Kate Lowrey - Director of Investor Relations Vic Richey - Chairman, CEO and President Gary Muenster - EVP and CFO.

Jon Tanwanteng - CJS Securities Ben Hearnsberger - Stephens.

Good day, and welcome to the Second Quarter 2015 ESCO Technologies Incorporated Earnings Conference Call. Today's call is being recorded. With us today are Vic Richey, Chairman and CEO; Gary Muenster, Vice President and CFO.

And now, to present the forward-looking statements, I would like to turn the call over to Kate Lowrey, Director of Investor Relations. Please go ahead..

Thank you.

Statements made during this call regarding the 2015 and beyond EPS, EBIT, tax rate future growth, profitability and revenue, margin, sales, orders, market share, product development, acquisitions, capital allocation strategy, corporate costs, and other statements which are not strictly historical are forward-looking statements within the meaning on 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, whether as a result of new information, future events, or otherwise. 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 their most comparable GAAP measures can be found in a press release issued today and found on the company's Web site at www.escotechnologies.com, under the link Investor Relations. Now I'd like to turn the call over to Vic..

Thanks, Kate, and good afternoon. Before I give my perspective on the quarter, I’ll turn it over Gary for few financial highlights..

Thanks, Vic. As noted in the release our second quarter earnings exceeded our internal expectations.

In February we expected Q2 EPS to be in the range of $0.27 to $0.32 and I'm pleased to report that we beat the top end of our EPS range by a penny as we delivered $0.33 per share despite a higher than expected effective tax rate which negatively impacted Q2 EPS by approximately $0.02.

The earnings increase is driven by the continued strength of the commercial aerospace market at PTI in Crissair and better than expected performance at Doble. At the start of the year we committed to offset of financial goals which are well defined and remain clearly in focus today.

We will continue to execute on our financial plan, deliver solid earnings results that meet or exceed our expectations position the company for sustainable long-term earnings growth enhance our focus on returns and follow our capital allocation plan. Given our Q2 results I think we achieved each of these.

During Q2 the impact of foreign currency was immaterial. As a reminder for comparative purposes the 2014 results exclude the charges related to the Crissair facility consolidation completed last year. Our call out a few highlights from the release to allow you to better understand the underlying results.

Q2 sales increased $4 million from the prior year primarily due to 12% increase in sales at Doble. Test sales increased to $1 million and filtration sales were essentially flat due to the lower SLS program sales at VACCO.

A bright spot with filtration is highlighted by the continued strength of PTI in Crissair's commercial aerospace sales which increased over 13% or $4 million in Q2 which offset the $4 million decrease noted at VACCO.

PTIs Q2 EBIT margin was 21% and Crissair delivered 28% EBIT in Q2 driven by the operating efficiencies being realized from the last year's facility consolidation. Doble's EBIT came in better than planned driven by higher than expected international sales and additional software and service business.

Doble's Q2 EBIT margin was lower than prior year Q2 due to the timing of the worldwide client conference which was in March of this year and April of last year.

Test sales and EBIT were below plan due to the issues of trying to project the exact timing and completion surrounding the significant number of projects in process at any given time throughout the respective quarters.

Corporate costs were higher than last year primarily as a result of additional professional fees and other cost surrounding the acquisition of ENOSERV.

The Q2 effective tax rate increased over prior year due to the amount of discreet tax benefits recognized in the respective quarterly periods as well as changes in the mix of international versus domestic pre-tax earnings. On the balance sheet we continued to maintain a modest level of net debt outstanding which was $38 million at March 31st.

We remain committed to our capital allocations strategy which includes share repurchases and dividends. As such we returned about $6 million to shareholders during the second quarter. We expect to continue to opportunistically repurchase shares in the open market during the balance of 2015, as we continued to be supported by a strong balance sheet.

A significant highlight of Q2 as well as for the first six months of the year is a continued strength of our entered orders. We booked the $142 million in orders in the second quarter reflecting a $13 million increase in backlog, resulting in a $348 million backlog at March 31st.

Filtration had a book-to-bill of 120% with each of the group members contributing to the sizable increase. Doble generated 111% book-to-bill driven by additional international service orders and higher than expected hardware business. The order strength at the halfway point bodes well for the sales outlook over the balance of the year.

Our EPS guidance and reaming outlook for 2015 is unchanged from the $1.70 or $1.80 and is well supported by our Q2 and six month results. Reporting a solid start for the first six months certainly provides additional comfort in our ability to achieve our full year stated goals.

Regarding Q3 we are guiding EPS to be in the range of $0.38 to $0.42 a share. It is important to note that the first half of the year came in above our original forecast both from an EBIT and EPS perspective.

