ESCO Technologies Inc. Stock

Good day, and thank you for standing by. Welcome to the Third Quarter 2026 ESCO Technologies Earnings Call. [Operator Instructions].

Please be advised that today's conference is being recorded. On the call today, we have Bryan Sayler, President and CEO; Chris Tucker, Senior Vice President and CFO.

And now I'd like to turn the conference over to our 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 or regulations.

In addition, during the call, the company may discuss non-GAAP financial measures in describing the company's operating results. 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, and thanks, everyone, for joining today's call. We're pleased to meet with you this afternoon to discuss ESCO's third quarter results. In Q3, we continue to see positive momentum in each of our business segments as demand across our served end markets continues to build. Aerospace, utility and test orders were all strong, driving a consolidated book-to-bill of 1.21. This continuing strength lifted backlog to record levels across A&D, Test, Doble and at the consolidated level. This is all clear evidence of growing end market demand and the strength of our competitive position.

Operationally, Q3 was another strong quarter of revenue and earnings performance, continued order strength is flowing through to drive high single-digit organic revenue growth and operating leverage. Over the past year or so, we have been working on development and implementation of an enterprise-wide continuous improvement process, which we will call the ESCO operating system. Although we are still in the early stages of the operating system implementation, we are already beginning to see impacts across our businesses through greater consistency and execution and are building a stronger foundation for sustainable value creation over time.

Chris will run you through all of the financial details for the third quarter. But before that, I wanted to give you a few comments on each segment. Starting with aerospace and defense. I recently had the opportunity to attend the Farnborough Airshow. It was really a great event, and it made clear that investments will continue to be made by our customers to support and continue robust demand outlook.

On the commercial side, the industry continues to be supported by a global aircraft backlog of approximately 18,000 aircraft with an estimated unmet demand of an additional 5,000 aircraft. This demand backdrop underpins a long-duration production ramp and creates a compelling growth runway for OEMs, suppliers and subcontractors across the aerospace value chain. At the same time, the show made clear that defense, security and strategic resilience are becoming increasingly central to the industry narrative. Defense companies represented roughly half of the record exhibitor base at Farnborough, reflecting elevated military spending and a more complex geopolitical backdrop.

Taken together, Farnborough reinforced the aerospace growth trajectory supporting a durable, multiyear production cycle. Strong commercial OEM and services outlook remain intact, while defense demand appears positioned to accelerate as governments prioritize readiness, modernization and resilient supply chains.

On the Navy side, we continue to see evidence of a strong commitment to submarine programs. Last week, the Navy awarded the largest shipbuilding contracted history to the prime contractors for the remaining 9 Block VI Virginia class and the next 5 Columbia class submarines. ESCO is already under contract with the primes for this content and the Navy's actions last week increased our confidence in the long-term outlook for submarine programs.

Turning to the Utility Solutions group. Doble's continued order strength has translated into double-digit revenue growth year-to-date as rising power demand, electrification and grid modernization are all increasing the need for reliable, well-maintained electrical infrastructure. As utilities expand their generation, transmission and distribution capacity to support data centers, EVs industrial electrification, heat pumps and other sources of load growth, they must invest in tools that help maintain aging assets, diagnose and prevent failures, reduced downtime and ensure grid reliability, safety and compliance.

In addition, as they progress on the longer-term infrastructure build-out, they need support in commissioning new assets and maintaining a larger, more complex grid. These are durable demand drivers for utility test instrumentation providers like Doble and Megger.

Related to the Megger acquisition, we continue to work through the regulatory filing process in the required countries. This is all going smoothly, and the timing is tracking to our expectations. We continue to believe that this process should be completed in a time frame that results in closing the deal in the first quarter of our fiscal 2027.

Teams from both ESCO and Megger, are actively collaborating on important integration planning activities. We believe this advanced work will help establish a clear path for efficient, well-coordinated integration of Doble and Megger while keeping us focused on achieving the anticipated synergies. Bringing Megger into the ESCO portfolio will build greater scale in utility solutions and reinforce our role as a trusted partner to utility customers around the world. The acquisition is an important milestone in the continued advancement of our portfolio, and we remain optimistic about the long-term prospects for the utility markets that we serve.

Finally, I'll touch on the Test business. which had another strong orders quarter with 42% growth over the prior year. Test order strength in Q3 was driven by industrial shielding projects and electromagnetic interference filters. On Industrial shielding, those orders primarily related to secure shielded rooms in both the U.S. and Europe. The EMI filters are for use in commercial and government data centers. The continued demand strength at Test is encouraging, and the team there is doing a really nice job of improving execution and expanding margins as their end market momentum continues.

With that, I'll turn it over to Chris to run you through the financial details of the quarter.

Thanks, Bryan. Everyone can follow along on the chart presentation. We will start on Page 3 which shows the financial highlights for the third quarter. ESCO had another strong quarter of top line growth, translating to even better growth in adjusted earnings and operating cash flow.

Getting to the numbers, we start with orders where the book-to-bill ratio in the quarter was 121%. All 3 segments delivered book-to-bill ratios over 100%, leading to a record backlog of $1.54 billion. Order growth in the quarter was negative, but that resulted mostly from the $364 million of acquired backlog from the Maritime acquisition that took place in last year's third quarter.

Turning to sales. Reported growth was 14%, which was comprised of 8% organic growth and $23 million of incremental sales from Maritime. Just to remind everyone, we had a 2-month impact from Maritime in last year's third quarter, while this year was a full 3-month impact. On the profitability side, we saw adjusted EBIT margins improved by 90 basis points to 22% and adjusted earnings per share increased by 37.5% to $2.20 per share.

Next, we will go through segment highlights, starting with Aerospace and Defense on Page 4. Another great quarter here as the A&D business continues to deliver for ESCO. Starting with orders, A&D had a book-to-bill ratio of 116% with particular strength from our aircraft components business. You can see from the bar chart on the left, we showed a large percentage decline in orders compared to last year. There are 2 main factors driving the percentage drop. First, and as mentioned previously, there was $364 million of acquired backlog from Maritime last year. Second, the Navy business at Globe received $82 million of Virginia and Columbia class orders in the last -- in last year's third quarter, which did not fully repeat this year. With backlog of $1.1 billion, the business continues to be situated well for future growth.

Sales in the quarter were $168 million, which represents an increase of 23%. Organic growth was 9%. The organic growth was driven by 10% increases from commercial and defense aerospace as well as 10% from the Navy business. So a really nice performance from all parts of the core aerospace and defense platform. On the profitability side, we had good improvement to 30% adjusted EBIT margins, an increase of 120 basis points. Margin increases were due to positive impacts from leveraging sales growth and increased prices.

Next, we'll go to Chart 5 and the Utility Solutions group. Orders here were up 20% in the third quarter, and that was driven by exceptional performance at Doble, where orders grew by 30%. We did see weak orders performance at NRG, where the renewables markets continue to be very soft. Sales in the quarter were up 8%. Again, the growth was driven by Doble, where sales increased by 17%. Doble continues to see strong end market activity across a number of product lines serving their regulated utility customer base. Adjusted EBIT margins in the quarter declined by 130 basis points. Doble margins increased modestly but were more than offset by margin declines at NRG.

Next, we have the Test business on Page 6. This business had another good quarter, starting with orders, which increased by 42%. The order growth was driven by industrial shielding products, projects and EMI filters in the U.S. This business is seeing robust market activity centered around U.S. and European EMC test and measurement as well as power filter demand in the U.S. Sales in the quarter increased by 5% and adjusted EBIT margins increased 50 basis points to 16.4%. The margin improvement was driven by volume leverage is somewhat offset by inflationary pressures.

Next to Chart 7, where we have year-to-date highlights. The first 9 months saw ESCO deliver great results as we work towards another record year. Order strength has been significant, with 19% organic growth year-to-date. All 3 businesses have delivered double-digit organic growth with aerospace and defense and test at 20% and 26%, respectively. Sales have also been strong with 11% year-to-date organic growth, led by test at 18% and aerospace and defense at 12%. Adjusted EBIT margins are up 250 basis points year-to-date and adjusted earnings per share have increased by 55%.

Going to Chart 8, we have cash flow highlights for the first 9 months. Operating cash flow is up significantly at over $193 million compared to $88 million in the prior year. The key driver for the increase has been increased advanced payments on large Navy contracts. Capital spending is up slightly compared to last year and acquisition spending is down significantly this year, given the large Maritime deal in April of 2025. The EBITDA leverage is low at 0.2x, and we continue to be positioned well for the debt requirements that will come with the Megger deal, which is expected to close in the first quarter of fiscal 2027.

Our last chart is #9, where we have updated 2026 guidance. With another strong quarter, we are increasing the full year '26 guidance. We now expect full year adjusted earnings per share of $8.30 to $8.40 per share. This represents an increase of 38% to 39% 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've heard from our commentary, Q3 was another solid quarter, and we're looking at another year of strong revenue and earnings growth. And 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 to Q&A.

[Operator Instructions]. Our first question comes from the line of Tommy Moll from Stephens.

Bryan, it wasn't the first time that you mentioned data center orders for the Test business, but you did give us a little more detail this time. So I'm curious to ask what more can you tell us about the complexion of that customer base? And is this one that has broadened over the last couple of quarters for you where you've had success with new and additional customers?

