Good day and welcome to the ESCO second quarter 2016 conference call. Today's call is being recorded. With us today are Vic Richey, Chairman and CEO, Gary Muenster, Vice President and CFO, and now to present the forward-looking statement I'd like to turn the call over to Kate Lowrey, Director of Investor Relations. Please go ahead.
Thank you. Statements made during this call regarding 2016 and beyond: EPS, EPS as adjusted, EBIT, tax rates, future growth, profitability and revenue, operating margins, cash flow, orders, success of new products, sales, acquisitions, implementation of the company's capital allocation strategy, the costs, benefits, and timing of restructuring and cost reduction activities, the results of recent acquisitions, corporate costs, 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 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 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, and good afternoon. Before I give my perspective on the quarter, I'll turn it over to Gary for a few financial highlights.
Thanks, Vic. As a reminder, at the start of the year we announced that certain restructuring actions were undertaken related to our lower margin international operations, primarily in the test business. We described and quantified these actions as well as the annual cost savings anticipated once the process was completed. The detailed restructuring costs were excluded from our FY16 guidance provided in November, and we noted that we would be presenting our quarterly and annual financial results for FY16 on an EPS as adjusted basis. Our restructuring actions have been running ahead of schedule and are expected to come in below the original budgeted amount. Once these actions are completed, we will have eliminated a significant management distraction at the operating unit level, which will allow us to begin realizing the identified cost savings and operating benefits we anticipated.
As described in the Q2 release and commensurate with the recent acquisitions of Fremont and Plastique, we have expanded the presentation of our reporting segments to reflect the operating results of our technical packaging group. We feel this additional disclosure will further shareholders' understanding of our underlying operations, as well as provide additional insight into our outlook. Turning to our Q2 and year-to-date results, I'm pleased with our operating performance, which exceeded expectations from several perspectives, including EPS, cash flow, and entered orders, which each significantly exceeded expectations. The early performance of Plastique is consistent with our acquisition forecast, and their potential growth opportunities continue to materialize. During Q2, we reported EPS as adjusted of $0.40 per share, which was 33% higher than Q2 of last year, and 11% higher, or $0.04, above the top end of our February guidance range of $0.31-$0.36 per share.
Our six-month year-to-date EPS as adjusted was $0.87 and is above our original six-month expectations we set in November. Compared to our February guidance, our increased earnings came from every operating unit, with the exception of VACCO, whose sales were impacted by the timing on long lead items between the first and second half of the year. Doble, TEQ, and ETS Q2 earnings each exceeded our previous expectations by a fair amount. Our Q2 and year-to-date cash flow is running several million dollars ahead of projections, and our cumulative entered orders at the six-month point put us in a comfortable backlog position at March 31st. The $273 million of orders year-to-date are supported by the continued strength of our commercial aerospace business, and in particular, the A350 program, coupled with the order strength generated in our technical packaging businesses.
Our multi-segment strategy and our strong operational focus are key themes that we've communicated over the past few years, and these results demonstrate that our goals remain well-defined and are clearly in focus throughout the organization. Here are a few highlights from the release to allow you to better understand the underlying results. Q2 consolidated sales increased 8%, or $10 million, compared to Q2 of the prior year. The increase was driven by technical packaging, where sales doubled from prior year, reflecting the strong performance of TEC and the contributions from Fremont and Plastique. Doble sales increased as a result of higher software and service revenues, test sales decreased due to project timing, and filtration sales were up modestly as a result of VACCO's sales timing issues partially offsetting the increase in commercial aerospace.
Corporate costs were higher than last year, primarily due to the timing and volume of spending on professional fees primarily incurred supporting our M&A activities. On the balance sheet, we continue to maintain a very favorable debt level, with $60 million of net debt outstanding at March 31st. We remain firmly committed to our capital allocation strategy, which includes share repurchases and dividends, and as such, we repurchased 87,000 shares and spent $3 million during Q2. We expect to continue to opportunistically repurchase shares in the open market over the balance of 2016. After reviewing our sales growth and profit improvement opportunities over the balance of the year, we determined it was appropriate to raise our FY16 EPS as adjusted guidance to $1.95-$1.202 per share from the previous range of $1.90-$2 a share.