When compared to the current Q2 we are expecting sequentially meaningful increases in both sales and EBIT during Q3, which drives the noted EPS increase range. Q3 consolidated EBIT dollars are expected to increase over 20% compared to Q2 led primarily by Doble’s additional sales volume.

Lastly we expect a more normal tax rate in Q3 of approximately 34%. And I’ll be happy to address any specific financial questions when we get into the Q&A. I’ll turn it back over to Vic..

Thanks, Gary. As ongoing reminder, the three-year outlook we communicated during our Investor Day last September includes growing our top-line 10% and increasing EPS 15% on a compound basis.

Considering a solid start over the first six months of the year coupled with our continued order strength we believe these longer term goals are reasonable and remain achievable. Our M&A pipeline continue to be challenging due to the high multiples being paid for quality assets.

We continue to work aggressively to expand our footprint within filtration and a doable. While still it's still early on I’m pleased with initial reaction to the ENOSERV acquisition. It was a positive contribution they’ve made.

While attending the Doble Client Conference I was impressed with the number of clients who sought me out to express their positive thoughts on the acquisition. Additionally I was very impressed with the ENOSERV team members to participate during the conference.

I firmly believe that our future growth opportunities are tangible and well defined and will result in a meaningful contribution Doble's withstanding sales and operating margins. We continue to explore additional acquisition opportunities with the primary focus on adding capabilities and solutions to USG and Fluid Flow.

Across the company, our core businesses continue to present us with long-term organic growth opportunities, that when supplemented with our M&A strategy create an exciting outlook for ESCO over the next several years.

In filtration, our year-to-date EBIT is well ahead of plan and we remain bullish on our underlying growth and profitability, driven by our recent aerospace program wins, coupled with having some sizable programs such as the A-350 continued to move toward full production.

The major OEM aircraft manufacturers continue to be bullish on their outlook and this up site was creating an exciting outlook for our business. The year-to-date order book is also well ahead of plan and continues to provide additional upside opportunities over the balance of the year.

The test business remains solid, both from a top line and bottom line perspective, as the outlook contains several additional projects, which we are in a process of negotiating, these opportunities was once POs are signed, are expected to deliver solid profitability over the balance of '15 and beyond.

As you know we’ve made several significant investments with Doble over the past few years which will necessary to accelerate their growth both domestically with new products and solutions as well s internationally by entering new markets.

As we review the first six months of Doble’s performance I think we are clearly seeing the results of these investments and we expect them to continue to accelerate in the future.

We are well positioned for solid organic growth and have the capacity, both from a financial and management bandwidth perspective, to augment our growth with appropriate acquisitions. We look forward to an exciting and successful remainder of the year. We can now turn it over for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question is from Jon Tanwanteng with CJS Securities..

So I’m just doing the math with your Q3 guidance.

If your 2015 expectations are consistent with your prior $1.70 to $1.80 and your Q3 somewhere in the high end, does that mean that Q4 should be between $0.54, $0.64, around that area?.

That’s correct. As we have in the past Jon, our fourth quarter is always our strongest and so looking at the sequential step from Q2 to Q3 we see that 20% plus move in EBITDA orders and then obviously sequentially from Q3 to Q4 they'll get a pretty meaningful path there as well driven by sales growth across the platform..

And then can you just quantify the risk of larger projects, maybe in the test segment? As you get close to the end of the year, what's the risk of them pushing out?.

Yes. We're in a pretty decent shape when we were just down there couple of weeks ago I met with the guys, detailed basis -- everything that we need is either in backlog or currently been negotiated, so unless these negotiations drag on for significant amount of time, we should be fine with those opportunities.

And in fact what will do because these are bigger jet opportunities or bigger projects that we're negotiating now with customers, we've done a lot of work with, so we would go and start building some of that product to ensure that we'll be able to make those delivers. There is always a risk but it is not a significant amount at this point..

And then just touching on the Doble business in the international strength that you're seeing, is that mostly the Middle East, and should we expect further strength there?.

Yes. It's real good in Middle East, that project is going well, hope we get a re-up of that before too long for the next 12 months, also seeing that it strengthen in Mexico and South Africa..

[Operator Instructions]. The next question is from Ben Hearnsberger with Stephens..

Looking at the test business margin, it came in a little bit below our expectation, and in the press release, you mentioned some work you're doing on the cost side of the equation to kind of help margins there.

Could you take us through some of those initiatives?.

Sure.

Some of things we've been doing with some basic blocking and tackling, I mean we've work toward on and the overtime on the planning process to make sure that we have the factory level loads, so we don't have to work overtime, we've been working harder on the freight side of it which doesn't seem like a big deal, but when you're shipping product around the world it's a big deal.