Yes. I would say that we are -- we have seen a little bit of improvement in the outlook there. We have a couple of good customers there. I don't want to get into the details of who they are, but they're in that, broadly speaking, data center space. It's important to remember that not every data center has a requirement for this kind of EMP protection. But any commercial data center that's going to house government data, utility systems, that sort of thing, those critical infrastructure, they tend to have this requirement. And we see it being embraced increasingly, and I think we're doing pretty well in terms of our market attainment.

And then shifting gears to Doble, Bryan, very strong acceleration there, both in terms of sales and orders. Particularly on the order side, what can you -- what additional detail can you give us there? And relatedly, have you been able to discern how Megger's book has shaped up since you announced the deal? I mean this is a big move higher for your order book. I'd be curious if they've seen the same thing.

Yes. I would say that the 30% year-over-year increase in orders was very broad-based. We had -- I mean, honestly, we had a 67% increase in our condition monitoring business that was led largely by some pretty good-sized large, high-voltage cable monitoring orders. We had a 13% increase in our services business. We had a 23% increase in our protection business, 13% in off-line testing. And we had a large renewal of one of our cybersecurity clients. So really broad-based across the board improvements there. The one laggard in our utility business continues to be the renewables business. And on a year-over-year basis, that was down considerably, but we are seeing some sequential growth that is encouraging.

You asked about Megger. So we have reason to believe that they are seeing something similar. I don't have as much detail on their numbers, but they're up nicely over the prior year. And that's an indication that the market itself broadly is improving and continues. I think we've been talking about this buildup in their spending for some time. And I'd say it certainly looks real, and we have POs to prove it.

Our next question comes from Scott Deuschle from Deutsche Bank.

Chris, can you share the updated segment revenue guidance?

Yes. I mean, what I would say is we don't typically give a guide every quarter on that. I mean what I would tell you is for A&D on an underlying basis, excluding Maritime, we're looking at 8% to 10% for the year. For test, we would be more like 10% to 12% now. And then for utility overall, more like 4% to 6%, something like that.

Okay. And then how did the Doble outlook within utility change?

So we're -- we'd be like low double digit there. So if you look at kind of where they've been, we would kind of see them continue in that trend through the fourth quarter.

Okay. And then either Bryan or Chris, why did USG margins go down sequentially on sales that were up sequentially?

Yes. I would say the main thing there, if you look at the Doble margins. They were up versus last year. But given the sales growth, they weren't up a lot. We had a little bit of unfavorable mix there. Some of the high voltage lines are seeing a lot of growth there product lines. Those are a little bit unfavorable mix in the business. So that's one issue. We also had just timing on some expenses for different SG&A and cost of sales items. So that was kind of one of the factors in there as well.

And then I would point to NRG. The NRG margins, we are kind of scuffling along the bottom here. And again, Scott, I'm kind of talking a little bit to prior year comps. But last year, they had very nice margins in the third quarter at NRG, kind of in line with the overall segment. And they're operating quite a bit below that right now, more like low double-digit type margins there. So that's really a big hit year-to-year and kind of a key driver in the overall kind of margins. I would say if you look at year-to-date at Doble, right kind of right in line with where we thought they'd be year-to-date. They're really strong in the second quarter, not quite as strong here in the third.

Okay. Have there been any like discrete inflationary pressures and cost of goods sold that have impacted USG, things like DRAM costs or electronics like that?

We haven't seen any that are really material at this point. I mean, we're anticipating that, and we're trying to get ahead of it, but we haven't seen anything that would be reflected in the third quarter numbers.

Okay. And then last question, Chris, is a 30% incremental EBIT margin for A&D still the correct go-forward rate given that you printed a 30% margin this quarter?

Yes. Listen, I think, as Bryan mentioned, we're kind of trying to roll out this kind of operating system. I think that -- we continue to expect to take the margins up there. I'll say it that way. I think the 30% could maybe be a little bit lower there. But when we put that 30% target out, we're kind of talking about the company in total. So I think for A&D, there are certainly parts of that we're going to have to do better than that to continue to drive margins up. So that's how we're looking at that right now.

Our next question comes from the line of Jon Tanwanteng from CJS Securities.

This is Will on for John. Can you talk about the strength in the defense business, you're seeing more relative strength from programs of record or more from aftermarket activity and consumables? And how should we think about that over the next couple of quarters given the high usage rate?

Yes, I think it's mostly from programs of record. I mean, I think that our aftermarket business there continues to accelerate at about the same rate as the rest of the business. So we're kind of maintaining that kind of 30% pressure -- or excuse me, 30% ratio. But our core business in -- particularly in the submarine programs is what's driving the big acceleration that you're seeing. And listen, we have every reason to believe that's going to continue.

Are you seeing a light at the end of the tunnel for NRG? When do you think you might return to year-over-year growth?

Well, we got one more quarter of pretty tough comps. If you will remember that right about now a year ago is when the One Big Beautiful Bill kind of went into effect. So what you're seeing in the third quarter from 2025 versus reflected in a quarter where the renewables market was still white hot. We carried that backlog through into the fourth quarter, we had a really good fourth quarter last year. So I think you're going to see another year-over-year negative in the fourth quarter. But I'm encouraged by the fact that we're beginning to see sequential growth. And so I would continue to believe that as we move into FY '27, that's when we'll begin to see a return to growth off of a lower base. And so the business doesn't get back to where it was in FY '25, but we do begin to see something that will look like high single-digit growth from that point forward.

Our next question comes from the line of Tomo Sano from JPMorgan.

I'd like to ask you about NRG in the USG. Could you talk about beyond U.S. tax credit dynamics? What are the key bottlenecks for NRG customer and CapEx cycles, competitions, portfolio gaps and so on. And what kind of actions are you taking like to address them?

Yes, yes. So NRG, it's principally diagnostics business that's around solar and wind generation, utility scale terrestrial. So what's happened there, the dynamic is driving the unpleasantness this year. It's really around the capital spending that you're seeing from energy developers who are -- really have been focused on safe harboring the projects that they already have in process. And so they've been working on qualifying for the tax credits, which expired last week. So now what we expect to see is that they will return to a broader focus. We do think long term that there's a place at the table for renewables because they are affordable relative to other forms of generation. They are available. We would expect to see a faster return to growth on the solar side compared to the wind side due to some of the animosity that the current administration has towards wind. So there have been some permitting issues there.

From a structural perspective, there have been some cost incurred on the wind side from tariffs and things like that. But otherwise, we remain -- our belief continues to be that on a levelized cost of energy basis the wind and solar continue to be attractive and affordable. And then over time, that we're going to see a return to growth in those markets.

And if you could talk about in the first 100 days post the close of Megger, what are the top priorities ahead?

Sure, sure. Well, so the good news is we've got a team that's kind of putting that plan together. What we would expect to do is shortly after closing, we're going to be able to communicate those plans across the business. We haven't -- we have not finished them. But that will require us to take a hard look at our footprint, our manufacturing sites, harmonizing our product lines, putting together our go-to-market strategy, those are all the big things that you should see rolled out in that first, along with a new combined identity of the combined enterprise.

I think the other thing that I might want to mention, I maybe didn't answer the question on other things we've done at NRG. We have taken some costs out of the business at NRG and we will be rolling that into the larger Doble Megger platform as a business unit rather than as a stand-alone enterprise.

That's helpful. And if I may squeeze a last one. Regarding improved operating cash flow, how much of the working capital benefit is structural versus timing related?

Listen, I would say that we -- over time, we kind of target free cash flow conversion to adjusted net earnings of around 100%, we're going to be above that a little bit this year because of the timing of some of these big contract payments. So I think, structurally, we feel really good about driving that 100%. But you'll see periods like now where we're above it, and you might see periods where we're more like 90%, 95%. But net-net, we're still going to have high-quality conversion in that 100% range.

Our next question comes from Scott Deuschle from Deutsche Bank.

Bryan, can you say what the lead times are for the condition monitoring orders that you secured in the quarter?

Yes. So the cable monitoring orders are the longest lead time. We kind of have to go at the rate that the cables themselves are built. And so that requires some field construction and that sort of thing. So they can be as long as a year.

Okay. And what percentage of the business is that?

I think it's -- I don't know the answer. Well, that's overall -- overall condition monitor is about 20% of the business, yes.

Okay. And just to be clear, you said condition monitoring orders were up 67%?

Yes, they were up big time this quarter on a year-over-year basis, yes.

Okay. I mean if 20% of the business grows 50%, you grow double digits next year, just off of that piece, like I guess, how much can I extrapolate off of this quarter? Or is it just lumpiness you'd say?

So we're going to stick with our very, very, very high single digits.

Okay. All right. And then, Chris, I think last quarter, there had been some pushout in surface ship revenue due to challenges the yards have faced and ramping up output. Has that gotten any better and normalized at this point? Or have you seen any additional push out?

I would say no more pushouts. I would say kind of the recovery plan that we put in place after some of those pushouts last quarter has kind of unfolded as expected. But we continue to kind of watch those programs pretty closely.

Our next question comes from Tommy Moll from Stephens.

Just to close with a couple of Megger if we could. Chris, I think when you announced the deal, you told us where you were dialing in the cost of debt there. But I just wanted to see if you could give us any updated view. And then if this deal closes, on your anticipated time line, when you report Q4, will you be able to then give us the NTM guide for fiscal '27 inclusive of Megger at that time?

