ESCO Technologies Inc. — Q2 FY2021 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2021; comparative periods ended March 31, 2020. Dollar amounts are in millions unless noted. The filing identifies three continuing segments: Aerospace & Defense (A&D), Utility Solutions Group (USG), and RF Shielding and Test (Test).
Financial performance and liquidity
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $166.6, down 7.7% from $180.5 | $329.6, down 6.4% from $352.2 |
| Net earnings from continuing operations | $16.3 vs. $17.8 | $30.0 vs. $28.6 |
| Diluted EPS from continuing operations | $0.62 vs. $0.68 | $1.15 vs. $1.09 |
| Consolidated EBIT (non-GAAP) | $21.8 vs. $21.3; margin 13.1% vs. 11.8% | $40.0 vs. $38.1; margin 12.1% vs. 10.8% |
| Operating cash flow, continuing operations | Not separately provided | $57.3 vs. $36.7 |
- Gross margin was approximately 38.1% for the quarter versus 37.3%; for six months it was approximately 38.7% versus 37.5%.
- Quarterly SG&A was $38.7 (23.2% of sales), compared with $40.0 (22.2%). Six-month SG&A was $79.7 (24.2%) versus $82.1 (23.3%).
- Cash and cash equivalents were $45.7 at March 31, 2021, down from $52.6 at September 30, 2020. Working capital was $181.5, versus $190.6.
- Total borrowings were $22.0, down from $62.4 at September 30; $20.0 was classified as current. The company had approximately $468 of credit-facility availability, plus a potential $250 increase subject to lender approval, and was compliant with its covenants.
- Six-month capital expenditures were $13.2 and capitalized software spending was $4.0. Dividends paid totaled $4.2 for the six-month period.
Material changes versus the prior comparable periods
- Quarterly sales fell primarily because A&D declined $11.8 and USG declined $4.2; Test sales increased $2.2. For six months, A&D declined $22.4 and USG declined $2.5, partly offset by Test growth of $2.3.
- Quarterly A&D sales declined 12.4% to $83.3, with lower sales at Mayday, Crissair, and PTI; VACCO increased. USG sales declined 9.6% to $39.6, mainly due to lower Doble product and service revenue. Test sales rose 5.3% to $43.8, supported by Asian and European operations.
- Six-month EBIT increased despite lower sales. USG EBIT rose to $19.5 from $14.2 and Test EBIT to $11.0 from $10.3; A&D EBIT fell to $27.6 from $34.2. A&D weakness reflected lower sales volumes; USG benefited from favorable mix and a building-sale settlement.
- Orders were $176.2 for the quarter versus $245.6; six-month orders were $333.9 versus $466.1. Backlog was $521.7 at March 31, compared with $517.4 at September 30, 2020.
- Six-month 2020 net earnings of $104.6 included $76.0 of earnings from discontinued operations, principally a sale gain. Thus, total net earnings comparisons ($30.0 in 2021) are not directly comparable; continuing-operations earnings provide a more relevant comparison.
Outlook, risks, and unusual items
- ESCO continued to suspend specific financial guidance because of uncertainty around COVID-19 and the timing and pace of market recovery. Management described tangible signs of recovery for the second half of FY2021 and expected that half to compare favorably with the second half of 2020. Its stated expectation was growth in sales, Adjusted EBITDA, and Adjusted EPS versus 2020, with Adjusted EBITDA and Adjusted EPS reasonably consistent with 2019.
- COVID-19 continued to pressure commercial aerospace and utility markets; the Westland facility had a partial shutdown for several weeks in Q1. Management said global supply chains had not been materially affected to date and that businesses remained operational.
- COVID-related commercial-aircraft weakness affected certain A&D reporting units. No impairment was recorded, but Mayday’s fair value exceeded carrying value by less than 10%; $30 of goodwill was recorded for that unit. A deterioration in estimates could lead to impairment.
- Other income included an approximately $2.0 final settlement on the sale of the Doble Watertown building, partly offset by Doble Manta facility-consolidation charges. The filing also reports an ATM acquisition and a $0.3 inventory step-up charge in Q1.
- The six-month effective tax rate was 23.1%, versus 16.9%; the prior-year rate benefited from a $2.8 release of a valuation allowance. Management said ordinary-course claims, litigation, and environmental matters were adequately reserved, insured, or not expected to have a material adverse effect.
- Management identified risks including COVID-19 duration and recovery, customer demand and order timing, government funding and contract changes, supply and labor disruption, raw-material costs, competition, acquisitions, and litigation or environmental outcomes. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported.
Key facts for investors to verify
- Whether A&D and USG demand recovers as anticipated, and whether order intake converts into revenue; monitor orders against the $521.7 backlog.
- Whether the second-half directional outlook remains achievable, given that formal guidance was suspended.
- Mayday’s valuation assumptions and goodwill headroom, which was less than 10% above carrying value.
- The sustainability of improved operating cash flow and margins, and the use of available credit capacity and the intended $20.0 debt repayment.
- The effect of the Doble building settlement, facility-consolidation costs, and tax-rate differences on future comparable results.