Good day and welcome to the ESCO Technologies First Quarter 2019 Earnings Conference Call. Today's call is being recorded. With us today are Vic Richey, Chairman and CEO, Gary Muenster, Vice President and CFO. Now to present the forward-looking statement, I would like to turn the call over to Ms. Kate Lowrey, Director of Investor Relations. Please go ahead.
Thank you. Statements made during this call regarding the amounts and timing of 2019 and beyond EPS, adjusted EPS, EBITDA, adjusted EBITDA, cash flow, debt, growth, profitability, sales, costs, productivity, tax rates, 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 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 operation 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, 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 their 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 provide some detailed insight into the first quarter financials, I want to make a couple of comments. We had a solid first quarter across the business, and our outlook for the year remained the same as we communicated entering the year. It was a good start to the year with the first quarter being a little stronger than expected, and this strength took a little pressure off the normal second-half ramp-up. Once again, I think the first quarter results demonstrate the earnings power of the business at higher sales volumes and continue to be a testament supporting our multi-segment, multi-industry strategy. We had solid performance across almost every business. The only soft spots we had were in our packaging business and in the renewable energy space, both of which we think are simply timing-related.
As we look to the rest of the year, our solid order performance in Q1 enhances our confidence in meeting our commitments for the year. I'll now provide a little insight into the individual businesses. The aerospace, space, and navy markets are all strong and will look to remain that way for the next several years. Aircraft manufacturers continue to ramp up production across several airframes, and the aftermarket and recently entered MRO market both remain strong. Additionally, we continue to identify new opportunities within our space business, and our outlook for increased submarine production shows growth for many years to come. The previously announced move of VACCO's aircraft products to PTI is on schedule and is expected to be completed in the third quarter. Our utility business is in a solid position, and the acquisitions we've rolled into Doble over the past several years are making a meaningful contribution.
We continue to look for complementary businesses to acquire in the utility space, which have products and services that we can add to our global distribution network. Additionally, we will look to expand our USG solution offerings into adjacent markets through a combination of internally developed products and software supplemented with acquisitions. As noted in the press release, we completed the sale of Doble's Watertown, Massachusetts, facility during the quarter. We've identified several facilities in Marlborough, which will fit our requirements. This will allow us to co-locate all of our Boston area personnel in a single purpose-built facility, and we're confident this move will improve efficiency, enhance our competitiveness, and enable us to better service our customers. Our test business is off to a solid start for the year.
The core business remains solid, and the growth markets we are currently accessing include 5G, electric vehicle motor testing, and EMP shielding. The recently implemented ERP system has enhanced our ability to more effectively manage the business and improve their forecasting accuracy. In January, we moved our existing Chinese operation into a new facility in Tianjin, which will enhance our productivity and increase capacity to support future growth in this region. We recently signed a long-term fixed-price lease on this facility, which gives us operating stability and a known cost structure. The packaging business always has a relatively soft first quarter due to project timing, primarily in our European business. This year was no exception. But with that said, we remain confident in their ability to hit full-year forecasts. The European consolidation activity we announced going into the year is on track and should be completed this summer.
A good number of our employees agreed to relocate to our other locations, which will aid in a smooth transition. As you recall, the acquisition of Plastique was primarily to access the European medical and fiber markets, and today we're seeing a lot of positive momentum in both areas. Across Europe, the move from plastic to a more sustainable solution such as fiber is happening quickly, and we are well positioned to take advantage of this opportunity. Additionally, for our European growth, last year we built a state-of-the-art medical clean room in Nottingham, and we will have another one in place this year in Poznań, Poland. On the M&A front, there continues to be a lot of activity with opportunities being brought to us by investment bankers and with businesses that we've identified through our operating units.
Since activity on this front doesn't always result in completed transactions, we have taken a prudent approach and have not included any non-organic growth in our 2019 forecast. But with that said, we're working hard to make something happen on this front, and I am encouraged by the number and quality of opportunities we're currently evaluating. Our board is very supportive of our M&A strategy, and our current credit facility provides us with plenty of liquidity at a reasonable price. In summary, we delivered a solid first quarter. The balance of the year looks good, and we're working hard for some upside. I'll now turn it over to Gary.
Thanks, Vic. Since the Q1 results of both periods presented were impacted by several unique non-operating items that we called out in the previous release, such as the gain on the Doble building sale, certain restructuring and cost reduction actions that we've undertaken, and last year's impact of U.S. tax reform, I will focus my prepared remarks on the adjusted numbers as these are more relevant measures of our operating performance when compared to expectations into prior year. Also, using adjusted numbers is consistent with our previous financial statement presentations and related management commentary for the past few quarters. As noted in the release, we reported Q1 2019 adjusted EPS of $0.47 a share, which is $0.02 above the top of our guidance range of $0.40-$0.45 a share.
It's $0.03 above the analyst consensus estimate of $0.44, and $0.14, or 42%, above Q1 2018 adjusted EPS of $0.33 a share. I commented during the November earnings call that we ended fiscal 2018 by delivering an extraordinary fourth quarter when measured on nearly all financial metrics, and I highlighted that Q4 was our best quarter on record. When you end the year with a quarter of that magnitude, one can be concerned that the Q4 performance was achieved at the expense of the succeeding Q1, which in our case, Q1 is historically our lowest quarter of the year. So for Q1 of 2019, I'm very pleased to report that not only did we follow up on an exceptionally strong Q4 with another solid quarter in Q1, but we also delivered the highest first-quarter sales, EBIT, EBITDA, and adjusted EPS in our history.