Yes, Tommy, we would anticipate if the schedule tracks the way we're hoping it does that our November announcement would include Megger in the guide. So that's our anticipation. We can give you our best look at the interest cost as part of that guidance. I would tell you right now, we do expect the cost of debt to be around 6%. We've got kind of our Term Loan A, Term Loan B terms locked in. Those are SOFR instruments. We've actually executed a deal contingent hedge as well to kind of lock in a portion of that for next year. That's slightly below 6%. But I think right now, where we are, 6% is the right way for you to plan it.

Got it. That's all for today. Thanks again.

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 some time to learn a little bit more about ESCO today. We continue to believe that our outlook is very bright, and we're working hard to make it come true. Talk to you next quarter.

Thank you for participating in today's conference. This does conclude the program. You may now disconnect. Thank you.

Good day, and thank you for standing by. Welcome to ESCO Technologies Q2 2026 Earnings Conference Call. [Operator Instructions] 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, and 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 continue 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 3 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, and 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. And while the timing of this process can be uncertain, our current expectation is that it should be completed in a time frame that results in closing the deal in the first quarter of fiscal 2027. In addition, I want 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, and 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 of the financial details for the second quarter. But before that, I want 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 continue 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. In addition, we are seeing broad order strength on commercial aerospace programs. As we have mentioned previously, commercial aerospace orders were a little soft last year as the OEMs work through some internal issues. So 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 multiyear 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 shipset 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, off-line 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. Overall, we remain bullish on the longer-term opportunity in the utility end market.

Finally, 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. 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, health care, industrial shielding and EMP filters serving utilities and secure data centers. We are optimistic about Test's 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 3, 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 3 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 improved by 370 basis points to 21.7% and adjusted earnings per share increased by 63% to $1.91 per share.

Next, we will go through the segment highlights, starting with Aerospace and Defense on Page 4. 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. So 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 5 and 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 in NRG. Doble continues to see good end market activity across a number of product lines serving the 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 6. 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 7, where we have year-to-date highlights. The first 6 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 3 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 were up 370 basis points year-to-date as all 3 businesses have delivered improved margins.

Going to Chart 8, we have cash flow highlights for the first 6 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 0.4x, 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 # 9, 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 to $8.25 per share. This represents an increase of 33% to 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. So as you've heard from our commentary, Q2 was another solid quarter, and we're looking at another year of strong revenue and earnings growth. And 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.

[Operator Instructions] Our first question comes from the line of Tommy Moll of Stephens.

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. And so 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? And then just moving to the bottom line there, any change post your planning conference on what the margin aspiration would be for that segment?

Well, thanks, Tommy. Yes, listen, I do think it's a little bit of a change. As you know, we're having a very strong year this year at the business. And we have adjusted -- I think historically, we would have said 3% to 5%. We're probably saying more like 4% to 6% now. And this year, we're going to be well ahead of that. But yes, I would say our outlook for the Test business broadly is improving. And I think what I've said to you all before is that we're driving towards 20% EBITDA margins in that business. And I think after what we've seen this year and what we saw in the 5-year kind of review that we just went through, we think we're going to get there a little quicker than we might have thought before.

And as a follow-up, I wanted to ask on Megger. 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 there 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? And 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?

Yes. Thanks for the question. Yes, I think what we said and what we still believe is that on an earnings basis and EPS basis, it's going to be accretive in the first full year, and then it's going to 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 related underwriting you used on the deal?

Yes. So we -- so our kind of our guiding star there is really making sure that our internal rate of return on the deal is going to be better than our weighted average cost of capital. And so we are going to -- we do see a better than double-digit return on an IRR basis, and we do have a pretty good spread over our weighted average cost of capital.

Our next question comes from the line of Scott Deuschle of Durchell of Deutsche Bank.

Bryan, can you characterize the demand that Doble is just seeing in its condition monitoring business and also characterize the pricing power you have in condition monitoring?

Yes. I would say that overall condition monitoring continues to accelerate. I think I've said to you before that one of the characteristics we're seeing is that increasingly public utilities commissions around North America are allowing the condition monitoring tools to be built into the rate base. And that has served to really accelerate the overall demand there. We are seeing really good demand characteristics. And it would be at the high end of what we are seeing in terms of our product lines in terms of growth. So 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 that's a year-over-year comparison number. I think we're seeing broad-based growth over our entire product line. And Scott, I think one of the things that we -- one of our thesis here was that the amount of spending was going to be the same, whether it went to renewables or went to regulated utility piece. And so 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 grid modernization side.

Okay. And last question just on this topic. Like do condition monitoring systems help operators reduce their long-term hiring needs for electricians? And if so, has that become a key part of the value proposition given the shortage of electricians that are out there today?

Well, 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. So yes, it does reduce the number of truck rolls. But in the grand scheme of things, I do not believe that, that is the most important financial reason why a utility would want to 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 -- those peak load conditions, they're able to operate the system more efficiently and they're able to push things a little bit harder than they might if they don't have those grid edge feedback. So 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 energy 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? And is a business that can see a 30% sales decline a business that you want to be in long term?

Yes. Listen, I think that 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. And 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. And so I'd like to be -- I'd like to believe that this is a bottom, but I've been around long enough to never call bottoms until I start seeing the trajectory in the other direction. So it's possible it could be a little deeper. And I also think it's possible that this could last a little bit longer.

But listen, long term, renewables are absolutely a piece of the overall grid solution. And we do believe that this is a business that can be profitable and even at a lower level. And so the answer is yes, I think this is a business that we want to be in. It's a business we continue to believe in. And it's a business that we do think is going to return to growth in the second half of '26 or beginning of '27.

Okay. Is the business profitable at this level of sales?

It is. It is profitable. I think the challenge is that on a year-over-year comparison basis, it was very profitable a year ago, and it's not as profitable now, but it's still profitable.

[Operator Instructions] Our next question comes from the line of Jonathan Tanwanteng.

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?

Well, it's pretty early to see any impact from something like an airline going out of business. We -- there has been a fair amount of impact to widebodies coming in and out of the Middle East in terms of overall air traffic. But we have not seen that manifest in a meaningful way in our order patterns. In fact, our orders this quarter were outstanding and really implied significant growth, both on the aftermarket and on the OEM side. We pointed in our prepared remarks to 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 we're prepared to support them at even higher build rates. And I would say 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 we're optimistic about what that means for our business.

Got it. That's helpful. And then just on the revenue guidance, it looks like you didn't change it. And I was wondering 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 noticed the 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 to $245 million. So they're going to be probably at the lower end of that range based on kind of how the first half has gone. 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.

So 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. So we're a little bit worse there. And then we've got a few places in aerospace and defense, mostly on the commercial aircraft side and defense aircraft side where we're a little better. So all these are kind of plus and minus. And yes, we kind of end up in the same place.

Got it. And then last one, if I could sneak one in. Any thoughts on where inflation is going and your ability to push pricing through to your customers? What's built into your forecast today? And what could be the risk there as we go forward?

Yes. We certainly believe that we're able -- I think we've got a demonstrated history of being able to drive price faster than inflation. We certainly keep an eye on that. It's a little bit early right now to call anything on oil prices or anything like that, but we are starting to see some signals there that may require us to kind of go back to customers with some price changes. But you can count on us to be pretty aggressive about the price side.

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. And we're looking forward to talking to you again about another great quarter 3 months from now. Take care.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to the Megger Group Limited Acquisition Call. [Operator Instructions] Please be advised that today's conference is being recorded. On the call today is Bryan Sayler, President and CEO, Chris Tucker, Senior Vice President and CFO.

I would like now to turn the conference over to the first speaker today, Kate Lowrey, Vice President of Investor Relations. Kate, you may begin.

Thank you. Statements made during this call regarding management's expectations for Q2 fiscal 2026 revenue, GAAP EPS and adjusted EPS as well as future growth, growth strategy, expectations, beliefs and benefits resulting from the acquisition and other statements, which are not strictly historical, are considered forward-looking statements within the meaning of the safe harbor provisions of the federal securities laws. Investors are cautioned that such statements are only predictions and speak only as of the date of the release, and the company undertakes no duty to update them, except as may be required by applicable laws and regulations. There is no assurance that the acquisition will be consummated, and there are a number of risks and uncertainties that could cause actual results to differ materially from the forward-looking statements made herein.

The results and uncertainties -- risks and uncertainties in connection with such forward-looking statements related to the acquisition include, but are not limited to, the ability and timing to consummate the acquisition, including obtaining the required regulatory approvals and financing to fund the acquisition, ESCO's ability to promptly and effectively integrate the acquired business after the acquisition has closed and ESCO's ability to obtain expected cost savings and synergies of the acquisition, operating costs, customer loss and business disruption, including difficulties maintaining relationships with the employees, customers or suppliers of the acquired business that may be greater than expected following the consummation of the acquisition and other risks and uncertainties described in Item 1A, Risk Factors, of ESCO's annual report on Form 10-K for the fiscal year ended September 30, 2025.

Now I'll turn the call over to Bryan.

