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spk05: Good day, and welcome to ESCO Technology's second quarter earnings conference call. Today's call is being recorded. With us today are Vic Ritchie, Chairman and Chief Executive Officer, Chris Tucker, Vice President and Chief Financial Officer. And now to present the forward-looking statement, I will now turn the call over to Kate Lowry, Vice President of Investor Relations. Please go ahead.
spk04: 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 law. 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 8K 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.
spk02: 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. We're really thrilled to be adding Jan to our board. She brings a very broad skill set with decades of experience in leadership roles at Teladon, a diversified industrial company. Her focus on technology development to meet customer needs and drive growth will bring 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 the ongoing support and commitment to ESCO. Now let's switch to the discussion of the second quarter. Overall, we saw the business continue to build momentum. All three businesses delivered organic sales growth in a quarter. With consolidated revenue growth of over 23% in a 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 seeing some good growth from that market so far in 2022. There's another strong quarter for orders and revenue, increased 30 percent over the prior year to reach the highest level since before the start of the pandemic. Some of this is from an easy comparison we had last year, but it's clear that travel is picking up and that is helping drive a recovery in our business. The Navy and defense businesses had some declines in a quarter, but we see that more as timing and feel good about the outlook there. While there was a revenue growth in a quarter, there are still margin and operational challenges in A&D. Past due backlog is something we're watching closely as supply chain challenges have not let up. So all of the operations teams are highly focused on managing these issues to support our customers. On the margin side, the bottom line is for A&D Bottom line for A&D is we expect margins to improve as the recovery continues and volumes build in the back half of the year. Let's turn now to test business where we had a really great quarter. The sales growth strength continued with nearly 28% increase compared to last year's second quarter. We're seeing great growth in Americas and in Asia with the growth coming from several key industries and product lines. The other thing I'd like to highlight about the test quarter is the margin performance. We talked a bit last quarter about how important it was to see the margin improvement in this business, and it really came through nicely in the second quarter. The team at Tess continued to work the inflation challenges aggressively. It's definitely an ongoing battle, but nice to see the jump in the margins after all their hard work. Similar to Tess, we had a really solid quarter from the USG business as well. The underlying sales growth came in at over 35% in Q2, just phenomenal growth. And when you add in the acquisition impact, the growth jumps to north of 60%. Really great work by the teams there. And we had a pretty weak quarter for Doble a year ago, so the comparisons were a bit easy, but I would say we still saw the orders and sales momentum outpacing our expectations as the quarter closed out. I did want to comment on the acquisition integration status for Doble, Altonova, and Phoenix. We just did a strategic review with these teams a few weeks ago, and they've really done a great job of analyzing the product portfolio to determine which products should be offered in our markets around the world. Clearly, the acquisitions have brought us some new capabilities, and now we have good visibility on our product roadmaps globally. It's a long process, and there will be additional work as we move into execution mode, but we still see nice revenue synergies and are really happy with how the businesses are coming together. Overall, through the first six months of the year, we feel good about what we've achieved, and we continue to be on track for the expectations we laid out back in November. It does require a step up in EPS growth in the second half of the year. This is how our plan was laid out from the beginning of the year, and we've been working hard with all of our subsidiary teams to make sure the plans are in place and delivered. You all know that the operating environment is very challenging right now, but we will continue pushing hard to deliver the year. Certainly, the backlogs are supportive of the second half projections, and we are committed to delivering for our customers. And now I'll turn it over to Chris.
