Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- ESCO Technologies Inc (ESE, Financial) reported substantial order growth in the third quarter, with a record backlog of nearly $890 million as of June 30.
- The Aerospace and Defense segment showed strong performance, with a 79% increase in orders, driven by significant growth in Navy orders.
- The Utility Solutions Group experienced a 17% increase in orders, with Doble delivering a 30% increase due to high demand for service work and testing.
- The Test business showed sequential improvements in both sales and margins, with adjusted EBIT margins reaching 16.6% in the quarter.
- ESCO Technologies Inc (ESE) has completed all required regulatory filings for the Signature Management & Power acquisition, expected to close in the first quarter of fiscal 2025.
Negative Points
- The VACCO space business is facing profitability challenges, with potential EBIT erosion estimated between $5 million to $7 million.
- The Test business experienced a decline in sales by 5% on an organic basis, although it showed sequential improvement.
- Adjusted EBIT margins in the Aerospace and Defense segment declined by 220 basis points due to additional margin declines in the VACCO space business.
- The Utility Solutions Group saw a reduction in orders for NRG compared to last year's record third quarter.
- ESCO Technologies Inc (ESE) has not yet secured larger Navy orders that were anticipated, indicating potential delays in expected revenue.
Q & A Highlights
Q: Bryan, a strong quarter on navy orders once again. Does this show the realization of the upsized shipset content you discussed earlier this year? Are there additional shipset awards here?
A: The orders we received are mostly navy spares and other pieces. We are still anticipating the larger orders we've been discussing, but I can't provide any new updates yet. We're getting close.
Q: Is there any reasonable scenario where the A&D segment doesn't grow revenue double-digits next year, given the record backlog?
A: It's too early to give guidance, but your math isn't significantly off. The commercial and military aircraft backlogs generally convert in about a year, while navy backlogs extend out 18 months to two years.
Q: Can you provide more details on the VACCO Space business's profitability and the expected EBIT impact for Q4?
A: We won't disclose specific profitability, but it's below segment averages. The potential EBIT impact is a negative delta beyond the guidance of $410 million to $420 million, and it's a risk item, not a certainty.
Q: Could you elaborate on the challenges faced by the VACCO Space business and the nature of the additional costs?
A: We have a small number of firm fixed price development programs with challenging requirements. If products perform as expected, we'll be fine, but additional go-backs could incur extra costs in engineering and fabrication.
Q: With the addition of two new directors from the utility space, is there a bigger focus on that segment due to growing power demands?
A: Our Board identified a need for more utility expertise. We have strong coverage in aerospace and defense but needed more on the utility side. The new directors bring valuable skills, including cybersecurity expertise.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
