative. Just anything you would highlight for us. It's a pretty big number at this point.

Yes, I would say that the way you want to think about that is on the commercial and military aircraft side, you generally we're quoting something like a little bit less than a year of lead time out of those factories. And so generally speaking, the aircraft backlogs will convert in about a year. The Navy backlogs do go out a little bit further. I would say, what we have in place right now is probably looking out 18 months to two years. These larger orders that I've been describing will – the award will go out for multiple additional years. So what we're seeing is a steady ramp rate of production for the Navy. And I think that, that's certainly on that double-digit path.

Thank you, Bryan. I will turn it back.

Thank you. [Operator Instructions] Our next question comes from the line of Jon Tanwanteng with CJS Securities. Your line is now open.

Hi, thank you for taking my questions. My first one is just on the VACCO Space business. You gave a revenue number for it, but I was wondering, on average, what the profitability of that business looks like on a normalized basis?

Yes, John. I would say, we're probably not going to disclose that specifically. And honestly, we're still working on some of the carve out around that. But I would tell you, it's certainly below segment averages overall.

Okay. Great. And the number that you're excluding from Q4 just in terms of the profitability erosion, is that the expected EBIT in the segment for Q4?

It's – it would be a potential delta of negative EBIT beyond kind of what's in that guidance of $410 million to $420 million.

And that's a risk item. It's – we don't know that that's going to happen. We just wanted to make sure we clearly identified the kind of downside there.

Okay. Can you tell us a little bit more about what's going on in the program that is having this additional cost and the nature of it?

Yes. So I think that we're still on the same path that we've been talking about for the last few quarters. We have a small number of firm fixed price development programs that we are working through. And so first of all, we're not taking new programs like that. So it's a finite number of programs and what's happening is that we've accepted some requirements that are a little more challenging than normal. And so as we go into the Test and if the products are when they perform as expected, we're going to be fine. But if we do have additional go backs, it could cost additional money in terms of both engineering time and fabrication and test time. And so that's – what we're trying to do is put a kind of a bottom end on what that would look like.

Got it. Okay. That's helpful. Thank you. And then you brought on two new directors from the energy space or the utility space. So I'm just wondering, is that prelude to just a bigger focus on that segment, just given the power demands that we're seeing and growth that we're seeing in the next couple of years from all these EVs and data centers and everything that's going on?

Yes. So listen, our Board has a really wide range of experiences. And we've had a couple of Board members that have retired over the last year or two. So as the nominating governance committee was kind of going through and determining where do we have strengths and where do we have gaps. One of the things that we identified is the big area of focus for us is going to be aerospace and defense. We've got really good coverage there. We've got three directors that have worked all sides of that, both at the big primes in the government side and at Tier 1 suppliers. So we feel really good about our coverage on the A&D side, but we've only got one independent director on the utility side. And he's done a great job. He's kind of been instrumental in helping us build that segment out over the last seven or eight years. But we felt like that bringing on two new board members from that segment would be appropriate. And one of the things – one of the characteristics of that is that folks out of that segment come with a broader set of cybersecurity skills and things like that, that we also found to be quite valuable.

Understood, thank you. I’ll jump back in the queue.

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

Did Jon Tanwanteng jump back in for questions?

I see he did.

Yes, we're seeing one on the screen, yes.

Yes. Jon, your line is now open again.

Great, thanks. I was just wondering if you could talk about the test business and the incremental improvement you're expecting to see next quarter. I mean, you had some pretty good jumps from Q1 to Q2 and Q2 to Q3, but what kind of – what degree of recoveries do we think you can see that in those markets as we go forward?

Yes. Listen, I think that as we've communicated a couple of times, the big downstrokes here were in China. And on the wireless side, we've kind of absorbed that now. The good news is we're seeing good growth out of the balance of the business, particularly in the U.S., particularly in our medical, in our EMP businesses. And the team has done a really good job of kind of taking cost out of the business and really refocusing on marginal returns. So in terms of expectations, what you should see is continued sequential growth for both revenue and margin. So I would kind of use that 16.5% is kind of your starting point and move up from there.

Got it, thanks guys.

Thanks Jon.

Thank you. Our next question comes from the line of Tommy Moll with Stephens. Your line is now open.

Hi, I figured out I want to follow up on your guidance for the full year EPS, you took a little bit out. And I'm just curious, was all of that delta explained by the VACCO space trends? Or were there any other factors driving that, Bryan?

Yes. Tommy, this is Chris. That was the majority of it was kind of what was embedded in that third quarter. I mentioned in my comments, we took about a $2 million hit there in the third quarter versus what we had expected when we gave that guidance at kind of the beginning of the quarter. So that flows through the year. That's the bigger part of it. And then I would say that the test business is a little bit weaker than whenever we laid out the guidance over the last quarter or so, not a big shift, but we've seen the fourth quarter come down slightly. We still expect some nice sequential improvement there, but just not as quite as much as we had baked in before.

Okay. Thank you, Chris. And while we're at it, I might as well throw one in on Doble, hopefully not overstaying my welcome here. But it looks like you were up a little bit year-over-year and there were some puts and takes within the Doble umbrella. So whatever insight you can provide for us there would be helpful. And at a higher level, I'm curious if we look across the utility end market this quarter, it does seem like there are more puts and takes this time around versus a quarter ago. And I don't know if you feel like that may be calendar/election uncertainty or if the end market may be slowing a bit. Just any kind of insight you have would be helpful.

Well, yes, yes, I don't think there's been more or different puts and takes here. I think that within the Utility Solutions Group, you have seen some softening on the renewable side compared to the prior year. I want to restate the prior year was an incredibly explosive comp to comparison quarter for both orders and revenue. So on the renewable side, that came down a little bit. Doble was up by a lot. And we're seeing just continued uptake on our services and our hardware as utilities are really pushing hard to maintain their current assets. They're facing big growth in demand and they're somewhat restrained on their ability to add capacity to their system. So what they're really focused on across the board is maintaining their current assets, and that really plays right into the wheelhouse for Doble. So we've had really good growth at Doble. USG is up 8.5% over the prior year. Doble was up 7% and NRG was up 13.7%. So our perspective is that, that's going to continue. You mentioned the election. We get that question from time to time. We – it's one of many factors that we think about that could have an impact on our business, technical, regulatory, economic issues. And we've assessed it, and we frankly don't see a significant benefit or a significant threat to any of ESCO's businesses based on the outcome of the election. So bottom line is we're not rooting for anybody here, and we don't feel vulnerable either way it goes.

Thank you, Bryan. I'll turn it back and appreciate the time.

Thank you. At this time, I'm showing no further questions, and we'll turn it back to Bryan Sayler for closing remarks.

All right. Thanks, everyone. I really appreciate you taking some time. We're excited about what's happening at ESCO, and we'll talk to you next quarter.

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