Good day, and thank you for standing by. Welcome to ESCO Technologies Q2 2026 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. On the call today, we have Bryan Sayler, President and CEO, and Chris Tucker, Senior Vice President and CFO. I'd now like to turn the conference over to your 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, thanks everyone for joining today's call. We are pleased to be with you this afternoon to discuss our second quarter results. I'd like to start the call by sincerely thanking all of our employees around the world. Your dedication, collaboration, and commitment continue to make the difference, and they were central to delivering another outstanding quarter. In Q2, we continued to see positive momentum across our business platforms as the pace of progress across our end markets continues to build. We had another strong quarter for orders across all three segments, and that sustained demand drove backlog to a record level, clear evidence of healthy end markets and the strength of our competitive position. From an operational perspective, Q2 delivered another strong performance, translating into exceptional results on both the top and bottom line. Revenue strength was broad-based across most of our served markets.
We see this quarter as further proof of the power of our strategy and our ability to execute with consistency, delivering sustainable value over time. As we announced in mid-April, we have reached an agreement to acquire Megger Group Limited. This acquisition represents a significant step in our portfolio transition. I wanted to give you a quick update on what's been transpiring since the announcement. We have begun the regulatory filings process in the required countries. While the timing of this process can be uncertain, our current expectation is that it should be completed in a timeframe that results in closing the deal in the first quarter of fiscal 2027. In addition, I wanted to let you know that we have already established internal teams with Megger, Doble, and ESCO staff working together to better understand key aspects of the integration process.
We expect that this early preparation and planning will be beneficial in setting out steps for a smooth and orderly integration of Doble and Megger with a focus on realizing identified synergies once the transaction is complete. Adding Megger to the ESCO portfolio creates a scaled utility solutions platform and strengthens our position as a trusted partner to utilities worldwide. This acquisition marks another meaningful step in enhancing our portfolio. We remain confident in the long-term outlook for our target markets. With durable demand drivers firmly in place, we are excited about the opportunities ahead. Chris will run you through all the financial details for the second quarter. Before that, I wanted to give you a few comments on each segment. We recently completed our annual strategic planning process with our subsidiary businesses.
As part of these meetings, we assess each of our end markets and our strategies to deliver above-market growth. My comments will focus on the current order strength that we are seeing, as well as some of the longer-term dynamics across our served markets. Starting with Aerospace and Defense. In Q2, we continued to see order strength on U.S. and U.K. Navy programs, both from the maritime business and organically at Globe, where we entered $24 million of Virginia class orders in the quarter for Block V.2 and Block VI content. We are seeing broad order strengths on commercial aerospace programs. As we have mentioned previously, commercial aerospace orders were a little soft last year as the OEMs worked through some internal issues.
It is nice to see the rebound in order strength here. We continue to see a positive long-term outlook across our A&D end markets, supported by strong demand visibility and multi-year program backlogs. In commercial aerospace, demand continues to outpace production, sustaining historically high OEM backlogs. Annual deliveries are expected to increase from approximately 1,400 aircraft in 2025 to more than 2,000 per year by 2028 and beyond. While we view industry forecasts with an appropriate conservatism, we believe that the OEMs are on a recovery path, and we are already seeing order momentum tied to early progress in raising building rates. In defense aero, elevated geopolitical uncertainty is supporting higher budgets and new program starts. The F-47 NGAD program represents a meaningful, long-cycle growth opportunity, and we have achieved strong early wins to secure attractive ship set content.
In naval markets, both the U.S. and U.K. remain committed to submarine modernization and fleet expansion, with increasing build rates and new platform development continuing to be key priorities. Turning to the Utility Solutions Group, we delivered another strong quarter of orders led by services, offline test equipment, and condition monitoring that supported double-digit revenue growth. These results were partially offset by lower renewables demand as developers continue to prioritize project completions ahead of tax credit sunsets later this summer. Looking ahead, we are encouraged by the outlook for utility solutions. Approximately 85% of segment activity is tied to utility capital spending, which we expect to remain elevated as electric utilities invest to meet rising electricity demand. This demand is placing increasing strain on an aging infrastructure, accelerating the need to maintain, expand, and modernize the electric grid.
Our diagnostic measurement, testing, and monitoring solutions help utilities improve reliability and performance across both new and legacy assets. Our condition monitoring equipment and high voltage test solutions are becoming increasingly important for utilities and OEMs that manufacture transformers and switchgear as they navigate the challenges of maintaining and expanding the grid. We remain bullish on the longer-term opportunity in the utility end market. I'll touch on the Test business, which carried its great start to the year into the second quarter. Orders were strong in the quarter, driven by EMC test and measurement in the U.S. and Europe, and filter orders for government-funded data centers and multiple industrial shielding projects. Over the longer term, we are seeing broad-based strength across most of test end markets and expect mid-single-digit organic revenue growth over our planning horizon.
