ESCO (ESE) Q3 Orders Surge 194%

ESCO Technologies (ESE -1.10%), a diversified supplier to sectors including aerospace, defense, utilities, and industrial markets, reported its third-quarter fiscal 2025 results on August 7, 2025. The release showed strong operational progress, including a surge in new orders and a record backlog. However, GAAP revenue came to $296.3 million, which was below the $318.6 million analyst estimate (GAAP). Non-GAAP earnings per share (EPS) reached $1.60, also below the $1.65 consensus, while GAAP EPS fell to $0.96 from $1.10 in Q3 FY2024. Overall, the quarter demonstrated significant year-over-year growth and strategic momentum, but fell short of expectations for both GAAP revenue and non-GAAP earnings due to acquisition-related costs and timing impacts.

Source: Analyst estimates provided by FactSet. Management expectations based on management's guidance, as provided in Q2 2025 earnings report.

Company Overview and Strategic Focus

ESCO Technologies operates across several key markets, specializing in solutions for aerospace, defense, utilities, and industrial testing. Its Aerospace & Defense (A&D) segment produces equipment for military and commercial aerospace, often for U.S. Navy and allied navies. The Utility Solutions Group (USG) delivers testing and monitoring systems for power grids, while the Test segment supplies products and systems for RF measurement and regulatory compliance.

In recent years, ESCO has concentrated on five strategic priorities: expanding its portfolio through targeted acquisitions, winning and sustaining large government contracts, ramping up international business, focusing on high-growth, high-margin end markets (such as renewable energy and defense), and maintaining robust regulatory compliance. The company’s success relies on strong execution in these areas—especially integrating new businesses, maintaining high government sales, and adapting quickly to shifting market demands.

Quarter in Review: Growth, Portfolio Shifts, and Order Momentum

During the third quarter, ESCO took significant steps to reshape its business. The company closed its acquisition of Maritime Solutions (previously known as SM&P), expanding its footprint in naval applications. Maritime generated $37.1 million in sales in just two months after closing (GAAP) and added substantial backlog. Simultaneously, ESCO completed the sale of VACCO Industries, marking its exit from the lower-margin space sector and sharpening its defense and maritime focus. These acquisitions and divestitures influenced both reported earnings and profit margins. $0.64 per share in after-tax charges—including acquisition costs, inventory step-up charges, stamp duties, restructuring charges, and acquisition-related amortization—weighed on GAAP EPS.

Financially, ESCO reported a 27% jump in GAAP revenue compared to the prior year’s period, despite missing consensus estimates on a non-GAAP basis. The Aerospace & Defense segment delivered 56% sales growth, partially from Maritime and U.S. Navy submarine program contracts, including Virginia and Columbia class orders. Notably, orders for the segment surged 547%, fueled by core demand and the addition of Maritime’s $364.2 million in backlog. The company-wide book-to-bill ratio—orders received divided by sales for the period—reached 2.53 times, signaling continued strong demand ahead. Utility Solutions Group posted 2% sales growth, but sustained industry-leading Adjusted EBIT margins above 23%, supported by solid demand in traditional electric utility testing.

Margins conveyed a mixed story. Adjusted companywide EBIT (Earnings Before Interest and Taxes) margin rose 1.8 percentage points to 21.1%. In the high-growth A&D business, adjusted margin climbed to 28.8%, up 5.6 points, but USG’s margin softened slightly due to changes in the product mix and cost inflation. The Test segment showed healthy top-line gains, but saw margin contraction from cost pressures, including tariffs and input inflation, despite strong performance in EMC testing hardware and industrial shielding. GAAP EPS declined 13%, mainly reflecting the impact of acquisition costs, especially for Maritime, and higher amortization. Excluding those charges, Non-GAAP EPS was up 25% year over year.

Entered orders increased 194% to $749.0 million, including $364.2 million of acquired backlog at Maritime. Aerospace & Defense was the standout, but USG showed 6% order growth, and Test booked $61 million of new business. The overall backlog for the company ended the quarter at a record $1.17 billion, providing strong visibility for future revenues. ESCO’s operating cash flows also improved, with net operating cash from continuing operations year to date at $88 million, up $25 million from the prior year for the first nine months of FY2025. However, leverage increased as ESCO funded the Maritime acquisition, raising long-term debt to $505 million as of June 30, 2025, from $102 million as of September 30, 2024. The quarterly dividend remained unchanged at $0.08 per share.

ESCO continued efforts to mitigate inflation and tariffs—key cost contributors this period—by raising prices where possible. Management emphasized ongoing government contract strength, particularly for the Navy, citing high-priority Department of Defense programs and multi-year demand from both U.S. and U.K. government clients.

Looking Ahead: Raised Guidance and Areas to Watch

ESCO raised and narrowed its guidance for the full fiscal year. The company now projects revenue between $1.075 billion and $1.105 billion for FY2025, up from its prior range, representing growth of 17% to 20% over the previous year. Adjusted EPS guidance was increased to $5.75 to $5.90 for FY2025, reflecting targeted growth of 21% to 24% compared to FY2024. For Q4 FY2025, management expects Non-GAAP (Adjusted) EPS to be between $2.04 and $2.19, an increase of 14% to 22% versus the prior-year quarter. These expectations incorporate the positive impact of Maritime, as well as higher anticipated contributions from core defense and utility businesses.

ESCO leadership did not announce any change to its quarterly dividend, maintaining it at $0.08 per share. Investors and observers are watching for the company’s continued ability to integrate new businesses efficiently—balancing higher debt and acquisition costs—with the target of reducing leverage below 2.0 times by fiscal year-end. Attention will remain on the pace of order conversion, organic sales growth in legacy businesses, and how cost pressures—including tariffs and inflation—trend in the coming quarters.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.