ESCO Technologies Inc.

Good day and welcome to the ESCO Technologies Q1 2020 Earnings Conference Call. Today's call is being recorded. With us today are Vic Ritchie, Chairman and CEO, Gray Munster, Vice President and CFO. And now to present the forward-looking statement, I would like to turn the call over to Kate Lowry, Director of Investor Relations. Please go ahead.

Thank you. Statements made during this call regarding the amounts and timing of 2020 and beyond, revenues, EPS, adjusted EPS, EBITDA, adjusted EBITDA, debt, growth, profitability, ROIC, shareholder value, future Block 5 orders, success in completing additional acquisitions, and other statements which are not strictly historical are forward-looking statements within the meaning of the safe harbor provisions of the federal security laws. These statements are based on current expectations and assumptions And actual results may differ materially from those projected in the forward-looking statement 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 8K 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 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 Vic.

Thanks, Kate. Before I hand it over to Gary to discuss the first quarter financials, I'll make a few comments. Clearly, the highlight of Q1 was completing the sale of the packaging business and receiving $191 million in cash before the quarter end. Gary will discuss the gain from the sale as well as other accounting matters related to the discontinued operations noted in the financials. As you saw in the release, we renamed our filtration fluid flow group Aerospace and Defense, which we will refer to as AMD going forward. Following the Globe acquisition last July, and in conjunction with the divestiture of the packaging segment, we decided to make this change. Aerospace and Defense better reflects the products in markets and customers in this segment. Additionally, we believe this is a more direct comparison to some of our peers in these markets. We have not changed the group's legal entities, reporting structure, or management relationships from what was previously presented as filtration. Moving on to our operations, I'm pleased with our start to the year as we delivered a solid first quarter by beating expectations on sales, adjusted EBITDA, and adjusted EPS, which beat the top of our guidance by 3 cents. We did better than planned in A&D and test as both businesses delivered higher sales volumes along with a favorable sales mix, which drove increased profits. USG sales were impacted by the monthly timing of orders, which moved some of the expected Q1 sales into Q2. USG orders in December were strong, and we expect this trend to continue, which supports our outlook for the balance of the year. I think it's safe to assume that the disruption and inefficiency surrounding the Q1 move to build this new headquarters building also contributed to the shortfall. Within A&D, the submarine market continues a solid outlook and we expect to show meaningful growth over the balance of the year. A significant amount of Block 5 orders have been received as reflected in our Q1 orders, with more expected over the balance of the year. VATCO, Westland, and Globe will benefit from these orders as the Virginia class continues to expand its build rate and our content on these boats continues to expand. We anticipate orders for the Columbia-class subs in the back half of the year. On the headwind side, we called out the impact of the 737 MAX production issue and how it impacts us in total. While certainly not good news, given our relatively modest dollar content on that platform, we can absorb the earnings impact with other well-defined opportunities within AMD. While our outlook for the year remains the same as communicated in November, It was good to start the year a little stronger than expected, as that takes a little pressure off of our second half ramp up. On the M&A front, we continue to evaluate several actual deals, and there's a lot of activity underway in this area. The news of the packaging sale also brought us a few new opportunities for investment bankers, and we continue to pursue ideas that we've identified through our operating units. We continue to look for complementary businesses to acquire in the aerospace and defense and USG segment where we can add to our global distribution network. Additionally, we'll look to expand our USG solutions offerings into adjacent markets through a combination of internally developed products and software supplemented with acquisitions. Our board is very supportive of our M&A strategy, and our current balance sheet provides us with plenty of liquidity to allow us to add to our existing portfolio. So in summary, we delivered a strong first quarter. The balance of the year looks solid, and we're working hard for some M&A upside. I'll now turn it over to Gary.