Getting off to a solid start over the first half of the year and considering the strength of our current backlog, coupled with the contributions from Plastique, this provides additional comfort in our ability to achieve our increased EPS goals. Regarding our Q3 outlook, we're expecting EPS as adjusted to be in the range of $0.40-$0.45 a share. Finally, commenting on our longer-term view, we continue to see meaningful sales, EBIT, and EPS growth across the business segments consistent with our previous expectations and earlier communications. I'll be happy to address any specific financial questions when we get to the Q&A, and now I'll turn it back over to Vic.
Thanks, Gary. As noted in the release and as Gary discussed, we had a solid quarter and are well-positioned to hit our increased EPS outlook for the balance of the year. I'm pleased to see that we had good performance across the company, both in Q2 and year-to-date. While I won't say we're immune from the economic headwinds many industrial markets are currently facing, I do believe the breadth and diversity of our end markets and the specific niches we operate in provide us a protection to mitigate their impact. Gary and I visited all of our major operating locations in April, and we came away encouraged by what we saw. Again, we're not without challenges, but the issues we are facing appear manageable. To offset these issues, we have identified some solid upside opportunities that we can capitalize on as we head into next year.
Also in April, we visited two of Plastique's operations in Europe: their engineering and design center in the U.K. and their manufacturing facility in Poland. During this trip, we had the opportunity to meet more of the management team and were able to do a deeper dive into their market opportunities. I can say I'm even more excited about this business and its future. Gary and I came away impressed with the strength of the management team, as everyone we met appeared very dedicated to the company and excited about their opportunities as a part of TEC and ESCO. Their core business is very solid, with some real upside as a result of their Fibrepak capabilities.
More and more customers want the option of using a sustainable fiber-based product or a combination of fiber and plastic packaging, and the desire for more environmentally friendly packaging is driving the demand for these alternatives. Our combined technical packaging group now has scale and market leadership positions across several growth markets, where we are providing highly engineered products to customers in the medical, pharmaceutical, and consumer markets. I'm confident these opportunities we're seeing set us up nicely for the future. Moving on to filtration, our aerospace business continues to perform above expectations, and our year-to-date earnings, cash flow, orders, and outlook for the balance of the year remain strong.
A key driver of the continued success and confidence in our commercial aerospace business is that we are well ahead of our near-term order and production plan on several platforms, led by the A350, which continues to run better than expected. Doble reported another solid quarter with operating performance in Q2 delivering adjusted EBIT margins of 25%. As utilities continue to rationalize their capital budgets and we better understand the potential impact on our legacy hardware sales, we continue to see additional opportunities in our service and software applications. Additionally, to mitigate the impact of CapEx constraints, we see tangible opportunities with our new products, such as the M Series, Doble Prime, and our Ducky offerings. Overall, the combination of our offerings and the breadth of our solutions bodes well for our outlook.
I recently attended the 83rd annual Doble Conference and was thrilled to see another year of record attendance as we hosted over 1,500 customers for the week-long event. The restructuring activities in TESS and in Doble are progressing ahead of schedule and below our projected cost. These activities have taken place without any negative impact on the rest of the business, and most importantly, we're seeing the cost savings materialize as anticipated. I feel good about the growth opportunities we see ahead of us across the business, which gives me confidence over the balance of this year and for additional growth in 2017 and beyond. I'm pleased we were able to supplement our outlook with some non-organic growth during the past six months because, as we've discussed previously, acquisitions are a key component of our ability to meet our longer-term growth targets.