Demand is being supported by a favorable regulatory and standards environment, rising requirements for electromagnetic compatibility and shielding performance across mission-critical applications. Compliance testing and evolving standards continue to drive increased test frequency and expanded certification requirements. We see sustained demand across EMC and microwave applications, healthcare, industrial shielding, and EMP filters serving utilities and secure data centers. We are optimistic about the continued opportunities to drive growth and margin expansion over time. With that, I'll turn it over to Chris, who will run you through the financial details for the quarter.
Thanks, Bryan. Everyone can follow along on the chart presentation. We will start on page three, which shows the financial highlights for the second quarter. The bar charts across the top of this page clearly show that the second quarter was another great set of results for ESCO. The key theme with ESCO's financial results right now is that the core company performance on an organic basis is quite strong, and the ESCO Maritime acquisition is adding significantly to that strong base company performance. It's been a powerful combination driving our results since the closing of the Maritime deal in April of 2025. Getting to the numbers, we start with orders, which increased 42%. Organic order growth was double-digit for all three business platforms, with overall organic order growth of 22%. Maritime added $53 million of orders or 20 points of additional growth.
On the sales side, reported growth was 33.5%, which was comprised of 13% organic growth and $48 million of sales from Maritime. On the profitability side, we saw adjusted EBIT margins improve by 370 basis points to 21.7% and adjusted earnings per share increased by 63% to $1.91 per share. Next, we'll go through the segment highlights, starting with Aerospace and Defense on page four. A great quarter across all metrics, starting with orders which came in at nearly $184 million compared to $96.5 million in the prior year quarter. Organic orders increased by 35% with strong growth from the commercial aerospace and Navy businesses. As stated previously, Maritime added $53 million of orders in the quarter, which brought reported order growth to just over 90%.
Sales in the quarter were $150 million, with organic growth of 14%. The strong organic growth was driven by strength from commercial and defense aerospace as well as the Navy business. It's a really nice performance from all parts of the core Aerospace and Defense platform. On the profitability side, we had good improvement to 28.6% adjusted EBIT margins, an increase of 160 basis points. Adjusted EBIT and adjusted EBITDA dollars increased by 78% and 72% respectively. Margin increases were due to positive impacts from leveraging sales growth and increased prices. Next, we go to chart five in the Utility Solutions Group. Orders here were up 10% in the second quarter, and that was driven by strong performance at Doble, where orders grew by 20%.
We did see weak orders performance at NRG, where the renewables markets continue to be very soft. Sales in the quarter were up a modest 3%. Doble sales growth of 11% was somewhat offset by declines at NRG. Doble continues to see good end market activity across a number of product lines serving their regulated utility customer base. Adjusted EBIT dollars in the quarter were up nearly 11%, with volume, price, and mix benefits at Doble more than offsetting margin drops at NRG. Next, we have the Test business on page six. This business had another terrific quarter, with orders up 21% and sales up more than 27%. This business is seeing robust market activity centered around U.S. test and measurement and power filter demand.
Adjusted EBIT margins improved nicely, increasing to 15.4%, which represents an increase of 300 basis points from last year's second quarter as the business continues to nicely leverage sales growth. Next is chart seven, where we have year-to-date highlights. The first six months have been very strong for ESCO as we make progress towards another record year. Order strength has been significant, with 30% organic growth year to date. All three businesses have delivered double-digit organic growth, with Aerospace and Defense leading the way. Sales have also been strong, with 12% year-to-date organic growth, led by Test at 27% and Aerospace and Defense at 14%. Adjusted EBIT margins are up 370 basis points year to date as all three businesses have delivered improved margins. Going to chart eight, we have cash flow highlights for the first six months.
Operating cash flow is up significantly at nearly $135 million, compared to $46 million in the prior year. A key driver has been increased advanced payments on large Navy contracts. Capital spending is down slightly compared to last year, and there's a $10 million use of cash on the acquisition line related to working capital and tax settlements for the Maritime deal. EBITDA leverage is low at 0.4 times, and we are positioned well for the debt requirements that will come with the Megger deal, which is currently expected to close in the first quarter of fiscal 2027. Our last chart is number nine, where we have updated 2026 guidance. With another strong quarter, we are increasing full year 2026 guidance. We now expect full year adjusted earnings per share of $8- $8.25 per share.
This represents an increase of 33%-37% compared to fiscal 2025. This is a substantial increase from our original November guide, and you can see from the bar graphs at the bottom of the page, we expect 2026 to be another record year and a nice continuation of the growth trend ESCO has delivered since fiscal 2021. That completes the financial summary, and now I'll turn it back over to Bryan.
