Good day, and thank you for standing by. Welcome to the Third Quarter 2022 ESCO Technologies Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. On the call today, we have Vic Richey, Chairman and CEO; Chris Tucker, Senior Vice President and CFO. And I would now like to hand 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 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 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 Vic.

Thanks, Kate, and thanks, everybody, for joining today’s call. I’ll start off with thanking our global teams. We continue to experience challenging operating conditions across all of our end markets that the teams are working tirelessly to deliver for our customers. We did see the benefits of this hard work during the quarter, with reported sales increasing by over 20%. This is the second quarter in a row of sales growth in excess of 20%. This strong top line growth translated to the bottom line, which reported earnings per share of over 50% and adjusted earnings per share up 33%, I would say, strong performance indeed. The other key highlight for the quarter was our ongoing order strength. During the third quarter, we saw orders increased by 25% and backlog ended at $707 million. As we mentioned in the press release, this is a record level of backlog for us. It’s great to be setting with a record backlog, it indicates healthy end markets and gives us some visibility as we plan for next year. We also managing high levels of past due backlog. And this is something we are very focused on bringing down. In general, we still see supply chain issues as a key driver of our past due backlog situation. It’s mostly focused on our Utility and Aerospace businesses. The teams have this in focus and we’re proactive with our customer base to make sure they address the issues. Visibility is somewhat limited, as the wind will clear up, their main focus will be or remain on doing everything in our power to get customers to products they want, when they want it. Chris looking into some financial details in a few minutes, but I did want to offer some top-level commentary about each of our business…

Thanks, Vic. Once again, we’ll have a chart presentation for you, and I’ll walk through the material in those charts. We’ll start on Chart number 3, which summarizes the Q3 results on a consolidated basis. It’s great to have a chart like this, and we have all the arrows pointing upward this quarter. You can see the strong performance here with orders and sales up 25% and 21% respectively. Adjusted EBIT dollars up 34% and adjusted EPS up 33%, all very strong numbers. I’ll go through the segment results in a moment, but we had a strong sales growth across all three businesses with organic growth of nearly 14% and acquisitions adding another 7 points of growth. On the margin side, we had adjusted EBIT of 1.4 points, as we continue to see good leverage on the sales increases. We do continue to see significant inflation unfavorably impacting margins, but the teams across the company are doing a good job managing cost reduction efforts and price increases to help offset these impacts. If we can go to the next chart, we can take a quick look at cash flow and capital allocation. Operating cash flow is lagging so far this year. We are investing in working capital as the business grows. We see this in accounts receivable and inventory balances, somewhat offset by accounts payable. Capital expenditures are up this year, driven by the first quarter building purchase at NRG and share repurchases year-to-date are just shy of $20 million. This represents our first share buybacks in a number of years and a good restart to this program. Acquisition spending is up driven by the NEco deal that was closed in the first quarter. On the next chart, we have details for the Aerospace and Defense business. Really solid quarter…

Thanks, Chris. Since I touch on quite a few of my thoughts earlier in my commentary, I’ll just offer a few more comments before we move into Q&A. It’s all the numbers from Chris but overall we had a really good first nine months of fiscal 2022. We see a good momentum across all three business segments in spite of the ongoing difficulties at common current operating environment. We hear a lot these days about the economy and fears of the deep recession. Certainly, we watch that very closely and be ready to act appropriately wherever the economy goes from here. With the continued orders and backlog strength are reassuring, I feel very confident in saying that the outlook for ESCO is positive. A few of our end markets are really just getting going with their recovery from the pandemic, and we think that has some runway even if the broader economies have been slower. As I said, we’ll watch this closely, but overall we’re very optimistic. With that, I think we’re ready for Q&A.

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question is coming from Tommy Moll with Stephens. Tommy, please go ahead with your question.

Good evening, and thanks for taking my questions. I wanted to start on Doble. It looks like another strong quarter. That makes at least a couple in a row now. And maybe even sequentially, it looks like it was flat to even higher in the quarter you just reported. So I guess now there’s some consistency here coming out of the pandemic when in prior periods, there was some volatility there. So if you wrap it all together, does it feel like you’ve hit pretty good run rate here for Doble or would you point to factors that are still at least on the revenue side, holding you back where there could be a potential for another step change higher from this new level that you’ve hit the last couple of quarters? Thanks.