We are currently reviewing some additional opportunities, which we find interesting, and we will continue to work diligently to make some of these happen. We certainly have the balance sheet capacity and management bandwidth to handle this additional growth within our current operating infrastructure. So wrapping up, we had a strong first half of the year, and our outlook for the balance of the year remains strong. Our actions to reduce our cost structure are paying off, and we're on track for bringing in a strong 2016 as we are well-positioned for profitable growth in all three segments. Our focus remains constant to improve our operational performance and execute on growth opportunities, both organically and through acquisitions. So now I'd be glad to answer any questions you have.
Ladies and gentlemen, at this time, if you wish to ask a question, please press star, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, press the pound key. Again, to ask a question, it's star, then one. One moment while we gather questions. Our first question will come from the line of Jon Tanwanteng from CJS Securities. Your line is open.
Hi guys. Thanks for taking my questions. I'm just wondering if the margins in the USG segment are sustainable. Is that more a result of the higher mix, excuse me, the less hardware in the sale in the quarter, and do you expect that to normalize?
There's always going to be some ups and downs from quarter to quarter depending on the mix, but, you know, certainly we see that businesses as being, you know, over 20% going forward.
Okay. We've seen a number of commercial aerospace suppliers talk about weakness, or slowdowns in deliveries. I'm just wondering why you haven't seen any of that. Is that purely the mix of programs you're exposed to?
Yeah. I think it's really very much platform-driven, and, you know, we get that question quite often, recently because there has been a good bit of that in the news. But quite honestly, we have not seen any of that, and I think it's just a mix of the programs that we're on. And, you know, in fact, we were just out with those guys a couple of weeks ago and kind of posed that same question to them because Gary and I have been getting the question some, and so we did a little deeper dive looking at the programs that they're on, and the production schedules for the platforms that we're on seem very solid. So we've not seen any indication that that's going to soften our specific airframes in the near term.
Okay. Great. And can you comment on the Technical Packaging business now that you've broken it out? You know, what should we expect from the new segment in terms of growth and margins over time?
Yeah. So I think, I think we're looking at kind of, you know, 12%-13% range now. We think that, you know, we're looking at some things to improve that and to get some additional growth, and obviously, we would have to add a lot of infrastructure as we grow that business. The core packaging business, if you will, we talk about it that way, the original business that we had, you know, we expected some attrition in that business this year because it's pretty typical to do that, and we've not really seen it. So I think the guys have done a good job of going out and working the existing customers pretty hard to ensure that we maintain the business that we have.
In fact, in a number of cases, they've been able to get longer-term LTAs, if you will, longer-term contracts. It gives us a little more stability. So as we add to that business, we do think we're going to get some leverage. Obviously, it's not the same level of profitability as we see in our filtration or USG business, but we do think there's opportunity to continue to drive margin there. I think the big question is how much leverage we're going to be able to get with having a European operation. We think it'll be good, but, you know, we're not really ready to commit to anything until we have a little more time with those two businesses. But certainly, we see the longer-term opportunity there is to do more medical in Europe.
I mean, a lot of our customers were really pushing, saying, "You need to have a European operation because of shipping costs," and that's where they're located. And so we think that will give us more opportunity there. Conversely, some of the areas where they were already very strong, we think we can bring some of that to the U.S. So, there certainly are opportunities there, but it's very early in the process, and it'll take a little time to see how much of that we can harvest.
Okay. Great. And that 12%-13% was an EBIT margin. Is that what you were talking about?
Yes.
Okay. I think you did a little more than that in the quarter, a little bit over 14. Is that, do you think that's going to come down?
Go ahead.
Yeah. No, that's, that's the right number, but I guess the one thing we have to keep in mind is, is that CAS program in what I'd call the core tech business, it, it's running at an extraordinary rate right now as they're restocking some of the, some of their inventory orders. So that's a, a high-margin product for us, and so when you're looking at what's going to happen with that business, it's not going to run at the rate it has been for the last quarter or two because as they convert from Gen 1 to Gen 2 and they backwards compatible things, you're going to see a little bit of stabilization in the revenue line, and that'll, that'll bring the margins back down to a little bit closer to historical.