Thanks, Kate, and thanks, everyone, for joining the call today for this exciting transaction. To get started, I want to thank the many team members on both sides of this transaction who have worked diligently through a rigorous process to get us to this point. We're excited to be here today to provide insight on this proposed acquisition. ESCO and our Board of Directors feel strongly that this transaction meets all of our stated M&A objectives and will create shareholder value by adding scale and meaningfully expanding our product portfolio serving utility customers worldwide.

I'm very happy to welcome the great team at Megger to ESCO. I can tell you that Megger has been close to the top of our list of M&A targets for the better part of a decade, and I am very proud to be bringing it into our portfolio. Megger is one of very few scaled global platforms in electrical test and measurement with a 130-year history and brand heritage and deep customer relationships with utilities and industrial operators worldwide. Assets of this quality, scale and strategic fit rarely come to the market.

We strongly believe in the compatibility of our cultures and the strategic fit with our overall portfolio, the Utility Solutions segment and Doble in particular. These are two highly complementary brands across multiple fronts, products, services and geographic exposure and combining them creates a strong global franchise, providing key products and services to a customer base that very much needs partners like Doble and Megger to help them get the most from their assets in the coming decades. We have a chart presentation available on our website to accompany our remarks, and I'll get started with Slide #3.

Adding Megger to the ESCO portfolio expands our capabilities as a valued partner to utilities worldwide. Megger is a leading provider of electrical test, monitoring and software solutions with integrated offerings that span the full utility maintenance life cycle. They have a long track record of serving blue-chip customers and delivering strong financial performance. Adding Megger expands our technology portfolio, serving markets with secular tailwinds and creates meaningful synergy opportunities and positions us to accelerate growth in our Utility Solutions segment. This combination provides complementary Utility Solutions capabilities when paired with our existing Doble business and adds important scale to a core ESCO business.

Let's move to the next chart, and I'll take you through the deal metrics. The purchase price is USD 2.35 billion for the business, consisting of a little more than $900 billion in -- excuse me, million, $900 million in cash and ESCO equity valued at approximately $1.4 billion. The cash portion will be funded through existing cash on hand and incremental debt with committed financing in place. The transaction will represent a multiple of approximately 14x the 2026 expected synergized EBITDA.

Upon closing of the transaction, TBG will have nomination rights for one seat on ESCO's Board of Directors and will own approximately 16% of the company. This deal aligns with the ESCO strategic planning process that we have discussed with you in the past as it continues our shift towards high-growth end markets, adding complementary technologies and capabilities that increase our scale and product breadth in serving the global utility market.

We expect to realize approximately $60 million in cost synergies by the end of year 3 and for the deal to be accretive to adjusted earnings per share in the first 12 months. Megger is expected to be accretive to USG revenue growth rates and highly accretive to adjusted earnings per share in year 2 and beyond.

Cash consideration will be funded through cash on hand and incremental debt with committed financing in place. We expect our leverage ratio to be 2.5x EBITDA or less when we -- when the deal closes, and we expect to be able to delever to less than 2x within the first 12 months. Post closing, we expect capital allocation to be focused on debt paydown as we focus on executing the integration of Megger and Doble. The transaction is subject to regulatory approval in both the U.S. and internationally, and we anticipate a closing date in the first quarter of our fiscal 2027.

Let's go to Slide 5 and talk a little bit more about the business. Megger has a 130-year history as a market leader providing electric test and measurement equipment. They are a global utility solution provider with a strong presence in Europe and the U.K. and will meaningfully expand our geographic reach. They operate out of seven primary manufacturing facilities and have expected 2026 revenue of $590 million. They offer a wide variety of products, software and services that are nicely complementary to Doble's product and service offerings.

Let's move to Slide #6. This slide highlights the complementary nature of the offerings that Doble and Megger provide to their global utility customers. The addition of Megger will broaden our portfolio of low-voltage battery, cable, water leak detection and circuit breaker testing, along with adding to our software and training product offerings. Our Doble business nicely complements Megger with its strong offerings in condition monitoring, power system simulation and services.

As highlighted on Slide #7, Megger and Doble together will serve the full utility maintenance life cycle from reactive to predictive maintenance. The companies have an extensive and complementary core test and measurement products. Doble has highly valued condition monitoring product line, while Megger's recent acquisition of IPS offers an integrated software solution for asset life cycle management, grid operations support and protection and asset testing that can be tailored to meet the needs of utilities worldwide. These are very important needs for utility customers and ESCO will now be well positioned to support our customers with our diverse capabilities in a holistic and value-added manner.

Let's go to Slide #8. As mentioned earlier, we expect to realize approximately $60 million in cost synergies over the initial 3 years post close, which would result in a 300 basis points of adjusted EBITDA margin expansion. Our expectation is that these savings will primarily be driven by optimizing our manufacturing footprint and the potential for in-sourcing some of Doble's products, leveraging our direct material spending and engineering expertise and the potential to synergize R&D, go-to-market and overhead expenditures in SG&A.

Let's go over to Slide #9. This slide shows the evolution of our revenue profile related to our recent portfolio moves. The middle pie chart reflects the impact of the sale of VACCO and a full year of maritime revenue on the business in 2026, which has resulted in the A&D segment currently comprising approximately 50% of our overall portfolio, with USG being 30% and Test 20%.

In the third pie chart, you can see the pro forma impact of adding in $590 million related to Megger's expected 2026 revenue. The addition of Megger would increase USG revenue to slightly over half of the company's revenue with A&D at roughly 1/3 and Test would decline to 14%. The Megger acquisition represents the next step in our portfolio transition, increasing our scale in the utility solutions market. Going forward, 85% of our revenue will be serving the A&D and utility markets where we have differentiated products with leading market positions, serving industries with long-term secular growth drivers.

Let's go to Slide #10. This slide highlights our positioning in the A&D and USG markets after the transformative portfolio moves that we've made over the last 2 years. On the USG side, utilities face electric demand that is forecasted to double by 2050, with similar growth expected globally driven by AI infrastructure build-out, heat pumps, reshoring, EV charging and the electrification of everything. Our diagnostic solutions help utilities push more power through the existing grid, where the average age of large power transformers exceeds 40 years. In addition, we are well positioned to support utilities as they invest in renewable generation and the infrastructure needed to connect it, along with the digital transformation required to improve efficiency, reliability and sustainability.

In A&D, commercial aerospace OEMs are committed to increasing their build rates to meet the long-term demand of airlines and geopolitical tensions are driving higher defense budgets, benefiting military aerospace and naval spending. Submarine programs are a top priority in the U.S., and the Navy is completing a multiyear submarine procurement effort intended to strengthen the supplier base as it ramps up build rates. In the U.K., the government is developing its next-generation fast attack submarine in support of the AUKUS program. We are well positioned to serve the growing unmanned underwater vehicle market as customers address heightened maritime security concerns.

Let's go to Slide #11 and discuss how the transaction meets our stated M&A goals. We've taken a thoughtful and deliberate approach to ESCO's enterprise strategy in recent years, focusing on acquisitions that strengthen our technology-led leadership in our preferred end markets. We target businesses that are complementary to our core operations with proven financial performance and predictable revenue streams in attractive high-growth end markets. The acquisition of Megger clearly fits these criteria, a differentiated business with a long track record of solid financial performance while serving the asset maintenance needs of utilities worldwide.

Moving on to the final slide. The addition of Megger is another exciting step forward as we execute our plan to supplement organic growth with strategic M&A. Our Utility Solutions businesses are well positioned to benefit from increased investment in utility infrastructure as global electricity demand drives upgrades and the expansion of an aging grid. This acquisition supports our strategic objectives while maintaining a reasonable leverage profile. In summary, ESCO will be strengthened by the steps we're taking to grow our portfolio and increase exposure to end markets with compelling long-term growth.

With that, we'll open up the phones for a Q&A session.

[Operator Instructions] And our first question will come from Scott Deuschle with Deutsche Bank.

Bryan, can you say what Megger's revenue and EBITDA was in calendar 2025?

Chris, you got that right there?

Yes. So it's actually not quite calendar. Their fiscal year-end is November 30. So that's kind of the numbers we're using on that basis right now. They were around -- just below $540 million of revenue and like, I'd say, high teens EBITDA.

Okay. And would you expect their growth rate to be higher than that 6% to 8% you're guiding Doble for in calendar '26?

Yes. We would say that they're probably more in the 7% to 9% range. They've got really good exposure internationally and a couple of parts of the market that -- where they'll complement Doble nicely.

Okay. And then, Bryan, can you give us a sense as to what percentage of Doble's products could potentially be manufactured inside Megger's facilities? And does Megger have spare manufacturing capacity to take on those products?

Yes. That's one of the things we're really excited about is Megger does have really outstanding manufacturing capabilities right up from the board, SMT lines, et cetera, both in Europe and in the U.S. And they have plenty of additional capacity. Most of Doble's products with the exception of our DGA analyzers, most of those products are made by third-party contract manufacturers. So we're going to have a substantial opportunity there.

Okay. And sorry to ask so many questions. But Chris, what share price will the $1.4 billion equity component be priced at? Is it based on the share price when the deal closes or something else?

No, it's -- we used a VWAP mechanism. So we're going to issue just over 5 million shares at around $280 per share. So that's kind of how that's going to work.

Okay. And then last question, if you could just characterize the cadence of the cost synergies, that $60 million. Is it relatively linear across the 3 years or more weighted to the year 3?