We did have a reduction in force last week both here in the U.S. and in Europe, so there is a number of things like that we've been working.

I would say there is nothing out of the ordinary it's really good business sense and we're just trying to get some of the things cleaned up to make sure that we're in a position to get those margins up to a reasonable place in the last half of this year and then go into next year think will be a much better position..

And then it sounds like your aerospace business has remained strong and you're really not seeing any impact from lower fuel.

Can you just comment on what kind of what you're seeing further out? Are the risks that you think you have to your aerospace business giving if we assume a lower fuel environment?.

Yes.

We started that good and talked to a number of people and done some research and while that always comes up, I think the reality is we don't see that changing, if you think about what the aero lines have their or what the Boeing Airbus have a backlog, that may have multiple years of backlog and in place, so let's say something did happen and some of that went away it would not impact us in the near-term first of all.

Second of all people talk a good bit about the fuel prices, but the reality is even with the lower fuel price that people want to have a lighter aircraft, they don't have a newer engines and so they are committed to do that, So if they pull out of the queue will say okay I'm going to push this off for a while, they are probably pushing acquisition of those aircraft off by five years or six years, I don't think anybody is really willing and to do that.

So, there is a lot of discussion around that, but we've seen no indication that that's really going to happen and if it does happen, I think would be in a very minor way with some of the smaller aircraft or some of the smaller airlines..

And the next question is from Jon Tanwanteng with CJS Securities..

I just wanted to get a little more color on the aerospace programs that you have out there.

Are they ahead of or behind schedule right now? And when do we start to see the inflection point on your P&L?.

The big one is the A-350 and I would say deal program is delayed from what original schedule was not as a result of anything we've done and say just these new programs always seem to take a longer than originally anticipated but we have a pretty good ramp, I'm starting really in '16 and '17 and then I think A-350 goes in the full production in 2018..

I'll add one thing to that John, I think just from an order perspective on these new platforms as we try to lay out the timeframe and when you are going to get these orders for the OEMs stuff it's only in the production, I'd say we're about on the order side we're about $4 million to $5 million ahead of where we thought we would be at the half way point relative to new orders.

And so now it just matter when do those translate into the P&L and it's not a 30 day turn obviously but I'd say what it gives us is a tremendous amount of confidence in the back half of the year relative to any delivery schedules that we have on the OEM side of the business and then gives us continued strength as we enter '16.

So it's really an order just the order side of the business that's coming in way ahead of plan..

And then just could you maybe go through the same line of thought on the defense side, maybe talk about the Virginia and acceleration of the builds there?.

We're not counting on any acceleration there now, but that program is projected out for the next eight or 10 years. So I don’t anticipate there been any change to that.

I mean if you have to be in the defense business, I’d say the submarine size probably great place to because there is a little rate of production but it’s very predictable, that’s all well-funded and there is such a capable weapons system, both from an offensive and defensive perspective, that if something is going to get funded I am pretty sure it’s going to be the submarine.

So we don't have a lot of concern about that in fact we have our orders for the next several years as we said here today..

Yes, I think one thing that I’d add to that Jon is when you see the materials coming out of the electric build and that sort of thing on how they are stepping up to 1.5 boats and that sort of thing our product is such long lead time stuff, we're way out ahead of that.

So the things that we are delivering today are in the fourth quarter here, those aren’t to the boats that are today being launched. So we’re probably a year to 15 months ahead of when that boat would be launched because we’re basically -- our product is attached into the core of the submarines.

So we're in early build addition and therefore our product has to be in the shipyard well and advance when the hall is being constructed. So we don’t get to immediate top of when you see that 1.5 boats, ours isn't going to go up 1.5 boats this year.

But it’s a cumulative effect situation that over the next five years I think you’ll see continued strength in that as well as the position that we’re getting on the Ohio-class boats as well. That’s going to be a nice opportunity for us over the next five to 10 years..

We have no further questions at this time. I’d like to turn the call back to Vic Richey for closing remarks..

Thank you. So to wrap up I’m very pleased with our second quarter and year-to-date results. I’m confident with our three year financial goals remain on track. I’m optimistic about our growth prospects, both short-term and longer term.

Our priorities remain simple and straight forward, execute and deliver our commitments in a core business, maintain our focus on new product development, supporting organic growth and supplement our existing plan with accretive acquisitions around our core business. Thank you everyone I look forward to talking to you on our next call..

Thank you. Ladies and gentlemen this concludes today’s conference. Thank you for participating. You may now disconnect..