It is 14% for this quarter, but I think as you look forward, keeping it at, you know, upper 12s%-mid-13s% is the right way to think of that as a longer-term run rate once CAS kind of goes back into its normal run rate versus this current extraordinary run rate.
And then again, I mean, I think the question is going to be as we get more business, if we're able to grow that, which we think we'll be able to, then we should be able to leverage that, and get a higher margin.
Gotcha. That's helpful. And then just one more question. The SG&A line was actually quite a bit below what we thought it was going to be. How should we think of that run rate going forward?
Yeah. And I think, you know, what you're seeing, this is, you know, the first real quarter where we have, you know, we're completely out of the facility in Germany and essentially out in the U.K., and we're also out of the facility in.
Brazil.
Brazil. So that's why you see the big downtick that you have there. I think if you just carried that forward, at least for the balance of this year, we would be comfortable, you know, again, because you're going to have we're not going to be adding people back into the facilities that are the relationships that we just, we just shut down. So this feels like, you know, give or take $200,000 that this is the run rate that, that you should see going forward, you know, kind of in that upper 32s, $32 million kind of thing, $33 million maybe, but you're not going to see it going back up to $34 miilion-$35 million anytime soon.
Okay. Great. Thank you very much.
Okay.
Thank you. Our next question will come from the line of Kevin Maczka from BB&T Capital Markets. Your line is open.
Thanks. I think this maybe is more of a question for Gary, but so we know that your years are typically back-end loaded, but this one is looking incredibly Q4 loaded. And I guess I'm a little bit surprised that we didn't see a little more lift in Q3, but, you know, we're looking now at something in the low 40s in Q3 and then pushing $0.70 in Q4. Can you—this might be very broad, but can you just talk about some of the major moving parts, what, how this progresses sequentially, Q2 by segment and then Q3 and Q4? Thank you.
Yeah. I think, Kevin, if we start with the VACCO commentary that I made, you know, relative to some of these long lead items, you know, as you're transitioning the SLS-type business from, you know, development into some production hardware and you're kind of moving the Virginia class from one lot to the next as those things transition, just to kind of put numbers around it. In Q2, VACCO was a little less than $20 million in revenue, and obviously, there's a nice infrastructure there. So the EBIT margins that came out of VACCO this quarter were about 13%-14% because that's not their run rate for revenue. And so taking VACCO up Q3 up to $26 million or $27 million is more rational.
As you're catching up on these long lead items that are converting through the calendar is probably the best way to think about it. And then their sales move up closer to $30 million in Q4, which might seem extraordinary going from $19 million to $30 million two quarters later. But again, I remind you that the revenue associated with SLS in the Virginia class these are significant programs that come through at high dollar in the high-margin content. So I'd say that's probably the only thing that's really unique relative to the thing relative to our past because, you know, VACCO's generally been pretty stable on a quarterly profile basis.
I'd say on the other side of the business, if you look at our historical test business profile, you know, the fourth quarter's always been their biggest revenue generator, and that's going to be the case this year as well. So as Vic said, we spend a lot of time down with those folks. We have program-by-program specific details there that support our thinking. And then, you know, we put a little assessment on top of that because it's not our goal to overcommit and underperform. So I think we've dialed it to a fair amount of time. But your math is right. I mean, if we're going to do the middle of our range in Q3, you got to get to a 70-something in Q4.
But when we go through the components, you know, by revenue profile and profit profile, it's not that extraordinary on a piece-by-piece basis.
What kind of assumptions are you making on Doble? Because I think at one point, you thought the year might be more than 10% growth top line, and it was more like 4% or 5% in the first half. I guess what I know there's an easy comp coming there in Q4, but what's driving that? Are you still holding that target, and what drives it? What accelerates?