Yes. We've modeled it linear at $20 million a year through the first 3. I do think we've obviously got to continue to do integration planning. We've done a lot of work already to get comfortable with the numbers. And we feel like we're going to be able to get after this pretty quick. So it's potential -- it could come in a little faster, but we thought it prudent to model at $20 million a year, and that's what we did.

[Operator Instructions] The next question will come from Jon Tanwanteng with CJS Securities.

Congrats on the deal as well as the stronger Q2 results. I was wondering if you could talk a little bit more about Megger's end market breakdown. Maybe what portion of their business is directly tied to utilities and grids, what portion isn't? And then maybe break out any kind of end markets of note like data center and what those pieces are growing at?

Yes. So they -- so broadly speaking, we would describe it as electrical. They do have a substantial amount that's in utility, but they do have exposure to data center. I think I got some numbers from them that were in the millions of dollars of direct to data center and then a lot of supporting activities, which would be similar to kind of what Doble is doing.

One of the benefits of this transaction is it does give us a lot of exposure to areas that Doble has not historically had a presence, and that would be more in the like C&I type electrical work. They do a lot more in distribution than Doble has historically; a lot of high-voltage cable testing, which is entirely in addition to what Doble does today. So yes, it's a very complementary type of transaction, and they do have exposure to some higher-growth areas that Doble hasn't quite had in the past.

Okay. Great. And did you mention the expected time to close and if there's any potential antitrust issues that we should be aware of?

We don't expect there to be any real risk there, but those things can be time consuming. So we've got it estimated at about 6 months. There are a number of jurisdictions that we have to go to. Not very much risk about that process. But as you know, those things can be time consuming. So we've got it kind of -- we're thinking that we'll be closing in our first quarter, which would be in that October to December time frame.

Got it. And then you have a defined target for cost synergies, but maybe can you talk about revenue synergies, whether that's cross-selling, regional access or things like cross-pollination of best practices and business models?

Well, I want to be clear that we have not modeled any kind of volume or revenue synergy as part of this deal. But I think we do think that given the diversity of these two businesses and the excellence of the engineering teams on both sides, we do think there will be a lot of opportunities to combine products, create new solutions and ultimately grow the business at a rate that's faster than the two businesses are growing independently. But I want to restate, we have not included any kind of revenue synergies as part of our model.

And the next question is going to come from Josh Sullivan with JonesTrading.

So just in the presentation, you talked a bit about Megger's software and analytics offering. Can you just highlight what they're currently doing there and maybe what portion of the business that is? And then as you have the datasets from both Megger and Doble, what could that look like as far as a product offering and maybe what you can bring to customers.

Yes. Well, that's a great question, Josh. It's one of the more exciting aspects of this deal. Last year, Megger completed the acquisition of a business that's called IPS. And IPS is a really exciting business. And what the intent there is to broadly utilize advanced analytics and make those available to utilities. I think you know that we've had this incredible Doble database that we've been trying to figure out how to really deploy in this kind of modern software world. And we think that kind of taking the IPS tools and talent and applying it with a lot of the core data stuff that comes out of our condition monitoring tools and our traditional test database, we think that's going to be a real powerful combination and it's going to give us the ability to do things for our customers that they, first of all, need and really aren't able to get anywhere else.

And the next question will come from Jon Tanwanteng with CJS Securities.

I was just wondering if you could give us any color on what you expect the incremental debt portion to be and what the market looks like for interest rates on that.

Yes. So we've got a bridge facility in place now to kind of backstop the deal, and we're going to now be working to secure a term loan A and a term loan B to be like the permanent financing in place for that. We're partnered with some lending institutions and feel good about our ability to do that. We've modeled, Jon, a 6.5% interest cost. I think where we sit today, we would expect to be able to do better than that. And so that's kind of how we're looking at it right now.

Okay. Great. And then does it make sense to explore any opportunities to reduce leverage more quickly, maybe some portfolio management or maybe pieces that aren't core within Megger or any other parts of the business?

Well, listen, that's -- it's always one of the tools in our toolbox, but that's not something -- given the leverage profile here at 2.5 or less, we don't feel like we're compelled to do anything like that. And listen, we'll be talking with our Board, but I would not anticipate that in the near term.

And the next question will come from Scott Deuschle with Deutsche Bank.

Sorry to ask a question on the quarter. But Chris, can you characterize what drove the EPS beat in the quarter relative to your guidance?

Yes. I would say that generally, we've had another good quarter. I would say, kind of in line or better performance and probably a little bit of upside at A&D and Test kind of driving that favorability. I don't want to say much more than that. I mean we'll get into the details here in a few weeks, but it's a good quarter across the board. Yes.

I am showing no further questions in the queue at this time. I would now like to turn the call back over to Bryan for closing remarks.

Well, thanks, everyone, for listening to this call. We're obviously very excited about this transaction. It will mean a lot for shareholders. It's going to mean a lot for our industry. And I think we're going to be able, as I said earlier, to use the diverse capabilities of these two businesses to create even better solutions that are going to really help power the world. So looking forward to talking to you in a few weeks on our earnings call. Thanks for tuning in today.

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Good day, and thank you for standing by. Welcome to the First Quarter 2026 ESCO Technologies Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. On the call today, we have Bryan Sayler, President and CEO; Chris Tucker, Senior Vice President and CFO.

And now I'd like to turn the conference over to the first speaker today, Kate Lowrey, Vice President of Investor Relations. Kate, now you 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 these forward-looking statements, except as may be required by 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.

Now I'll turn the call over to Bryan.

Thanks, Kate, and thanks, everyone, for joining today's call. We are pleased to meet with you this afternoon to discuss ESCO's strong first quarter results, which have our fiscal 2026 off to a great start. We booked over $550 million in orders in the first quarter, which is an increase of 143% over the prior year.

All three of our segments saw double-digit orders growth, led by strong aerospace demand and large Navy orders at Maritime and Globe. We believe in the long-term growth drivers across our end markets, and it was great to see the positive momentum across our businesses to start the year. Top line sales growth of 35% combined with 380 points of adjusted EBIT margin expansion drove a 73% year-over-year increase in adjusted earnings per share from continuing operations to a Q1 record of $1.64 per share.

Our exceptional financial results for the quarter are a testament to our strategic positioning across our served markets combined with disciplined execution by our global team. Chris will take us through all of the financial details in the quarter, but before we get to that, I want to give you a few comments on each of the segments.

Let's start with Aerospace & Defense. As I mentioned, we're seeing tremendous order strength on both U.S. and U.K. Navy programs from the Maritime business and from our organic baby business. In addition, sales were up 76% in the quarter driven by the addition of Maritime and double-digit organic growth across our Navy and aerospace programs. The growth story here remains intact, driven by increasing build rates for commercial aerospace OEMs and sizable investments from our defense customers as they refresh and expand their capabilities. Overall, we're seeing the benefits of our A&D segment sharper focus on the Aerospace and Navy markets where the long-term outlook remains quite positive.

Switching over to our Utility Solutions Group. The results here were a little bit more mixed in the quarter. Orders were up double digits with very strong order flow for services, condition monitoring and offline test equipment at Doble. But this was partially offset by lower demand in our renewables business. Sales were up modestly over the prior year as renewables headwinds largely offset the 6% revenue growth at Doble.

Overall, we remain quite excited about the outlook for our utilities business. The majority of the activity here is driven by utility capital spending focused on grid reliability and capacity increases, and we continue to see those forecasts grow. ESCO's capabilities have a clear role to play in assisting utilities to meet growing electricity demand, and we remain bullish on the long-term prospects for growth here. As we have discussed previously, the renewables market is recalibrating right now as U.S. developers focus on completing current projects in order to satisfy the safe harbor provisions related to tax credits, which expire in July. This has slowed domestic renewables investments in the near term but we continue to believe that longer term, renewables will play a vital wall as a cost competitive source of generation as utilities work to meet the increasing demand for electric power.

Finally, I'll touch on the Test business, which had a robust start to the year with orders up 17% over the prior year and revenue up 27%. This business had a nice year of recovery at 2025 and it's great to see that momentum continue with significant growth during the first quarter. This is a technology-driven business with broad capabilities to serve customers across the RF test and measurement in industrial shielding markets. The team here is executing very well, and we're excited at the outlook for test continues to improve. Overall, our Q1 results got us off to a great start for the year. With record backlog and continuing strength across our businesses, we are raising our full year sales and earnings guidance.

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 3, which shows the financial highlights for the first quarter. The bar charts across the top of this page clearly show that ESCO had a tremendous first quarter. The key theme with ESCO's financial performance right now is that core company performance on an organic basis is quite strong, and the ESCO Maritime acquisition is adding significantly to that base company performance. It's a powerful combination.

Getting the numbers, we start with orders, which increased 143%, organic order growth was double digit for all three business platforms with Aerospace & Defense being particularly strong. Maritime added $238 million of orders as the business received large contract awards in the U.K. On the sales side, the reported growth was 35%, which was comprised of 11% organic growth and $51 million of sales from Maritime. On the profitability side, we saw adjusted EBIT margins improved by 380 basis points to 19.4% and adjusted earnings per share increased by nearly 73% to $1.64 per share.

