Q3 2024 Earnings Summary
- Anticipation of Large Navy Orders: ESCO Technologies is expecting significant Navy orders beyond the strong orders already received. The CEO mentioned they are "still anticipating the larger orders that we've been talking about" and are "getting close" to securing them, which could further boost the company's performance.
- Recovery and Growth in the Test Business: The Test segment is seeing a turnaround, with expectations of "continued sequential growth for both revenue and margin." Management highlighted that "the team has done a really good job of taking cost out of the business and really refocusing on marginal returns," indicating improved profitability ahead.
- Record Backlog Supporting Future Growth: The company has a record backlog of nearly $890 million as of June 30. This backlog provides strong visibility into future revenue growth, with aircraft backlogs converting in about a year and Navy backlogs over 18 months to 2 years. Management suggested this supports a "double-digit path" for revenue growth in the Aerospace & Defense segment next year.
- Potential profitability challenges in the VACCO Space business: ESCO is facing additional profitability erosion in its VACCO Space business due to fixed-price development contracts with challenging requirements. This could result in a negative EBIT impact of $5 million to $7 million, which has been excluded from the current earnings outlook. The company acknowledges the risk of additional costs if products do not perform as expected during testing.
- Reduced EPS guidance and weaker Test business performance: The company lowered its full-year adjusted EPS guidance, partly due to a $2 million hit from the VACCO Space business in the third quarter and a slightly weaker performance in the Test business than previously expected. The Test segment continues to face challenges, particularly in China and the wireless side, and while sequential improvements are expected, recovery may be slower than anticipated.
- Extended backlog conversion timeline may delay revenue recognition: A significant portion of ESCO's record backlog, especially in the Navy segment, has an extended timeline for conversion into revenue. Navy backlogs are expected to convert over 18 months to 2 years, and larger orders will extend for multiple years. This could delay revenue recognition and impact near-term financial performance.
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A&D Segment Growth
Q: Will A&D revenue grow double digits next year?
A: While it's too early to give formal guidance, management acknowledges that a 50% year-over-year increase in cumulative A&D orders suggests double-digit revenue growth is likely ( ). They do not think the analyst's math is off significantly ( ). -
Backlog Conversion Timing
Q: When will the large A&D backlog convert to revenue?
A: For commercial and military aircraft, backlogs generally convert in about one year ( ). Navy backlogs extend 18 months to 2 years, with larger orders spanning multiple years ( ). This indicates a steady ramp-up in Navy production, supporting double-digit growth ( ). -
Impact of VACCO Space Business on Guidance
Q: Is lower EPS guidance due to VACCO Space trends?
A: The majority of the EPS guidance reduction is due to a $2 million hit in the third quarter from the VACCO Space business ( ). Additionally, the test business is slightly weaker than previously expected ( ). -
VACCO Space Profitability
Q: What is the profitability of the VACCO Space business?
A: Management is not disclosing specific profitability figures but states it is below segment averages overall ( ). -
Test Business Recovery
Q: What improvement is expected in the test business?
A: Despite prior declines in China and wireless, the test business is expected to see continued sequential growth in both revenue and margin ( ). Growth is driven by U.S. markets, particularly in medical and EMP businesses ( ). Margins are expected to start at 16.5% and move up from there ( ). -
Doble and Utility Market Outlook
Q: Any insights on Doble and the utility market?
A: Doble experienced 7% growth, with the Utility Solutions Group up 8.5% and NRG up 13.7% over the prior year ( ). Utilities are focusing on maintaining existing assets due to growth in demand and constraints on adding capacity ( ). Management does not see significant impact from the upcoming election on this segment ( ). -
Navy Shipset Content Realization
Q: Has the upsized Navy shipset content been realized?
A: The recent orders were mostly Navy spares, not the larger shipset content previously discussed ( ). Management is still anticipating these larger orders and is getting close but cannot share more details yet ( ). -
Nature of Costs Affecting VACCO
Q: What's causing additional costs in VACCO programs?
A: The company is working through a few challenging firm-fixed-price development programs ( ). If products perform as expected, there will be no issues, but additional costs may arise from engineering, fabrication, and test time if rework is needed ( ). They are not taking new programs like this ( ). -
Election Impact
Q: Is the election affecting the utility end market?
A: Management does not see a significant benefit or threat to ESCO's businesses based on the election outcome ( ). They feel neither vulnerable nor advantaged regardless of the result ( ).
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