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Text: Before I hand it over to Gary to discuss the second-quarter financials, I'll make a few comments on the current state of the company as well as our outlook for the future in light of the COVID-19 crisis.
Given how much the world has changed since our last earnings call three months ago, I think it's important to share with you the details of how we're managing the business through this unprecedented time.
As the pandemic spread across the globe during February and March, and as economic impacts started being felt in some of our businesses, we did what we do best: we took decisive action.
The actions we've taken have a clear and precise focus, which is protect our strong financial condition, to secure the financial well-being of the company and to support business continuity.
These measures will allow us to weather the storm while continuing to support our long-term strategy for profitable growth.
In the past, we've shown our operational excellence and our ability to effectively manage costs to meet challenging market demands.
This challenging time will be no different as we're actively addressing today's business pressures by using all the tools at our disposal.
The beauty of these current cost reduction initiatives is they're being done and implemented with minimal cost to achieve, thereby maintaining our flexibility to ramp up quickly should demand increase as customers, communities, and countries reopen their economies.
Bottom line is we're controlling what is within our control and focusing on the near term without losing our vision for the future.
I hope our comments today will leave investors with three clear messages about ESCO going forward: our diverse portfolio of strong, global businesses serving a wide range of nondiscretionary end markets provides us with the strength and resilience to continue to support our long-term growth outlook.
Number two, our strong balance sheet and significant financial liquidity will allow us to effectively manage through this crisis and maintain the company's financial health and well-being.
And finally, our deep and experienced leadership team has managed through and overcome many challenges in our 30-year history.
And I'm confident that we will emerge from this extraordinary time as an even stronger company.
Today, we have a very clearly defined priorities.
First and foremost is the health and safety of our employees and our families, followed by a commitment to meet the needs of our customers and suppliers.
Both of these will help support the business today and secure our future during this uncertain time.
ESCO will benefit from the fact that we have developed leading positions in various niche markets with a set of unique and highly technical products and solutions specifically designed to meet our customers' needs, which makes it difficult to be replaced by alternative sources.
Our continued investment in new products across all three segments and our staff of highly skilled engineering talent will continue to create new opportunities to provide value to our customers, which will drive our long-term growth.
I firmly believe that our future will rise as our customers' communities recover and spending returns to more normal levels.
To close out my comments before I hand it over to Gary, as we face the immediate and ensuing economic fallout of COVID-19, I believe we're well-positioned to navigate the short-term challenges in front of us.
I'm confident that our fundamental approach to operating our business and our solid liquidity will be the cornerstone of our continued long-term success.
Our employees are our most important asset.
And Vic will close out today's call with his current view related to our future and our end markets.
As Vic noted in his comments, our liquidity position is of the utmost importance to us during this challenging time.
I'm extremely pleased with where we stand today by having nearly $700 million of dry powder at our disposal between cash on hand and available credit capacity, while carrying a modest leverage ratio of 0.92.
I wish I could tell you that we saw this economic prices coming late in 2019 when we extended our five-year credit facility out to the year 2024 and we increased our debt capacity by an additional $50 million at lower rates, or when we sold the Technical Packaging business and generated over $190 million of gross proceeds to significantly improve our cash and debt positions, but we didn't see it coming.
We did not anticipate a pandemic as we executed both of these liquidity enhancements as these were part of our normal financial strategy.
But I'm sure glad we did these things as they have bolstered our current financial position.
I'll touch on a few Q2 highlights from the release.
Sales increased 5%, led by our Aerospace & Defense segment growing $16 million or 20% driven by the addition of Globe's submarine businesses, coupled with strong aerospace sales at PTI and Crissair, and higher space sales at VACCO.
Q2 A&D sales came in approximately $3 million ahead of plan.
Test sales were relatively flat as a result of a three-week shutdown of our Chinese manufacturing facility in February, coupled with the timing delays as several installation sites where personnel access was restricted due to COVID.
Domestic chamber sales were relatively strong and on-plan during the quarter, which nearly offset the installation site issues.
USG sales were down due to the timing of various project deliverables as several large utility customers, both domestic and international, realigned their short-term maintenance and spending protocols to focus on uninterrupted power delivery during the global crisis.
Entered orders clearly were a bright spot in both Q2 and year-to-date, where we booked $466 million of new business and ended March with a record backlog of $565 million, which is up 25% from the start of the year.