Next, we'll go through the segment highlights, starting with Aerospace & Defense on Page 4. A great quarter here, starting with orders, which came in at over $380 million compared to $75 million in the prior year quarter. Order activity was quite strong from the commercial and military aircraft customers. Additionally, Navy order activity was also very strong with organic growth driven by Virginia Class Block VI orders.

Sales in the quarter were $144 million with organic growth of 14%. This robust organic growth was driven by strength from commercial and defense aerospace, as well as the Navy business. So really nice performance from all parts of the core Aerospace & Defense platform.

On the profitability side, we had tremendous increases with adjusted EBIT margins up to 26.5%, which is more than 500 basis points of improvement. Adjusted EBIT and adjusted EBITDA dollars both more than doubled from last year's first quarter. Again, this demonstrates the strength of our base company performance and the additive impact of the ESCO Maritime acquisition. Margin increases were due to positive impacts from leveraging sales growth and increased prices, while Q1 also had favorable mix due to aftermarket sales.

Next, we'll go to Chart 5 in the Utility Solutions Group. Orders here were up 10% in the first quarter, driven by strong performance at Doble, where orders grew by 15%. Backlog finished at nearly $155 million, up 8% since September 30. Sales in the quarter were up a modest 1%. Doble sales growth of 6% was mostly offset by declines in NRG. Doble continues to see good end-market activity across a number of product lines serving the regulated utility customer base, while NRG continues to see near-term market weakness as the renewable activity resets. Adjusted EBIT dollars were down just over 4% with price increases and sales volume leverage at Doble, unable to offset margin drops in NRG.

Next, we have the Test business on Page 6. This business had a terrific start to fiscal '26 with orders up over 17% and sales up nearly 27%. This business is seeing robust market activity centered around U.S. Test & Measurement, industrial shielding, medical shielding and power filters. Adjusted EBIT margins improved nicely increasing to 13.8%, which represents an increase of 320 basis points from last year's first quarter. The business is leveraging the sales growth nicely and also increasing margins via price increases and cost containment.

Going to Chart 7, we have cash flow highlights for the first quarter. Operating cash flow in the first quarter was very strong, more than doubling the $68.9 million on a continuing operations basis. This was led by an increase in contract liabilities at the Navy businesses. Capital spending increased slightly in the quarter, and there was also a payment of just over $5 million during the quarter for the final working capital settlement related to the ESCO Maritime acquisition last year.

Our last chart is #8, where we have the updated 2026 guidance. With the great start to the year, we were able to substantially increase the 2026 outlook. The sales guidance is increasing by $20 million at the midpoint to a range of $1.29 billion to $1.33 billion. The increase is coming primarily from the Test business where we had Q1 outperformance in sales and orders driving up the full year forecast. The original sales guidance for Test was for growth in the range of 3% to 5% and the updated guide is for revenue growth in the range of 9% to 11%. Additionally, we had a slight increase in the A&D sales outlook.

Overall, sales increased -- the sales increase is driving increased adjusted EBIT performance expectations for 2026. Additionally, the first quarter tax rate was favorable, and that impact will flow to the full year forecast. This means that full year tax rate projections are now in the range of 23% to 23.5% compared to 237% to 24.1% in the original guidance. All of this drives the full year adjusted earnings per share to a range of $7.90 to $8.15 per share.

Compared to the prior guidance range, this is an increase of $0.38 per share at the midpoint and represents growth of 31% to 35% compared to 2025 adjusted earnings per share. The original outlook represented a strong growth plan for ESCO, and we are pleased to share this increased forecast, representing an even stronger growth trajectory.

That completes the financial summary, and now I'll turn it back over to Bryan.

Thanks, Chris. So as you've heard from our commentary, Q1 was a great start to the year. Robust orders and strong execution has put us in a position to raise our outlook for the full year.

So with that, we're finished with our prepared remarks and can turn it over to the Q&A.

[Operator Instructions] The first question today will come from the line of Tommy Moll of Stephens.

Bryan, my first question is on the A&D orders. To the extent you can comment on shipset content on either side of the Atlantic, if there's any update there, we'd appreciate it. And maybe bigger picture on orders. Last quarter's 0.83 book-to-bill was clearly not the right level. This quarter's 2.66 is probably not a sustainable level. But how would you -- just give us something about the -- some kind of enduring takeaway here on the state of affairs there.

Well, I'll take the last piece first. And that is, I think the enduring takeaway is that the long-term demand in all of these markets is really, really good. I think we've signaled a number of times that Navy, in particular, is going to be very lumpy. I think we mentioned in November's conference call that we had a large couple of hundred million dollar order in the U.K. that came through.

Unfortunately, the way that the MOD thinks about those things, we're not really in a position to be able to give you specifics on platforms or our content there. So I would not be able to give you a lot of detail there. I'd say over on the U.S. side, we also received in the quarter about $30 billion in orders for Virginia Class Block VI, and we would expect that to kind of be continuing. But again, that's going to come in big chunks. And so that's going to be kind of lumpy. And it's not always going to be in the same quarter every year. So the year-over-year, quarter-to-quarter comparisons aren't really great.

I think the other big story here is that we really did see pretty robust return to orders from our aerospace OEMs. 2025 was kind of a year that was a little soft on the order side as build rates were kind of stable and there seemed to be a lot of management of inventory going on in the supply chain, but we think that they're kind of through that. We're really encouraged to see Boeing and the other OEM is kind of getting their build rates up. And we're starting to see that come through on our order book.

I'd also say there was a pretty good amount of military aircraft activity in the quarter as well. That's something that is more stable, probably we'll be lumpy through more quarter cycle. But generally speaking, we'll be pretty repetitive on a year-to-year basis with a little bit of growth.

Bryan, if I could stay on A&D for another question. Just looking at the results in the first quarter and the guide for the year, I'm talking revenue now. It looks conservative at first glance. I mean you raised it from a 7% to an 8% at the midpoint, but you started the year in the teens on a pretty tough comp. So maybe walk me back from that assumption if there's something I'm missing here.

Yes. Tommy, this is Chris. I would say that we do expect that the first quarter is going to be the strongest growth. And we would expect to still see solid growth through the year, but maybe kind of taper down a little bit. And then when we get to Q4, we have kind of lower growth overall. Again, I think that's a function of the comps a little bit. So we still see a high single-digit outlook there in the core business, but understanding it's a little bit front-end loaded.

And the next question will be coming from the line of John Tanwanteng of CJS.

If you could start, what's driving the strength in Test? And how did that change so quickly in the span of 90 days?

Listen, the -- a lot of our traditional core markets, particularly electromagnetic compatibility, medical shielding, those really came back very, very strong this year. This quarter, I would say we want a couple of pretty good-sized orders, and that's really -- because it happened earlier in the year, we're going to see a lot of that come through as revenue within the year.

I would also say that we're starting -- we've seen kind of a return to regular orders from our -- kind of our EMP filter, product line that supports some of the government data centers and that sort of thing. So listen, just a pretty broad based. I would tell you that the one area that we're still not feeling love on is the wireless business.

I mean, we did see a little bit of growth there, but it's coming off a very low base. So that's the one area where we're probably still looking for some recovery. But I would say, overall, quite good. A little bit of A&D in there, some microwave stuff. So really good -- and I would say Europe and the U.S. were the two big leaders there.

Got it. And then, are you within sight of the trough of the NRG business? Or do you think that's going to extend a little further out?

Yes. Listen, I think that what we believe about that is that the focus for all of the developers in the U.S. is really they're hyper focused on kind of getting as much done on their existing projects by the end of July so that they can qualify as much of that as possible for those tax credits.

And so a lot of our content has already been delivered on some of those projects. And so that's leading them to make lower investments right now on new projects. But we expect that, that's going to kind of revert in the second half of 2026. So it might be in our fourth quarter, it might be in the first quarter of next year. That's when we think that things are going to kind of return to what we would call normal growth, which would be kind of high single digits kind of like our regulated utility business operates.

So please remember, John, that for -- after the inflation Reduction Act was put in place, that whole market kind of got turbocharged for 2 or 3 years. And now they're kind of getting off that sugar high from all those tax incentives, and it's going to take a couple more months to kind of get back into the pocket and really making good decisions. The renewables business will have a big role to play because it is very cost-effective, relatively easy to deploy and the assets are available. And those are all characteristics that utilities are looking for.

Got it. And then last one, if I could. Just the large orders of the Maritime business. Can you just talk about how they layer in over the next couple of years? And if that's an acceleration of the growth rate or if that's in line with what your expectations were?

Yes. I would say it's in line kind of since we've owned the company, we closed the deal at the end of April. And so these were kind of the expectations were that this order would come in. As far as how that layers in, I would say we would get a little revenue starting in the fourth quarter, and then you'll start to see it kind of kick in more in '27 and '28. So these are long-term contracts and programs that really kind of help solidify the outlook for '27 and beyond, I would say. So that's kind of how we're thinking about them and really not much of a revenue impact this year, although there will be a little bit towards the end of the year.

Coming from the line of Tommy Moll of Stephens.

A follow-up question here. I had to ask on capital allocation. You'll look not too long from now and potentially have a net cash balance sheet. So I'm just curious what comments you can make on M&A funnel or capital allocation more broadly.