spk03: Thanks, Vic. So I'll go through the financial results now. We're going to do that with a 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 number three, 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 1.15 times 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 seven points of growth. So, again, we saw nice sales growth and really good strength from utilities, commercial and aerospace, commercial aerospace, and also 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 the 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 59 a year ago in the quarter. On an adjusted basis, that came down to 56. You'll recall that a year ago we had a gain as we resolved the Watertown building, and so that gain was pulled out of the numbers a year ago. This year we had one cent for various different adjustments So that gets you to $0.65 this year versus $0.56 a year ago, or growth of 16%. If we go to the next chart, we'll have a little look at cash flow here. We are down in cash flow year to date. So through the first six months, we're at $23 million versus just over $57 million a year ago. A couple of key things to point out in the balance sheet changes that are driving that. First is kind of our contract assets and liabilities that you see on the balance sheet. We have various milestone payments that we receive as our contracts are executed on. Last year, we had some pretty big payments come through. This year, we haven't had those yet. It's really just an impact of timing, so we would expect that to level out as we move forward. The other big impact is inventory. That's hurting us by about $18 million year over year. A couple things going on with inventory. First, as you all are aware, we're managing a lot of supply chain issues, as is everybody out there these days. What that means is sometimes to secure parts, we're maybe buying quantities that are a little bigger than normal. Other times we might have most of the parts we need to finish an order but not all of them, so we can end up with a little bit of stranded inventory. And then the other big factor is just the increased backlogs. I mentioned we have record backlogs right now. So we're bringing in a lot of inventory to get ready to kind of flush that backlog out as we move into the back half of the year. So those are the big drivers on the inventory impact to cash flow. The other items on this page, capital expenditures, were up about $7.5 million year-to-date. That really is driven by the Q1 purchase of the NRG headquarters, which we discussed three months ago. On the acquisition side, we've spent $15.6 million this year. That was for the NICO acquisition. in the A&D group. A year ago, we had done the ATM acquisition also in the A&D group for $6.7 million. Lastly, it's the share repurchase. You'll recall that back in November, we were reauthorized to spend $200 million on the new program. For the first time in several years, we started the buybacks again this year, and we've spent approximately $18 million year-to-date. If you go to the next page, we'll go through the segment performance. starting first with A&D. So you can see that the orders here were up 7%. If you look at the bottom right of the chart, you see the backlog at almost 397 million, which is nearly a 14% increase from a year ago. So we still have very healthy backlogs here really across the business, but certainly the commercial aerospace with many of the different platforms inside of there has begun to recover nicely, and that's a key driver in the numbers you see here. Same with sales. The sales growth was 3% overall. Commercial aerospace really led the growth in this quarter. As Vic mentioned, we kind of had some easier comparisons right now because last year was very weak, but no doubt we're seeing those businesses start to come back a little bit. Navy was actually, we saw growth there from the Globe and Westland businesses, but VACO had some pretty big declines in their Navy business. Again, kind of timing as they execute against some of their contracts. So they were overall, the Navy business was slightly down for us in the quarter. And then if you look at the EBIT margins, you can see at 17.1% down from 20.7 a year ago. I mentioned the back of sales decline, so we did have some deleverage on that and a little bit of mix inside of the commercial aero businesses being the main drivers for the margin decrease. If we go to the next page, we have the utility solutions group. Really just a great quarter across the board here, starting with orders. The orders almost doubled, so you can see 98% growth. That was built up with about $27 million of growth from the core Doble business, $12.6 million contributed from the acquisitions, and then the renewable business grew by $3.2 million. On the sales side, we were up 62%. Doble organically was up 39%. Altonova and Phoenix added $10 million. And then NRG was up 23%. So we continue to see good strength in the renewables market. I would also point out here that year-to-date, if you exclude the acquisitions, we're up 9%. So you'll recall that in the first quarter, we were pretty weak organically. A big recovery this quarter, and year-to-date, we're seeing solid growth there. Adjusted EBIT margins were up almost four points, so 17.7% compared to 13.8% a year ago. So obviously we saw good leverage on the revenue flow through. We are putting some price increases through here, which are helping to more than offset the wage and material inflation we see. We're also starting to incur some expenses related to trade shows and customer events that we're now doing in person. So that's bringing back a little more cost than we had in the prior year. If we go to the next page, with the test business, Similar to USG, just really strong performance here across the board. Orders up 25% to $55.4 million. We're really seeing strength domestically in the medical shielding, and then globally we're seeing good order input across the test and measurement project business. From a sales perspective, we're up 28% to $55.9 million. We've talked before about some of the power filter orders that have been coming in. definitely starting to see those flow out of backlog and into the sales line, and really seeing broad strength in the U.S. and in China in that business. On the margin side, we're up over two points to 15.2%. Again, it's a volume and price impact. Definitely still fighting inflation here as well on the material side and the wage side, but with the big growth and the price increases, we're able to drive the margin increase. So if we go to the last page, just a quick discussion on our guidance. Vic had mentioned this a little bit, but fundamentally we came out with guidance for the full year back in November of $3.10 to $3.20 per share. I would say in the first quarter we probably came in a little light of expectations. Here in the second quarter we outpaced expectations a little bit, so we're really pretty much on track. through the first half of the year and we feel like the full year range is still appropriate. That leaves us for the third quarter then with a solid growth projection of 25% to 35% or a range of $0.84 to $0.91. So that's really all I had on the financials, and I'll turn it back over to Vic.
spk02: Thanks, Chris. Since I touched on quite a few of my thoughts early in my commentary, I'll just offer a few 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. A lot of growth coming as we move into third quarter and beyond. We recently held 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 three-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. 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 are delivering. 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.
spk05: Thank you. To ask a question, you'll need to press star 1 on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from John Franz Reb with Sedodian Company. Your line is now open.
spk00: Good afternoon, Vic and Chris. Thanks for taking the questions. I'd like to start with the supply chain issues that you had with a 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? Sure.
spk03: Yeah, 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. I think we were able to kind of power through that and still obviously drive to the earnings and sales commitments we had made. But I think from our perspective, we're watching the supply chain close and kind of expecting everybody's 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, you know. And, again, everybody's got plans to get those past dues down. But we are, you know, we did see an increase in the quarter, and we'll continue to work them down from here.
