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.

Christopher Tucker: 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.

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

Thomas Moll: 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?

Bryan Sayler: 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.

Thomas Moll: 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?

Bryan Sayler: 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?

Thomas Moll: Whatever return related underwriting you used on the deal?

Bryan Sayler: 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.

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

Scott Deuschle: 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?

Bryan Sayler: 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.

Scott Deuschle: Okay. Are orders for condition monitoring systems growing faster than the 20% headline number you put up for Doble's orders this quarter?

Bryan Sayler: No, I don't think so. I would say 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.

Scott Deuschle: 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?

Bryan Sayler: 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.

Scott Deuschle: 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?

Bryan Sayler: 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.

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

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

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?

Bryan Sayler: 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.

Jonathan Tanwanteng: 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?

Christopher Tucker: 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.

Jonathan Tanwanteng: 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?

Bryan Sayler: 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.

Operator: I'm showing no further questions at this time. I would now like to turn it back to Bryan Sayler for closing remarks.

Bryan Sayler: 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.

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

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ESCO (ESE) Q2 2026 Earnings Call Transcript was originally published by The Motley Fool