Yes, yes. Well, listen, I think with the sale of the VACCO business and the completion of the Maritime business, and that integration is kind of going pretty well. Our cash flow really has been outstanding, and our leverage is pretty low. We aren't actively rebuilding a pipeline of M&A opportunities. The market looks pretty healthy. And we do see a number of different prospects on the horizon, nothing we can announce at this point in time, but we do have a couple of good things that we could get some done this year.

So that's really our primary focus for deployment of capital would be to continue to add good fit, strategic acquisitions. I think that we're going to continue to be a little bit picky, focused primarily on our Utility segment, our Aircraft Components segment and our Navy segment, where we think we understand those markets pretty well, and they are all markets that have really good long-term secular growth characteristics. So that's kind of where our focus is right now.

And we have a follow-up question from the line of John Tanwanteng of CJS.

I was wondering if you could talk a little bit more about the military business in the A&D segment that is not maybe you mentioned strength in military aircraft. Just wondering where that's coming from, number one? And if there's anything outside of that, maybe drones or munitions that's driving some strength there.

Yes. I'd say it's pretty broad-based. But a couple of highlights there. You would have seen in the 2025 reconciliation bill that they put a lot of money out there. They're buying 21 of the F-15 EX fighters. That's a platform that we have a lot of content on. There's a lot going on with regard to the sixth-generation fighter platform, the F-47, and that's been a positive story for us. So yes, there's a lot of good things going on. But I would say, yes, the traditional kind of F-35 missile programs, all those things are all kind of coming through for us.

Got it. And then just for the broader airplane business, the commercial side, how closely does your guidance, I guess, mirrors the targeted production rates at the OEMs? Or are you still giving them a little cushion in your outlook?

No, we still have cushion. I think that we follow our OEM partners very, very closely. But I think that we have our own opinion, which is probably modestly skeptical of their ability to get -- to reach their targets. And so when we are communicating to you, I think you should assume there's a little bit of discount on there, which -- listen, if they're successful, then that's going to be all upside for ESCO.

And this concludes today's Q&A session. I would like to turn the call back over to Bryan for closing remarks. Please go ahead.

Well, listen, thanks for taking a little bit of time to hear about our first quarter. We're pretty excited about the results and probably more excited about our growth prospects going forward. So we'll look forward to talking to you again next quarter.

Thank you for joining today's program. You may all disconnect.

Good day, and thank you for standing by. Welcome to the Fourth Quarter 2025 ESCO Technologies Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. On the call today, we have Bryan Sayler, President and CEO; Christopher Tucker, Senior Vice President and CFO. And now I'd like to turn the conference over to our first speaker today, Kate Lowry, 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 these forward-looking statements, except as may be required by 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. Now I'll turn the call over to Bryan.

Thanks, Kate, and thanks, everyone, for joining today's call. We are pleased to meet with you this afternoon to discuss our fourth quarter results. And by any measurement, we finished the year strong and closed out another great year at ESCO. Q4 was the first full quarter to include the Maritime business which had impressive performance, leading to a significant impact on our top and bottom line results. But in addition to Maritime's contribution, we delivered 8% organic sales growth in the quarter. This top line sales growth, combined with 100 basis points of adjusted EBIT margin expansion at the bottom line to drive a 30% year-over-year increase in adjusted earnings per share from continuing operations to a record $2.32 per share. 2025 was a truly transformative year for ESCO. The successful acquisition of Maritime and the divestiture of VACCO were both title steps in the evolution of our portfolio. We now have an expanded presence in the Navy market, offering a broader suite of products across both U.S. and U.K. platforms. With our exit from the space market, our A&D segment now has a sharper focus on serving the aerospace and Navy end markets, both of which present durable long-term growth opportunities.

Our exceptional financial results this year are a testament to the dedication and expertise of our global team. I want to extend my sincere thanks to everyone at ESCO for their hard work and dedication throughout the year. Their commitment enabled us to deliver outstanding operating performance during a period of significant change. Chris will take us through all of the financial details of the quarter. But before we do that, I want to give you a few comments on each of our segments. Let's start with Aerospace and Defense. We remain positive regarding the long-term outlook for both the aircraft and Navy markets. We see fundamental drivers across both of these markets and expect increasing production rates to drive growth going forward. We continue to see positive momentum on the Navy side as in addition to contribution from Maritime, organic sales were up 53% in the quarter and 24% year-over-year. Our U.S. and U.K. customer bases are highly focused on increasing build rates for submarines, and we see the benefits from this in our sales and our order rates.

We continue to be very pleased with the Maritime acquisition, which has started up 2026 very well, already booking over $200 million in orders in the first month of the new fiscal year. We've been anticipating these orders, and it's been a really nice way to start off the new year. In Aerospace, revenue was up over 10% in the quarter and 14% year-over-year. It's been good to see Boeing successfully ramp up production and to get approval to take 737 build rates up to 42 per month. As we all know, the end market demand is there and their customers really need more planes. We remain positive on the long-term outlook in the aircraft end markets.

Switching over to the Utility Solutions group which had a solid quarter, highlighted by record orders of over $100 million and a 29% adjusted EBIT margin. Sales growth was a little lower this quarter due to policy headwinds in the renewables market, but Doble's revenue was up over 7% over the prior year. As we have discussed previously, there are many factors driving the increase in electricity demand and utilities need to both maintain and expand the grid. On the Doble side, revenue will vary from quarter-to-quarter, but the long-term growth drivers remain firmly in place. The renewables market is recalibrating right now as developers focus on completing current projects as tax credit subset under the new legislation. This has slowed growth domestically in the near term, but we continue to believe that longer term, renewables are a cost competitive source of generation and we think that long term, utilities will favor a mix of generation sources, and that renewables will continue to have a vital role to play as utilities work to meet increasing demand for electric power.

Finally, I'll touch on the Test business, which had a really nice fourth quarter with 10% revenue growth and a high teens EBIT margin. For the year, it was great to see a rebound in orders, which were up 25% over the prior year. One of the strengths of our test business is the diversity of the end markets that it serves. And with the exception of wireless, we are now back to seeing strong activity across all of our test and measurement and shielding industrial markets. The key takeaway here is that the test business has stabilized and we feel good about their trajectory as we move into 2026.

In summary, we're excited about the future as we continue to see robust growth drivers across our core aerospace Navy and electric power markets, supported by record backlog, a strong balance sheet and entrenched positions in our served markets, we are well positioned to deliver continued value for our shareholders. With that, I'll turn it over to Chris, who will run you through all of the financial details for the quarter.

Thanks, Bryan. Everyone can follow along on the chart presentation. We will start on Page 3, which shows the financial highlights for the quarter. The bar chart on Page 3 illustrates that this was a strong quarter for ESCO. You'll see as we go through the results, our recurring theme of the Maritime acquisition having a sizable impact but also seeing strong underlying performance from core operations. beginning with orders, which increased by 30% on a reported basis and delivered organic growth of 13%. Sales for the quarter were $353 million, which represented 29% growth and organic growth came in at 8%. So for orders and sales, you can see, it was a great quarter.

Moving to profitability. Adjusted EBIT improved by 100 basis points to 23.9%, and adjusted earnings per share increased by 30% to $2.32. Next, we will go through the segment highlights, starting with aerospace and defense on Chart 4. Orders were quite good with growth of 60% on a reported basis and organic growth of 12%. In total, we delivered $142 million of orders, which led to ending backlog of just over $800 million, a good indicator of future growth for the business. Sales for A&D in the quarter came in at just over $170 million or growth of 72% on a reported basis, and organic growth was 13%. Organic growth was driven by growth in the commercial aerospace and Navy end markets. Adjusted EBITDA dollars grew by nearly 63% in the quarter and margins came in at 28.6%. Margins were down slightly from last year's record level in Q4 as we saw slight dilution from the Maritime acquisition and core margins down 80 basis points compared to last year's fourth quarter.

Moving to the next chart, we have the Utility Solutions Group, which once again saw good order activity and delivered 17% growth compared to last year's fourth quarter. The order growth was driven by Doble, which saw strength across the business. Backlog Sweet Utility Group ended at just over $143 million, which represents growth of 20% compared to prior year-end. Sales growth was more muted with 2% growth in the quarter. Once again, the growth came from Doble, which was up 7%, while NRG was down 20%. Bryan mentioned this in his comments, but we continue to see the renewables market scuffle a bit throughout 2025. Margins were very good for the utility business in the quarter with adjusted EBIT dollars increasing 12% and and adjusted EBIT margins expanding by 270 basis points to 29.1%. This is a great performance as price increases, favorable mix and good cost containment all contributed to the margin result.

Moving to Chart 6, we have the test business. Order activity here was solid with growth of 6%. This business ended the year with $187 million of backlog, so it's been a nice year of recovery here and great to see the backlog up nearly 20% compared to September of last year. Sales growth was strong in the quarter with a 10% increase to $72 million. Adjusted EBIT margins came in at 17.5%, a reduction compared to last year's record quarter as unfavorable mix and inflation were more than offset by leverage on the sales growth.