Sure. So Tommy, I think there’s always opportunity here. I mean, as we’ve talked about some past calls, we took the time during COVID to do some significant product development at Doble, and as NRG as well as Morgan Schaffer. And so coming out of pandemic, we think that we should have a pickup of those new products. And I think we have developed some things in kind of a setup function better than what we’ve had in the past and what competition has. And so I think there’s not a governor on this that we should – and therefore, we should be able to get some additional growth as we go forward, particularly in the next year. And even with the acquisitions, and we talked about some of the growth we had there, but as you know, the European economy has been a little more challenged than U.S. and what’s going on with Ukraine. And so I think as those businesses are incorporated, I think we’ll see a little more pickup in the European market as well.

Yes. And one thing I would add, Tommy, you kind of mentioned incremental things. I mean, one thing we do see there is that the supply chain challenges are still pretty acute. So the last couple of quarters, we probably had $6 million to $7 million each quarter – each quarter end in kind of what we would call past-due backlog there, where we’ve got the orders, but can’t get the product to the customers because supply chain issues. Certainly, we expected that will be a little better by now. So we’re really kind of seeing a lot of challenges on the supply chain front, and hopefully, that will continue to work itself out as we move forward, and that can allow us to execute in the business a little bit better. But I can tell you, month-to-month, we continue to be doing a lot of kind of hand-to-hand combat there to manage different issues that flare up across the supply base.

So you anticipated my follow-up question, which was going to be on the past due backlog that you’ve mentioned a couple of times now. And you don’t historically guide on cash flow, but maybe you could talk qualitatively versus what you had planned at the beginning of the fiscal year. Have these issues gotten worse? Were there some unanticipated items that arose? And then as you look forward, I feel like I got asked the question, how much visibility do you have? I mean, this has been a tricky issue for plenty of high-quality companies in this challenging environment. So if that forward visibility is limited, knowing that would be helpful, but whatever you could share there would be – would be appreciated.

Yes. I think what I would say is that we talked a little bit and quantified in the Q1 numbers about kind of how much past due we had and how much that cost us. We haven’t really done that the last couple of quarters, but I would tell you, it did get bigger from Q1 to Q2. From Q2 to Q3, kind of stable, so not a big increase. So I would say the problem really isn’t getting worse. But I would say we would hope that things would have gotten a little better by now or that some of these pressures would have started to ease. So I think what you’re finding is, we don’t have a lot of things that are 6 or 9 or 12 months past due, we’re getting things out the door eventually, they’re just a little slower. And then you get to the next month and some other issue kind of arises. So as I said, we just kind of have to battle through it month-to-month. As far as visibility on when it gets better and how that all kind of rolls into the numbers. It is hard to say. I mean, I wouldn’t want to say we’ve got a crystal ball says it all gets better September 30 or whatever date you want to pick. So I think visibility is tough to get on that front, but we continue to work it hard. And I think we feel good about what we’ve delivered here the last couple quarters in spite of some of those challenges. And so we’ll continue to kind of push to do that.

Yes, if I could just add, I mean, one real benefit of having the orders that we’ve had and the backlog that we have is it gives us some flexibility. I mean, in a number of places, we’ve not been able to get certain components, we’re not able to get some of that processing done. So we’ve been able to kind of move around what we’re going to deliver. So the fact we’ve been having as many challenges that we’ve had, and we are still be able to get the – hit our numbers, I think is a testament to people’s flexibility, to be honest, but having that backlog makes a big difference, because it does give us the opportunity to pull some things in.

I appreciate it and I’ll turn it back. Thank you.

All right. Thank you, Tommy. Our next question comes from John Franzreb from Sidoti. John, go ahead with your question.

Good afternoon, Vic and Chris. Thanks for taking the questions. I guess, I’m curious a little bit about the order intake. What’s your sense of how much there is that’s still deferred spending that’s kind of flown through the booking profile or customers now spending based on the current market expectations?

Yes. I would say the vast majority of it is just kind of people are buying what they need. I’d see the place where we’re seeing a little bit of pent-up demand is in our Test business on the medical side. I think that was the – as much of that capital spending going on during the pandemic, as they were focused on other things. And then the other thing is we do a good bit of sales to the Test Labs. And so they’re playing a little catch up now, because they kind of put a lot of their capital expenditures on hold. And you’ve seen some good pick up there. And it’s really across the board. We’ve seen that in U.S., we see in China, we’ve seen it in Europe. And so I’ll talk a little bit about the European economy on the Utility side, we’ve seen that pick up from an order perspective, in particular, we’ve seen a pickup with the Test business and the test houses. I’d say a little bit of that on the Utility side, but I think on the Utility side, it’s just kind of getting back to more normalized order rates.