Our DoD business, led by our participation on the Block V contract for additional Virginia Class submarines, was the clear winner.
During Q2, we generated $34 million of cash from continuing operations with free cash flow of $23 million, which is 127% free cash flow conversion to net earnings during the quarter.
Q2 and year-to-date adjusted EBITDA improved from prior year, with Q2 reflecting a 17.4% margin despite the lower contribution from USG, which is our highest margin segment.
And finally, Q2 adjusted earnings per share was $0.68 a share, down slightly from the $0.71 a share delivered in Q2 of 2019, which resulted from the noted COVID impact.
To set the table for the balance of 2020, the COVID-19 global pandemic has introduced considerable uncertainty around the extent and duration of today's economic circumstances, which makes it difficult to predict how our future operations will be affected using our normal forecasting methodologies.
And as a result of this uncertainty, we're withdrawing our previously issued full-year guidance and will not provide guidance for Q3 at this time.
To add some color to Vic's comments on our cost savings actions, we are clearly focused on the right things, and we are pulling on all reasonable cost levers to maintain and optimize our cash flow and liquidity.
Our focus is to prudently cut our deferred costs in the short term and focus on those costs which do not have a negative outcome, impacting our ability to meet increasing demand or growth in the future.
I will offer some qualitative comments about our end markets, but I will emphasize that today's situation is very fluid, and there are many unknowns so my comments today may change materially in the future.
We recently completed a thorough review of our individual businesses as part of our April planning meetings to better frame our expectations of the impact of COVID-19 across and within our various operating units.
Starting with the Aerospace & Defense segment, we expect to see a slowdown in commercial aerospace deliveries over the balance of the year.
And it's too early in the cycle to determine the sales and EBIT impact from the current industry downturn as it relates to future build rates and airline passenger miles.
We are working with all of our aerospace customers to get a better picture of their demand and requirements over the coming quarters, but the situation continues to evolve daily.
Our defense contract within Aerospace & Defense, both military aerospace and navy products, is expected to remain strong given its current backlog and the urgency of expected platform deliveries.
Our aerospace supply chain partners continue to deliver necessary parts and services to us.
And in some cases where we see some weakness, we are working on bringing some of these products and services back in-house, such as machining and other capabilities we can replicate as a safety net.
We also did see this weakness in the aerospace market as an opportunity for ESCO.
So we find suppliers or competitors experiencing financial or operational stress during this crisis, we may be able to provide assistance about your partnering or through an acquisition at a reasonable price.
Our Test business is expected to remain relatively solid over the balance of the year given the strength of its backlog and the strength of its served markets, including medical shielding and 5G and its related communications technologies.
We expect USG's customer spending softness to continue through the next few months as they come out of their summer testing protocols and return to their more normal buying patterns.
Once some of the social distancing guidelines get sorted out and utility service personnel can return to their normal site visit routines, we expect our service business to return to normal as it has been essentially on hold for the past few months.
Utilities have money spend, and I'm certain that spending will return in the near future as maintenance spending cannot be delayed indefinitely without creating significant risk to grid safety, efficiency, or regulatory compliance.
The critical need to maintain, repair and improve the utilities' aging infrastructure is not reduced by this pandemic crisis.
On a positive note, I'm really pleased with USG's pipeline of new products and solutions, especially related to the software security and the related asset hardening solutions.
We introduced several new solutions at the Doble conference in March.
And from customer feedback, both there and after the show, these products are being enthusiastically received.
Moving on to M&A.
Prior to COVID, we had a couple of actionable opportunities well down a path to completion, and we'll continue to evaluate several other -- and we're continuing to evaluate several other actionable deals in the pipeline.
When the time is right, we will take action on these opportunities to grow our businesses than we have in the past.
Our Board is supportive of our M&A strategy and our current balance sheet provides us with plenty of liquidity to allow us to add to our existing portfolio.
In summary, we delivered a strong first half of the year.
And for the balance of the year, our plan is to hunker down while dust settles, work hard to control our costs while maintaining our critical workforce, develop contingency plans for multiple scenarios, and look for opportunities to leverage our infrastructure.
We will survive and prosper.
I'll now be glad to answer any questions you have.

user
esco suspends previously issued fiscal year 2020 guidance.
q2 adjusted earnings per share $0.68.
from a liquidity perspective, we are in a really solid position.
not changing its dividend payment plan.
suspending its previously issued fiscal year 2020 guidance.

assistant