spk02: Yeah, I'd just add, I think it's a constant dance 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 just normal supply chains, you would think about it with piece parts. In our aerospace and defense group, we were really challenged on outside processing. You know a lot of the products we make, you have to send it out, have some processing done, it comes back. The lead times on that outside processing have increased dramatically. you know, typically get back in two weeks. It may be taking 12 weeks. And so it's just a really advanced. But as Chris said, I think the good news is we've kind of dealt with those challenges, done a lot of workarounds, pulled some things in. And so we really do need to get that worked off. But, you know, 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.
spk00: Right, right. Great. And just to shift over to Altonova and Phoenix, 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.
spk02: Yeah, I think the biggest opportunities for us there are really doing some cross-selling. So as I talked about in all the comments, you know, 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 characteristics 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, other types of synergies we'd 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.
spk00: 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 seemed like a really good comeback there at Doble and everything.
spk02: Yeah, it was. You know, we were really disappointed going into the first quarter, and so we've really seen a lot of strength here. And a lot of it is, you know, anecdotal, if you will, because we do survey our customers to understand where they're at. People are getting back into the office. You know, the number of people that are saying yes or no about 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, but I do think that the momentum's there, and we're going to see that throughout the year. Again, the backlog in that business is probably as good as it's ever been. I think 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. I would say attendance was lower than it has been historically, but still pretty robust. And I would say that the people were there were very engaged and I think very excited about some of the things we're doing. As we've talked about on 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're able to get to the customers.
spk03: Yeah, and I would just add, I mean, I think as Vic said, you know, as we talked 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, you know, so I think there's just seems to be a little bit better of a, you know, 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, you know, 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, you know, really through the whole pandemic.
spk00: Great. Thanks, Chris. Thanks, Vic. I'll get back to you.
spk05: Thank you. As a reminder to ask a question, that's star one. Our next question comes from John Tanwanting with JCPenney. I'm sorry, with CJS Securities. Your line is open.
spk01: Hi, good afternoon, guys. Thank you for taking my questions in this quarter. 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 it might have, number one and number two. Is 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?
spk02: I didn't hear your first question, but I'll answer your second one. And 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, you know, there's some discretionary nature to it. But it does seem like it's getting back to where it was prior to the pandemic. So I think it's more something that's sustainable. I mean, if it 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.
spk01: Got it. And the first part was just have you seen that sustained through Q3 so far?
spk03: Honestly, we don't even have our first month yet, but, you know, so it's hard for us to comment kind of what we've seen in April so far. You know, the other thing I would point out, John, is that we are seeing some pretty big orders right now, too, for some of our, like, lease renewals. And we mentioned the press release that we had. One of the big duck orders, you know, which is the double 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 all the way up to five years. So we did see some pretty big of those in the quarter, which helped grow 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.
spk01: No, 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 that Doble had some issues, you know, acquiring electronic parts. We know China has had, you know, lengthening lockdowns. I'm just wondering if you're able to actually meet that demand that you have now.
spk02: Yeah, I think we'll be okay. I mean, like I mentioned earlier, we may be delivering a slightly different mix of products than what we anticipated, But, you know, they're working through these issues, but they're not insignificant. But, you know, they worked, you know, hard on finding things in a gray market and through reps and things like that. So you can find it's just a lot more work than it used to be.
spk03: Yeah, and I would say, you know, when we disclosed last quarter, John, that I think we said $5 million to $8 million that we had missed because of, you know, some of the past two backlogs. Billable was part of that. And their number inside of that buildup did get bigger here in the second quarter. So they still have, and they're used to kind of having zero pass due. You know, 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, you know, with the chips and other things that they need. But, again, a lot of other demand, obviously, that allowed them to have such a strong top line. But no doubt the supply chain is still kind of holding us back there slightly.
spk01: Okay, great. I understand. And then my last question, just could you talk about your preference for share repurchases now versus, you know, potentially more M&A at this point?
spk02: Well, I think we always would prefer to make, good acquisitions and we continue to look for things there. We are a little more aggressive than we have historically on the stock because we didn't really even 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 based on what we see from opportunities for acquisitions and so we review that on an ongoing basis. if we aren't able to achieve some of those things and we'll, we'll look at being more aggressive on the, on the buyback side.
spk01: Yeah. Yeah. Good. Pretty good.
spk02: I mean, you know, we've, uh, it seems like over the past three months has picked up a bit, uh, some interesting properties out there. So, you know, nothing that's going to close this week, but, uh, you know, there's a number of things that we're working on.
spk01: Okay. Great. Thank you guys. I'll go back to you. Right. Thanks, Sarah.
spk05: Thank you. I'm currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Ritchie for any closing comments.
spk02: Okay. I appreciate everybody's participation. We'll end the call now. Thanks for dialing in. I look forward to talking to you in the next call.
spk05: Ladies and gentlemen, thank you for your participation. You may now disconnect. Everyone have a wonderful day.
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