Yeah. I'd say some of the things that we have in front of us that where we have contracts in hand, but we obviously haven't started delivering the product yet. So we have some things related to Doble ARMS that are, you know, unique revenue recognition items. And again, these aren't $5 million and $7 million things, but they are things that when they pop through in the second half of the year, you know, they're $500,000 and $1 million kind of things. And some of these products that Vic alluded to, whether it's the Ducky or the Prime, some of these new things that are coming through. So you're going to see a sequential ramp-up from Q1, Q2, Q3, Q4 through the year. And again, that's really just the manifestation of the order profile converting through.
As we do our diligence in the utility space, we see at least we anticipate, from conversations that we've had that the budgets are going to be loosening up here a little bit in Q3 and Q4 as the utilities rationalize their CapEx. So that's a long answer to say we have some optimism, and then we've dialed that back a little bit. So we're probably not at a 10% number right now. I mean, could we do that? Yes, but we'd probably need some extraordinary budget releases, and that's what we've dialed back into our current assessment.
But in terms of your optimism there, Gary, we just did $30 million. We were closer to $35 million in Q1. We're maybe back more along the lines of that Q1 run rate in the second half?
Yes.
Yeah. And usually, again, the margins come through with pretty strong incrementals here, mix aside. And that's a fair assumption as well that we'll see the strong flow through that we normally see?
Right. Especially as Vic alluded to, the benefit of the mix working favorably. As you get more software and services through, those tend to pull through higher incremental margins. So as that mix moves forward, you know, we get a nice sequential dollar-for-dollar pop to the EBIT line that's higher than if the legacy hardware stuff would come through at the same revenue volumes.
Yeah. Again, you have to remember, we did take some cost out of that, business as well, both in Brazil and then some domestically as well.
Right. Well, to your earlier comment, Vic, I mean, it sounds like holding 20% isn't a real high hurdle when we did 28% and 25% basically in the first two quarters. But you're not suggesting that there's something in the mix coming that would knock us down, but it sounds like maybe we've seen the low watermark in Doble for the year on sales and EBIT margin.
Right. Right.
Yeah.
I would agree with that.
Got it. Okay. Thank you.
Yeah.
Thank you. Our next question will come from the line of Ben Hearnsberger from Stephens. Your line is open.
Hey. Thanks for taking my question. I wanted to ask a question on the packaging, the technical packaging segment. I think it may have been asked earlier, and if I missed it, I'm sorry, but how should we think about growth in that business now that you've broken it out, you have critical mass there?
Go ahead. Thank you. Go first.
Well, no. I mean, I think there's good opportunity for growth with the business. I think, you know, the underlying business is honestly, this year's grown a little bit better than we thought it was going to, as I mentioned earlier, because we didn't have some of the attrition that we typically would encounter in that business. And then so the question is, with the addition of you know, Fremont and the addition of Plastique, it's really you know, we're still getting our arms around how much they're going to grow organically, but having just been over there, it feels really good because they have great opportunities, particularly in the fiber pack piece of it.
And so I think we're with the real question is how quickly we can take advantage of the, you know, being in two different continents and a number of different end markets now. So, you know, I'm not committed or not ready to commit to a, you know, a long-term growth number, but I do think there's a lot of really good upside opportunity, as we, again, take some of the medical product to Europe and bring some of the consumer product back here. And, you know, we're in a process of even expanding the Fiber pack capacity now because we have won some opportunities there that requires to continue to do that.
You know, it's going to take us a quarter or two to really understand how quickly we're going to be able to grow that business, but there's a lot of opportunity there.
And Ben, I'll put some numbers around that. Just the one of the nice parts of the timing of when we purchased Plastique, they do have seasonality, and their strongest period of revenue historically, when we were diligencing the company, let's go back 4-5 years, the period where they get the majority of the revenue is our fourth quarter. So a lot of their products get delivered to their customers in time for the fourth calendar quarter, okay? So what that means is our quarter is when we're producing and selling to those customers who then distribute it to the medical field or the consumer field or the Gillette's of the world and things like that. So as we move to the third quarter and again, this kind of goes back to Kevin's question.