Comparing Q1 of 2019 to Q1 of last year on an adjusted basis, we increased sales five percent with both filtration and test up 10% each. We increased adjusted EBIT by 21%, increased adjusted EBITDA by 14%, increased adjusted EPS by 42%, and paid down net debt to $179 million and lowered our leverage ratio to 1.5. The increased profit percentages that I mentioned are well above the percentage increase in sales, which clearly demonstrates the earnings power we can deliver when we grow our sales. As Vic mentioned, exceeding the top of our expectations for Q1 bodes well for the balance of the year and provides us with protection against any unanticipated downside surprises. Since the earnings release lays out the key points and highlights of the Q1 results, I'll dispense with repeating them here so we can get to the Q&A.
For my final comments on the quarter, I also remain confident with our fiscal year outlook and our ability to generate cash flow from operating activities to further reduce debt. Coupled with our credit capacity and available liquidity, we are well positioned to effectively execute our M&A strategy to support further growth, both organically and through acquisitions, all while maintaining our focus on ROIC and increasing shareholder value. Now I'll turn it back over to the operator to begin the Q&A section.
Thank you, ladies and gentlemen. If you have a question at this time, please press the star then the one key on your touch-tone telephone. Again, if you would like to ask a question, press the star then the one key on your touch-tone telephone. And our first question comes from Jon Tanwanteng with CJS Securities. Your line is open.
Good afternoon, gentlemen. Nice quarter, and thanks for taking my questions.
Hi, Jon.
Just any impact from the government shutdown on your businesses? It doesn't seem like it, given your guidance, is pretty in line with what you said last quarter, but I just wanted to make sure.
No, there's no impact.
Okay. Got it. And then as we look at the NRG business, which has struggled a bit over the last year, how do you see the prospects for that in the next year or so? What's going on in that industry and that market?
Yeah, I think long-term it's still a very solid business. I mean, obviously, the march towards renewables is kind of unrelenting, if you will, and that's good. We just had a couple of issues that the market, I think, is kind of taking a little bit of a pause, and part of that as a result of the tax law change, and a lot of the developers really focused on getting projects that had already started completed in that time frame. And so as you know, much of NRG's products really goes on the front end of that. So I think some of those things just got pushed out a couple of quarters.
I think long-term, we're still very confident in the business, and we're working on some new product developments, which I think will expand our product offering in that area and give us a little more stability as the market moves forward.
Okay. Great. Thank you. And then I didn't hear you mention the VACCO move of the aerospace business. Is that ahead of you still, or did you do that in the quarter?
No, I'm sorry. I did mention that. It is on track. We'll get that done. We're due to start manufacturing the PTI facility in May.
Okay. Great. And then finally, just a quick update on the M&A environment. I know you mentioned some in your prepared comments and in the press release, but just any color on the valuations that you're seeing out there, the number of opportunities compared to where you were maybe 90 days ago?
Yeah, I would say that it's picked up a bit. I mean, the fourth quarter, our first quarter is always a little light because of the holidays and everything, and activity kind of stalls a little bit. So I would say I'm pretty happy with what's going on. As far as the valuations, on the aerospace side, particularly if they get into, it's an auction format. They get pretty expensive. So where we've really excelled is to be able to find smaller privately owned businesses where the owner really wants to make sure that the employees go to a good place and it's a good fit rather than just going to the highest bidder. And so we really worked those pretty hard through our operating units where they've identified those types of businesses. And so when we do that, the multiples don't get quite as bad.
We're also seeing some things on the utility side as well, and that's a mix of things that people are bringing to us and companies that we've identified as well. So honestly, it feels pretty good right now as far as the number of opportunities that are out there. And these kind of unfold on their own pace, unfortunately, and you can't kind of force those things. But we're staying busy looking at a number of things.
Okay. Great. I'm sorry. One more, and I'll jump back in queue. You've seen a high-profile bankruptcy in the energy sector, mostly due to the lack of equipment monitoring and reliability out west. Are you seeing increased interest in your Doble business due to utilities being concerned about the quality of their equipment and safety that's as a result of under-maintenance and not quite paying attention or investing enough in their grids?
I think that will happen. We've not seen a lot of it yet. But between something like that where certainly maintenance is an issue, I mean, look at companies that have gotten fined recently for not meeting NERC requirements. We think those types of things really play to our strengths. So while they're not immediate, certainly, I think that there will be a refocus on those areas in the fairly near term because, look, utilities would spend a lot more on maintenance if they didn't have other priorities. And priorities get shifted by a number of reasons, and one of those is regulatory. And certainly, I think the regulatory environment in that area not everywhere, obviously, but in that area, in particular, does seem to be tightening it up a bit.
As a result of that, I think we will see more opportunity and capital spending in the maintenance side of things.
Great. Thank you very much.
Yeah, just to add one thing. It's not only regulatory, but it's kind of public perception as well. If you have issues like you've had in California and people start putting pressure on utilities to do things differently, that can be as strong or stronger than regulatory requirements.
Thank you. Again, if you would like to ask a question, press the star then the one key on your touch-tone telephone. One moment for questions to queue up. I'm showing no further questions at this time. I'd like to turn the call back to Mr. Vic Richey for any further comments.
Okay. Well, thank you, everyone. I look forward to talking to you on our next call. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect, everyone. Have a great day.