Esco Technologies’ NRG Growth Delays, Defense Shifts, and Inconsistent A&D Guidance Clash in Q3 2026 Earnings Call

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Date of Call: Aug 6, 2026

Financials Results

• Revenue: Reported growth of 14% in Q3, comprised of 8% organic growth and $23M from Maritime acquisition. Year-to-date organic growth of 11%.
• EPS: Adjusted EPS increased 37.5% to $2.20 per share in Q3. Year-to-date adjusted EPS up 55%.
• Operating Margin: Adjusted EBIT margin improved 90 basis points to 22% in Q3. Year-to-date adjusted EBIT margin up 250 basis points.

Guidance:

• Full-year 2026 adjusted EPS guidance raised to $8.30-$8.40, representing 38%-39% growth compared to fiscal 2025.
• Expect 2026 to be another record year.
• Underlying segment growth expectations: A&D 8%-10%, Test 10%-12%, Utility 4%-6% for the year.
• Megger acquisition expected to close in Q1 fiscal 2027, with integration planning underway.
• Anticipate cost of debt around 6% for the deal.

Business Commentary:

Record Backlog and Order Growth:

• ESCO Technologies reported a consolidated book-to-bill ratio of 1.21 in Q3, with record backlog reaching $1.54 billion.
• This growth is driven by strong demand across aerospace, utility, and test segments, particularly in commercial aerospace and defense programs.

Aerospace and Defense Performance:

• The A&D segment achieved a book-to-bill ratio of 116%, with sales increasing by 23%, driven by 9% organic growth.
• The growth is supported by robust demand outlooks from commercial and defense sectors, including commitments to submarine programs and elevated military spending.

Utility Solutions Group Dynamics:

• Doble's orders grew by 30% year-over-year, contributing to an 8% increase in segment sales.
• The growth is fueled by rising power demand, grid modernization, and investments in reliable electrical infrastructure, despite challenges in the renewables market.

Test Business Strength:

• The test segment experienced a 42% increase in orders and a 5% rise in sales, with improved adjusted EBIT margins by 50 basis points.
• This performance is attributed to strong demand for industrial shielding and electromagnetic interference filters, particularly in the U.S. and Europe.

Financial Outlook and Guidance:

• ESCO increased its full-year 2026 guidance, expecting adjusted earnings per share between $8.30 and $8.40, reflecting a 38% to 39% increase compared to fiscal 2025.
• The optimistic outlook is based on continued strong revenue and earnings growth, supported by record backlog levels.

Sentiment Analysis:

Overall Tone: Positive

• "We're pleased to meet with you this afternoon to discuss ESCO's third quarter results. In Q3, we continue to see positive momentum... This continuing strength lifted backlog to record levels... 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." "With another strong quarter, we are increasing the full-year 26 guidance... we expect 2026 to be another record year."

Q&A:

• Question from Tommy Mall (Stevens): What more can you tell us about the complexion of data center orders for the test business? Has the customer base broadened?
  Response: Management noted improvement in outlook, with orders driven by a couple of good customers in the broadly defined data center space, particularly those housing government or critical infrastructure data. They are doing well in market attainment.

• Question from Tommy Mall (Stevens): What additional detail can you give on Doble's strong acceleration? And how has Megger's book shaped up since the deal announcement?
  Response: Doble's 30% order growth was broad-based across its business lines, with the exception of the renewables segment. Megger is believed to be seeing similar trends, with year-over-year growth, indicating the market improvement is real.

• Question from Scott Doichla (Deutsche Bank): Can you share the updated segment revenue guidance?
  Response: Management provided underlying segment growth expectations: A&D 8%-10%, Test 10%-12%, and Utility 4%-6% for the full year.

• Question from Scott Doichla (Deutsche Bank): Why did USG margins decline sequentially despite sequential sales growth?
  Response: Attributed to unfavorable product mix (growth in lower-margin high-voltage lines), timing of expenses, and particularly weak margins in the NRG business compared to a strong prior-year comp.

• Question from Scott Doichla (Deutsche Bank): Are there any discrete inflationary pressures impacting cost of goods sold, like DRAM costs?
  Response: Management stated they have not seen any material inflationary pressures in Q3, though they are anticipating potential future impacts.

• Question from Scott Doichla (Deutsche Bank): Is a 30% incremental EBIT margin for A&D still the correct go-forward rate?
  Response: Management believes the 30% target could be low for A&D going forward and expects to take margins up, with parts of the business needing to perform better than that rate.

• Question from Will (CJS Security): Is defense strength driven more by programs of record or aftermarket activity? How should we think about it over the next quarters?
  Response: Primarily driven by programs of record, especially submarine programs, with aftermarket activity maintaining its relative growth rate. Expect this to continue.

• Question from Will (CJS Security): Is there a light at the end of the tunnel for NRG? When might it return to year-over-year growth?
  Response: Expect another year-over-year decline in Q4 due to tough comps from the prior year's tax credit expiration. Sequential growth has begun, and a return to high single-digit growth is expected in fiscal year 2027.