Keep in mind, we had them for two months in Q2, and now we get three months in Q3. So that inherently adds $2 million or $2.5 million or $3 million of revenue in Q3 sequentially. Then you take the commentary on our fourth quarter, which is their highest revenue quarter. It would not be unusual to see an extraordinarily high quarter at Plastique with, you know, north of $11 or $12 million, okay? And again, that's the restocking and pushing through things that are going to be in the ultimate end customer's hands for the October to December 31st period. So that rationalizes this year on why we have a steep ramp.
Again, I, I mentioned the VACCO thing in detail, and if you put the Plastique thing in there, let's call it $12 million in that quarter, and you're pulling through, you know, 13%-14% EBIT. That's an incremental add. That's net of purchase accounting. So a short answer on the growth is, for 2017, we're going to have an unusual-looking growth curve because you're going to have 12 months versus 8 months, so it's going to look extraordinary in 2017. Just the calendar works in your favor. But if you just neutralized everything and if, you know, you had the advantage of seeing the last three years, this would be kind of a, a 5%-6% grower on a normalized basis. And that's setting aside what Fiber pack can add to the upside.
So relative to how we valued the company when we purchased it, you know, we were looking at kind of a 5% or 6% normalized year-over-year growth rate with the ability to accelerate that both from the top line and the bottom line by the contributions that can come from this Fiber pack product that's really just hitting the market here. So it looks good for the rest of this year, and we're going to have this extraordinary pop in Q4. And then obviously, you know, you'll see it drop down a little bit in our Q1 of 2017 but then ramp back up. So 2017 will look great compared to that. So hopefully, that long answer helped answer your question.
Yeah. That's helpful, Gary. Thank you. Vic, I wanted to get your comments on the test order pipeline. It's slowed down over the last year, and I'm sure that has to do with the general industrial slowdown. Can you talk about what you're seeing there and the different pieces of that business?
Yeah. If, you know, the domestic business, I would say, is kind of playing out like we anticipated. You know, the medical business is, is solid. You know, it's not up. It's not down. I mean, it's kind of hit the numbers we've seen historically. The acoustics business is, is a little soft right now, and that's not surprising. If you look at the rest of, of the domestic business, I'd say we're seeing good opportunities. The wireless business remains good and strong. Moving outside of the U.S., you know, Europe's tough. I mean, it's tough for everybody right now. We've got some opportunities, but, you know, there, it's been very competitive because a lot of our competitors are, are headquartered there, so that makes that more difficult. But the place we're really seeing great opportunities is in, in Asia still and particularly in China.
You know, we want a nice job with the electric vehicle manufacturer in China. There's a number of additional opportunities in that specific space out there right now, because, you know, China came out with one of their five-year plans, and that's a specific area that they identified, you know, development of electric vehicles that they want to put a lot of investment in. So that, that's resulting in a lot of opportunities for us, which we're taking advantage of. Additionally, you see a lot more, particularly in China but throughout Asia, where historically, our primary customers had been the government or government agencies. And we're seeing a lot more commercial companies and test companies, you know, if you think that are increasing their activity. So we're seeing really good opportunities there. So, you know, the U.S. is solid.
Europe's a little weak, but Asia has been good and strong for us. And again, you if you think about that business, particularly on the EMC side, a lot of it goes to direct, you know, to customers, but a lot of it does go to test facilities as well. So they're both customers for us, and the good thing about it is, you know, that maybe, you know, a customer will go to a test facility and get their products tested that way, but then when they get enough business, it makes more sense for them to have their own facility. And so they've been used to using our equipment in a large, you know, test company, and so they'll come to us, and we'll build a facility for them.
I'd say that the overall market for the test business has been pretty solid. You know, we've got a good position with Apple, and we're a preferred vendor for them.
Okay. I think you're probably the only one out there saying good things about growth with Apple right now. So kudos to you guys. Thanks for taking my question.
Well, you know, they've got that new facility underway, and so that's what's driving a lot of that.
Got it. Thank you.
Got it.