And you mentioned in your prepared remarks or concerns about the recession, where would you see that first in your order book? Any particular business that would stand out?

I would say probably Test. I think as we look at the business, and I wouldn’t say we were trying to express concern about the recession as much as just acknowledging that there’s a lot of chatter out there about it. I think from our perspective, the Utility business and the A&D business have some unique and good characteristics about where they are in their cycles right now that should give us, hopefully, pretty good foundation to move forward from. But I think in the Test business, if you saw a big slowdown in some kind of overall business activity and capital and that kind of stuff, you could see a quicker impact there. I’d say that’s probably where we’d expect to see it first.

Great. And one more, if I may. Of the organic growth is up at least 7% year-over-year. How much of that was volume versus pricing? How are you getting pricing?

Yes. We’re getting price overall. I mean, when you look at – it kind of nets out overall to about 3% or so on the revenue line and the rest would be volume. Again, you’ve got places where you’re kind of getting more than that obviously and you got places where you’re not getting any, because of LTAs and things like that. So it’s kind of a lot of different circumstances that drive that overall number, but we estimate it would be in that range.

Great. Thanks. I’ll get back into queue for now. Thank you.

Thank you very much. We have one more question, and that is coming from Jon Tanwanteng of CJS Securities. Jon, go ahead with your question.

Hi, thanks for taking my question. I actually wanted to follow-up on the last one on regarding inflation. Is the net pricing improving as we go forward? Are you starting to see any moderation at all or maybe a pickup in your ability to pass price through? Or should we expect that margin to remain the same as we go forward here?

Yes. I mean I think we’ve saw it a few times as we moved through this year that we saw maybe inflation was going to settle in a little bit, but then it kind of continues to rear its ugly head. So I wouldn’t say we’ve seen a slowdown in inflation, but we would expect to continue to drive price as we move forward, so that we can get a little more favorability in that price cost equation. Generally, I think we feel good about where we are year-to-date. We’re kind of covering the issues we see with price, but we need to do a little better than that. So yes, Jon, we would expect moving forward, that will continue to get a little bit better.

Okay. Great. And it’s great to see you guys doing repurchases again. It’s been a while, I think, since we saw that. Just one question about your priority for capital allocation. Seeing repurchases at a time of not much in the M&A pipeline? Or are you still active there? And then – and put more of a balance than anything else?

Jon, I mean, yes, we still want to continue to make acquisitions. We had a couple of things a few months ago. We did something in the first quarter. So there’s still opportunities there. I can say I mentioned at the Farnborough Airshow earlier. Unfortunately, the vast majority of my time there sitting in a conference room talking to investment bankers and other folks about opportunities and so we certainly have a full core for us out there still on that. I think there’s some opportunities there. But we’re very judicious about that. And we’ve gone to have some things that got away from us. But there are a lot of opportunities in there. So we are not – wouldn’t plan more as far as looking for good acquisitions.

Okay. Great. And then one final one for me. Just the climate bill that’s making its way through Congress. It’s got a big focus on renewables and the grid. I’m wondering if there’s anything in there for NRG or Doble or anything like that, that would make a difference to you guys?

Yes. I mean the NRG business, we don’t break that out separately, but they’re going gangbusters right now. We anticipate that should all be more right. So there’s been some puts and takes this year where they’re going to allow some of these imported solar panels and that kind of got pushed out where that’s not an issue. But I think within this bill that I think certainly are going to going to help that business.

Yes. And I would also say, Jon, even in the Doble business, that’s maybe not directly in the renewables, the way NRG is. We still expect a good impact there as the grid gets kind of remade and modernize and gets more renewables added in, that’s going to drive testing requirements as these new assets are commissioned and such. And so we think that’s good for our business as well. So yes, we – maybe not anything in those bills that directly drive spend of our products, but we think it absolutely drives the whole market and it’s going to benefit us.

Okay. If I could sneak one more in there. Maybe attacking the Doble question from another angle. Are you back to where you were at the 2019 levels in the legacy Doble business yet? Or is this still somewhat into recovery there?

So we project that by the end of this year, we’ll be close, but not quite there. So within $5 million on the revenue line. So pretty close, but not quite there. So obviously, we would get there next year would be the plan.

Got it. Thank you, guys.

You bet.

Yes.

[Operator Instructions] It appears we have no more questions. So I’d like to now turn it back over to Vic Richey for closing remarks.

Okay. We’ll end the call now then. So thanks, everybody, for dialing in. I look forward to talking to you on our next call.

Thank you.