Thanks, Chris. As you heard from our commentary, Q2 was another solid quarter, and we're looking at another year of strong revenue and earnings growth. With record backlog, we continue to feel great about the long-term prospects for ESCO. That concludes our opening remarks, and we'll now turn it over for the Q&A.
Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Tommy Moll of Stephens . Your line is now open.
Good afternoon, and thanks for taking my questions.
Hi, Tommy.
Bryan, on Test, you talked about mid-single digit sales growth over the planning horizon. I don't think that's different from what you've said previously, but you gave a lot of detail on some of the drivers for that today. I'm curious, just given some of the recovery there, is it fair to say you've got increasing conviction and visibility in that outlook? Just moving to the bottom line there, any change post your planning conference on what the margin aspiration would be for that segment? Thank you.
Well, thanks, Tommy. Yeah, listen, I do think it's a little bit of a change. You know, as you know, we're having a very strong year this year at the business. We have adjusted, you know I think historically we would've said 3-5, we're probably saying more like 4-6 now. This year we're gonna be well ahead of that. Yeah, I would say our outlook for the Test business broadly is improving. You know, I think what I've said to you all before is that we're driving towards 20% EBITDA margins in that business.
I think after what we've seen this year and what we saw in the five-year kind of review that we just went through, we think we're gonna get there a lot quicker than we than we might have thought before.
Thank you, Bryan. As a follow-up, I wanted to ask on Megger.
Yeah.
At the time of the announcement, you framed the accretion as I forget the exact word you used, Bryan , but accretive in the first year and significantly accretive in the other years. Two-part question for you today. Are the fair bogeys to assume they're something like low single digits on, just on a percentage basis in the first year, going to potentially even low double digits by the third year? Then second part of the question, how would you frame whatever return parameters you use to underwrite the deal, potentially on the ROIC side or some other framework that you used here? Thank you.
Thanks for the question. I think what we said, and what we still believe is that, on a earnings basis and EPS basis, it's going to be accretive in the first full year. Then it's gonna be significantly accretive in the year beyond that. I'm kind of doing math in my head, but it's approximately double digit accretive in that second year. I'm sorry, the second question was?
Whatever return.
Okay, yeah.
Related underwriting you used on the deal.
We, you know, so our kind of, our guiding star there is really making sure that our internal rate of return on the deal is gonna be better than our weighted average cost of capital. We do see a, you know, better than double-digit return on IRR basis. We do have a pretty good spread over our weighted average cost of capital.
Got it. Thank you, Bryan. I'll turn it back.
Very good.
Thank you. Our next question comes from the line of Scott Deuschle of Deutsche Bank. Your line is now open.
Hi, good evening. Bryan, can you characterize the demand that Doble is seeing in its condition monitoring business, and also characterize the pricing power that you have in condition monitoring?
Yeah, I would say that overall condition monitoring continues to accelerate. You know, I think I've said to you before that, you know, one of the characteristics we're seeing is that increasingly public utilities commissions around, you know, North America are allowing the condition monitoring tools to be built into the rate base. That has served to really accelerate the overall demand there. We are seeing, you know, really good demand characteristics. You know, it would be at the high end of what we are seeing in terms of our product lines in terms of growth. It's in the double-digit growth category.
Okay. Are orders for condition monitoring systems growing faster than the 20% headline number you put up for Doble's orders this quarter?
No, I don't think so. I would say that, you know, that's a year-over-year comparison number. I think we're seeing broad-based growth over our entire product line. You know, Scott, I think one of the things, you know, one of our theses here was that the amount of spending was gonna be the same, whether it went to renewables or it went to regulated utility piece. I think a little bit of what you're seeing is the softness that we're seeing over on the renewable side is really coming through as increased spending on the grid sustainment and, you know, grid modernization side.
Okay. Last question just on this topic, like, do condition monitoring systems help operators reduce their long-term hiring needs for electricians? If so, has that become a key part of the value proposition given the shortage of electricians that are out there today?
The answer to the first piece is yes. That, the way that condition monitoring operates is it allows you to only send a truck roll when you know there's an issue or something that needs to be responded to. Yes, it does reduce the number of truck rolls. In the grand scheme of things, I do not believe that that is the most important financial reason why a utility would wanna do this. What the condition monitoring allows them to do is get better real time data from the grid edge, so that as they're operating their system, they're able to in those peak load conditions, they're able to operate the system more efficiently.
They're able to, you know, push things a little bit harder than they might if they don't have those grid edge, you know, feedback. I think the bigger value in condition monitoring is they get more life out of existing assets. Meaning that they can defer capital investments and expensive replacements, and that allows them to put their investments more into needed areas and into grid expansion.