Next is Chart 7, where we show full year results for continuing operations. The Danaher is impressive with strong double-digit performance on all key metrics demonstrating the strength of our core portfolio and the clear benefits of the Maritime acquisition. You can see the note at the bottom, highlighting that we have achieved record performance in 2025 on all key metrics. Orders finished in excess of $1.5 billion, growth of over 56%. Organic order growth was 11% with double-digit organic order growth from the utility and test businesses. Reported sales increased 19% to nearly $1.1 billion, with A&D and Test both delivering double-digit organic sales growth. On the profitability side, adjusted EBIT margin improvement was significant with 20.3%, representing an increase of 180 basis points. All 3 businesses delivered increased adjusted EBIT margins in 2025. This led to adjusted earnings per share of $6.03, representing growth of 26%.

Next is Chart 8 with our cash flow highlights. ESCO had a breakout year in operating cash flow delivering just over $200 million from continuing operations, which compares to nearly $122 million in the prior year. Earnings growth and good working capital performance drove the 2025 increase. The teams across ESCO have focused sharply on working capital improvement, and we are starting to see nice benefits from that activity in our operating cash flow results. Capital spending increased to just over $36 million in 2025 as we saw modest increases from all 3 segments. We finished the year with an EBITDA to net debt ratio of 0.56x, and as we saw strong cash generation and also proceeds from the VACCO divestiture facilitate a large debt paydown during the fourth quarter.

Our last chart is #9, which contains our fiscal 2026 guidance. We are expecting to show another strong year financially, which reported sales growth in the range of 16% to 20%. This is comprised of 6% to 8% organic growth from our A&D businesses and Maritime revenue in the range of $230 million to $245 million. For the utility group, we expect growth of 4% to 6%, which includes Doble growing in a range of 6% to 8% and partially offset by NRG. For test, we expect top line growth to be in the range of 3% to 5%. Additionally, we expect nice improvements from adjusted EBIT and adjusted EBITDA margins to drive overall adjusted earnings per share to a range of $7.50 to $7.80, which would represent growth of 24% to 29%. The bar chart at the bottom here show a real nice trend for ESCO on sales and adjusted earnings per share growth.

The 4-year compound annual sales growth through 2025 is 16%, and the adjusted earnings per share CAGR is 27.5%. The company has delivered very well, and we feel strongly that 2026 will continue these great trends. That completes the financial summary, and now I'll turn it back over to Bryan.

Thanks, Chris. So as you've heard from our commentary, FY '25 was a great year, and ESCO's future remains bright as we continue to see a path for value creation enhancement as we move forward. With that, we are finished with our prepared remarks, and we'll turn it over to Q&A.

[Operator Instructions] Our first question comes from the line of Tommy Moll with Stephens.

This is Zack on for Tommy. Could you please give context on how we should think about growth rates and margin trends at the segment level going forward?

Yes. So if you look at the guide we had in there, I mean, we've got the A&D business on a core basis, growing in that 6% to 8% range, and then we've got the maritime addition on top of there, then we've got -- we've got what we have for [indiscernible] and then 3 to 5 for test we would expect margin improvement from all 3 of the segments next year. So I would say, generally, we see 26 as kind of on trend with how we've communicated where the businesses all have been kind of running for the last couple of years and kind of where we are in the cycle.

Awesome. And then can you please give an update on the integration of SMP? Obviously, there was a delay getting the deal closed. But since the close, are you tracking ahead or behind what you had planned?

Yes, I'd say that in terms of the cultural integration and financial integration, operations and all that stuff, I think we're on plan, maybe it's a little bit ahead of plan. I would say things are going very, very well on that front. In terms of financial results, I would say that the Maritime business is ahead of what we originally communicated when the deal was announced. We had some I would say we're prudent and gave the advertised plan, a little bit of a haircut. And as we've gotten through the regulatory approval and into the business, what we found is that they're actually performing at or above their originally advertised plan. So that's been a very welcome result. Since then, we've had some real positive new order activity in the fourth quarter and then just here in the early innings of the first quarter of '26. So yes, we would say that everything is going great here and probably better than we had expected.

Our next question comes from the line of Jon Tanwanteng with CJS.

Really nice quarter and outlook. A really great job there. I was wondering if you could expand on the previous comment, just I think you said something about $200 million in Escamaritime orders. what programs were associated with, number one? And how are you, number, thinking about growth going forward for that business that you've acquired?

Yes. So the $200 million, it was more than $200 million, but it came in, in the first quarter. So Jon, it's in the U.K. And so we're operating under a little bit of a different security scheme there. So we're not going to be able to give precise details on programs and contests and things like that. But suffice it to say that these are U.K. submarine related programs.

Okay. Great. Can you disclose what time frame those are supposed to revenue over?

Yes, those will run out for over 2 years, Jon. So we'll start to book a little bit of revenue in, let's say, the second, third quarter and then we kind of start to ramp it a little bit in the fourth and then it would run out through '27 and beyond. So it's -- those are long-term programs.

Got it. And then just on the aerospace side, are you expecting any headwinds from just the capital slides you've been seeing with the shutdowns in the TSA executed ATCs? Or is that not really significant for you, number one? And number two, as you look into '26 that 6% to 8% growth rate, can you just tell us maybe what the underlying assumptions are, especially with the build rates that the OEM is going up as much as I think they're forecasting.

Sure, sure. Yes. So on the shutdown, we really didn't see any impact from the shutdown and certainly not in the aircraft manufacturing or MRO space. So we are thinking that we are thinking that, that's moved forward without any delay. Overall, I think you asked about the 6% to 8% at Doble. And what we're seeing there is that we're seeing continued strong spending from the utilities that are really focused on grid infrastructure. It's less about the AI piece, it's way more about the reliability and maintaining their existing aging assets. And so that spending is really up. We had a record fourth quarter of orders and here in the early part of the first quarter, it looks like that trend is continuing. So we feel pretty good about the Doble business. I think the challenge here is that the renewable side of the business is definitely seeing a little bit of a challenge as we move forward.

Got it. I think I might have misspoke. I was referring to the 6% to 8% in [indiscernible]?

For aircraft, yes.

Yes.

So that wasn't -- what's happening there is we're seeing really good growth in the build rates for the -- for the various platforms that we're on and I would say from our perspective, in particular, we're seeing growth on -- we're seeing growth of 37%. And then we are seeing broad-based growth. We are seeing some military content that's coming through to our benefit. There's more [indiscernible], some of the newer generation platforms. So all of that stuff is really working to our benefit in the aircraft business. SP-2 Thank you.

[Operator Instructions] We have a follow-up question from the line of Jon with CJS.

I was just wondering if you could expand on the energy business a little bit. Just do you see an inflection point at some point? Or is there might be further downside as companies digest what the new policy a little bit.

Well, I think it's -- yes, so our assessment as follows. I don't think it's a big secret that the inflation Reduction Act in 2022 really kind of turbocharge that entire industry. And so we were seeing 25% to 30% growth rates in '23, '24. And then with the new administration coming in, they kind of certainly got a different perspective and then with the One Big Beautiful Bill, the tax credits that we're driving a lot of that activity are set to expire, I think, mid next year. So what we're seeing from the developers there is really kind of a focus right now on trying to get everything that they currently have under construction qualified for those tax credits. So the fundamentals of renewable energy relative to other forms of energy are still pretty positive from a cost and availability perspective -- but right now, the focus is really on those existing programs.

So what we think is going to happen is there's going to be a downstroke for the industry broadly this year -- and that beginning, let's say, call it, this time next year, I think we would begin to see a little bit of a turn back to what I would call normal growth, so that would be high single digit growth. It's really driven by the fact that we just need a lot more generation that people are going to be able to get built out of natural gas, given all the constraints in that industry. and the solar, in particular, pretty affordable. I think domestically, terrestrial win, it's going to be very challenged in the current environment. But internationally, it's still a pretty thriving business. And Jon, remember, we did not have any exposure in our business to any of the offshore wind stuff or any of the rooftop solar. And that's a lot of carnage in those spaces today. So listen, we think our business right now is very well managed. We've been able to maintain margins. And we believe even though our top line is down a little bit, we think we're taking market share in a down market. And so we're going to be well positioned to kind of take advantage of that normalized growth when it returns to '27.

Got it. And then last one for me. Just any thoughts on capital allocation from here. Looks like you're generating really solid cash flow. It looks like you'll have the debt from Maritime payoff in about a year. What are your priorities at this point?

Yes. We're -- so listen, we've been successful with the acquisition of divestiture and put ourselves right back in a position where we've got a tremendous balance sheet and a lot of firepower. So we are very active in the M&A space. I don't have anything to announce. But I would say that the M&A market has significantly improved in the last half of the year. There's definitely a lot of very attractive assets that either are coming to market or are rumored to be coming to market here in the early next year. So we're looking at those things carefully. Now I want to be clear that we're going to continue to be pretty disciplined about this stuff. We really are most interested in businesses that would fit squarely into our aerospace, our Navy or our utility end markets. And the reason for that is because we assess that those markets have -- first of all, we understand them, but second of all, we assess that those markets have very durable, long-term secular growth characteristics that provide us a really good opportunity to really grow up a business like that added to our portfolio. That's kind of our focus. We've got the balance sheet to go do it, and we're starting to build that pipeline up again.

Ladies and gentlemen, I am showing no further questions in the queue. I would now like to turn the call back over to Bryan for closing remarks.

Well, thanks, everyone. Again, a really tremendous year transformational one more shout out to all the employees of ESCO who really have made this possible. It's been a lot of work. But our team is good at their jobs, and we've been very, very successful and will continue to be in the years to come. So thanks a lot.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.