Thank you. Our next question will come from the line of John Quealy from Canaccord. Your line is open.
Hey. Good afternoon, guys.
Yeah.
Sorry if I'm hey. How are you? I'm sorry if I missed this. On the ETS and Doble restructuring, you said you're mostly done with it below budget. Did you quantify how much is the delta and, and when it will come back to the P&L, or how should we think about that, Gary?
Yeah. What we said in the release is we've spent or at least expensed about $5.5 million, and then we have about $2 million yet to spend, so let's call that 7.5%ish and, you know, round it to 8%. And so, you know, that's kind of how the math is laid out in the press release. So it feels like it's running about $1 million under budget at the pre-tax line.
Okay. So that might be a.
Remind you, it's a zero-sum game, so, you know, whatever happens to the positive and negative goes in and out. So we're reporting on as adjusted, so as that, I don't want to give you the impression that that means that's why we raised earnings because it's whatever hits the P&L gets backed out dollar for dollar to net to zero. So by underrunning it, it's great from an economic perspective of cash, but from a reporting as adjusted basis, it's neutral.
Yeah. Right. So it doesn't matter how it winds up, to your point, Q4, Q1. It's as adjusted out. The second question I have is, as we get, I guess, acquainted with technical packaging, book-to-bill was, you know, very strong. And I think, Gary, your point about it lines up with deliveries, perhaps, in your fiscal Q4. Should we think that book-to-bill sort of moderates towards one in that Q4 period, or how should we just think about the booking-forward-look side of technical?
Yeah. I think, because the sales are going to be so extraordinary relative to the monthly average, if you just took their year divided by 12, I don't think it'd be fair to anticipate a high book-to-bill in Q4 because of the sales impact.
Right.
But I think if you look at it on a year-over-year basis, you know, carrying a 1-to-1 relationship probably is okay. But again, then you keep the CAS business in mind because you get a big order, and then you run it off for, you know, two years, and then you get another big order. So those are really the only two things I think you have to kind of keep set aside in your model is quarterly seasonality and then the one-off big things. It's not unusual to get an $8-$9 million CAS order and then burn through it over the next 12 months. So obviously, you have an awkward book-to-bill on that program as you go over three quarters. But I think you'll be pleased with, on an annual basis, what the book-to-bill looks like.
It's not one of these things where, you know, because these production runs are so long, you know, you get the order on Monday and ship it on Tuesday, so backlog, you know, flips real quick. It's not something like that. So I think you'll be able to model out three and six months of comfort relative to how the order book lays in front of that, which is what you see now when you look at what the order book for Q2 was in Technical Packaging. And then that kind of supports the commentary I made on what's going to happen over the next two quarters here relative to the sales, as that converts itself to revenue.
Yeah. That's helpful. Thank you, Gary. And lastly, Vic, for you, so now, you know, four distinct subsegments for ESCO. Can you comment on any potential one-off dispositions, or is there another little sleeve of business that you could bolt on here without much managerial oversight on the ESCO portfolio? Thanks, guys.
Yeah. You bet. Well, I certainly don't see, you know, us strapping on another leg, if you will, if that was your second half of your question. And the other thing is, very happy with the four businesses we have now. I think they're performing well. We've made some changes this year to get our cost structure in place. And, you know, as we've talked about before, you know, selling a business that's making good money to, you know, pay off debt at 1% just doesn't make sense. And so we're happy with where we're at now. You know, we're always open-minded about looking at the business. We were just with our board last week and spent a day and a half talking about, you know, strategic planning, those type of things.
So obviously, our job is to look at all the options, and we always do that. But I'd say today, as I mentioned at the end of my prepared remarks, what we're really focused on is, you know, performing on the business that we have and looking for good growth opportunities both domestic or organically and through acquisition. So we're pretty happy with where we're at now. We think we've done the things we needed to to get the cost structure in place and now ready to leverage that, as we grow the business.
Okay.
Okay. I think we're done. So, appreciate everybody's attention today, and we'll talk to you next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.