That's clear and really helpful. Last question. The declines in NRG accelerated this quarter by a pretty meaningful amount in both sales and, I think, orders actually declined by even more. Is there any hard evidence you can point to that this business is actually at a bottom? Is a business that can see a 30% sales decline a business that you want to be in long term?
Listen, I think that, you know, the challenge with renewables is they are pretty volatile and they're very responsive to a lot of the policy changes that we see in Washington. I think that's what we're experiencing right now, is that the removal or the imminent removal of the tax credits is changing behavior amongst developers. I'd like to believe that this is a bottom. You know, I've been around long enough to never call bottoms until I start seeing, you know, the trajectory in the other direction. It's possible it could be a little deeper. I also think it's possible that this could last a little bit longer.
Listen, long term, renewables are absolutely a piece of the overall, you know, grid solution. We do believe that, you know, this is a business that can be profitable and even at a lower level. The answer is yes, I think this is a business that we wanna be in. It's a business we continue to believe in, and it's a business that we do think is gonna return to growth, you know, in the second half of 2026 or, you know, beginning of 2027.
Okay. Is the business profitable at this level of sales?
It is. It is profitable. I think the challenge is that, you know, on a year-over-year comparison basis, you know, it was very profitable a year ago, and it's not as profitable now, but it's still profitable.
Understood. Thank you.
As a reminder, to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. Our next question comes from the line of Jon Tanwanteng. Your line is now open.
Hi, guys. Thank you for taking my questions and nice job on the quarter and the increased outlook. I was wondering if you could first talk about the commercial airline demand, particularly in consumables. I know you've seen a pretty strong trailing demand, but as we look forward, you see flights getting canceled, even entire airlines getting canceled in the case of Spirit. I'm just wondering if you see any pressure from that on the consumable bit of your business as you look into the future.
It's pretty early to see any impact from something like, you know, an airline going out of business. You know, there has been a fair amount of impact to, wide bodies, you know, coming in and out of the Middle East in terms of overall air traffic. We have not seen that manifest in any meaningful way in our order patterns. In fact, our orders, you know, this quarter were outstanding and, you know, really implied significant growth both on the aftermarket and on the OEM side. You know, we pointed in our, in our prepared remarks to, you know, some of the increases we're seeing on the OEM side. We're pretty excited about what we're seeing from Boeing, and others.
We do think that they're back on track and, you know, we're prepared to support them at even higher build rates. I would say, you know, we seem to regularly have this discussion about how conservative I am about taking their forecast to heart. I would say that our belief in what's happening there is improving and, you know, we're optimistic about what that means for our business.
Got it. That's helpful. Thank you. Then just on the revenue guidance, it looks like you didn't change it. I was wondering, you know, what are the moving parts in there, just given the Test has outperformed your expectations by so much. Are you just tracking towards the higher end of the range, or are there some puts and takes that we should be thinking about in the other segments?
I would say there's a few puts and takes. I mean, I think that, you know, you noticed that Maritime is slightly under $100 million year to date. And kind of the full year guide we had given there before was like $230 million-$245 million. They're gonna be probably the lower end of that range, you know, based on kinda how the first half has gone. I mean, overall, the business is still doing great. Profits are good, cash is good, orders are good. They're just seeing a little bit of some delays and slowdowns on some of the U.S. surface ship type programs. Again, I think that kind of brings it back to the lower end.
We're probably a little bit better in Doble than what we had thought a quarter ago. NRG is offsetting that, we're a little bit worse there. You know, we've got a few places in the Aerospace and Defense, mostly on the commercial aircraft side, and defense aircraft side where we're a little better. All these are kinda plussing, plus and minus, and yeah, we kind of end up in the same place.
Got it. Thank you. Last one, if I could sneak one in. Any thoughts on where, you know, inflation is going and your ability to push pricing through, to your customers? You know, what's built into your forecast today, what could be the risks there as we go forward?
Yeah. We certainly believe that we're able, you know, I think we've got a demonstrated history of being able to drive price faster than inflation. You know, we certainly keep an eye on that. It's a little bit early right now to call anything on, you know, oil prices or anything like that. You know, we are starting to see some signals there that may require us to kinda go back to customers with some price changes. You know, you can count on us to be pretty aggressive about the price side.
Great. Thank you.
I'm showing no further questions at this time. I would now like to turn it back to Bryan Sayler for closing remarks.
Well, listen, thanks everyone for taking our call. I mean, I think as you saw, we feel really good about our quarter. We feel really good about our year. You know, we're looking forward to talking to you again about another great quarter three months from now. Take care.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.