• Question from Tomo Sano (J.P. Morgan): Beyond tax credits, what are the key bottlenecks for NRG, and what actions are being taken?
  Response: The primary dynamic is reduced capital spending from developers focused on qualifying existing projects for expiring tax credits. A return to growth is expected as developers refocus, with solar recovering faster than wind due to permitting and tariff issues.

• Question from Tomo Sano (J.P. Morgan): What are the top priorities in the first 100 days post-close for the Megger acquisition?
  Response: Priorities include reviewing manufacturing footprint, harmonizing product lines, aligning go-to-market strategy, and communicating a combined enterprise identity. Cost actions at NRG will be integrated into the larger platform.

• Question from Tomo Sano (J.P. Morgan): Regarding improved operating cash flow, how much is structural versus timing-related?
  Response: Target is ~100% free cash flow conversion to adjusted earnings. The current above-100% level is partly due to timing of large contract payments, but structurally they expect to maintain high-quality conversion around that target.

• Question from Scott Doichla (Deutsche Bank): What are the lead times for the large condition monitoring orders?
  Response: Cable monitoring orders have the longest lead times, potentially up to a year, as they align with cable construction schedules.

• Question from Scott Doichla (Deutsche Bank): How much can be extrapolated from the strong Q3 growth for Doble's condition monitoring business?
  Response: Management will stick with a very high single-digit growth outlook for the business despite the strong Q3 acceleration.

• Question from Scott Doichla (Deutsche Bank): Have any additional surface ship revenue push-outs occurred due to yard challenges?
  Response: No further push-outs. The recovery plan implemented last quarter has unfolded as expected, though programs are monitored closely.

• Question from Tommy Mall (Stevens): What is the updated view on cost of debt for the Megger deal? Will the Q4 report include the NTM guide for fiscal 2027 inclusive of Megger?
  Response: Cost of debt is expected to be around 6%. If the closing schedule is on track, the November guidance announcement will include Megger in the forecast.

Contradiction Point 1

NRG Business Outlook and Growth Timeline

The expected timing for a return to year-over-year growth for NRG has been pushed back.

Will (CJS Security) - Will (CJS Security)

2026Q3: A return to year-over-year growth is expected in Fiscal Year 2027 (FY27), starting from a lower base... - Brian Saylor(CEO)

Is there an anticipated recovery for NRG, and when might the company return to year-over-year growth? - Scott Deuschle (Deutsche Bank)

2026Q2: The business is considered profitable at current levels, and the company intends to remain in it, expecting a return to growth in the second half of 2026 or early 2027. - Bryan Sayler(CEO)

Contradiction Point 2

Defense Business Growth Drivers

The primary driver of defense strength transitions from being broad-based to being specifically programs of record.

Will (CJS Security) - Will (CJS Security)

2026Q3: The strength is primarily from new programs of record, particularly submarine programs. The aftermarket business continues to grow at a rate consistent with the overall business... - Brian Saylor(CEO)

What is driving the strength in the defense business, new programs or aftermarket activity, and will this trend continue in the next quarters? - Scott Deuschle (Deutsche Bank)

2026Q2: Strength is from new programs of record, particularly submarine programs. The aftermarket business continues to grow at a steady rate... - Bryan Sayler(CEO)

Contradiction Point 3

Test Segment Growth Outlook and Margin Aspiration

Guidance for test segment growth and margin timeline has been revised downward.

Tommy Mall (Stevens) - Tommy Mall (Stevens)

2026Q3: The outlook has improved with a couple of good customers... ESCO is performing well in market attainment. - Brian Saylor(CEO)

Could you provide more details on data center orders for the test business and whether the customer base has expanded? - Tommy Moll (Raymond James)

2026Q2: The sales growth expectation has been raised from the previous 3-5% to now 4-6%... The target for EBITDA margins in the test segment remains 20%, but the company now believes it will be reached much quicker than previously thought. - Bryan Sayler(CEO)

Contradiction Point 4

Growth Expectations for the A&D (Aerospace & Defense) Segment

Inconsistent guidance on the growth trajectory for the full fiscal year.

Scott Doichla (Deutsche Bank) asks about the company's performance during the earnings call? - Scott Doichla (Deutsche Bank)

2026Q3: The company maintains its guidance for very high single-digit organic growth for the full year, indicating that while Q3 was strong, growth is viewed as consistent rather than lumpy. - Brian Saylor(CEO)

How should we extrapolate the 67% Q3 growth in condition monitoring into next year's growth? - Thomas Moll (Stephens)

20260206-2026 Q1: Q1 will be the strongest growth quarter, with solid growth tapering through the year, leading to lower growth in Q4 due to compounding effects. The core business is expected to maintain high single-digit growth for the year. - Christopher Tucker(CFO)

Contradiction Point 5

Outlook for the NRG (Renewables) Business

The expected timing for a return to year-over-year growth for NRG has been pushed back.

Will (CJS Security) - Will (CJS Security)

2026Q3: A return to year-over-year growth is expected in Fiscal Year 2027 (FY27), starting from a lower base... - Brian Saylor(CEO)

"When does NRG expect to return to year-over-year growth?" - Scott Deuschle (Deutsche Bank)

2026Q2: The business is considered profitable at current levels, and the company intends to remain in it, expecting a return to growth in the second half of 2026 or early 2027. - Bryan Sayler(CEO)

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