ESCO Technologies Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. ESCO is a diversified engineered-products company operating in Filtration/Fluid Flow, Utility Solutions Group (USG), RF Shielding and Test, and Technical Packaging. Amounts below are U.S. dollars.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $813.0 million | $771.6 million | +5.4% |
| Net earnings | $81.0 million | $92.1 million | -12.0% |
| Diluted EPS | $3.10 | $3.54 | -12.4% |
| EBIT (non-GAAP) | $110.6 million | $96.8 million | +14.3% |
| EBIT margin (non-GAAP) | 13.6% | 12.5% | +1.1 percentage points |
| Operating cash flow | $105.1 million | $93.3 million | +$11.9 million |
Reported gross margin was approximately 37.4%, versus 36.4% in FY2018, based on net sales less cost of sales. The effective tax rate was 20.7%, compared with a 4.7% tax benefit in FY2018; the prior-year result included substantial tax-reform benefits. ESCO reported adjusted diluted EPS of $3.13 for FY2019, excluding specified acquisition and restructuring charges and the Doble property-sale gain; management’s FY2020 comparison separately uses FY2019 adjusted EPS of $2.95 after excluding Technical Packaging.
Segments and material changes
- Filtration: Sales of $325.8 million, up 13.6%; EBIT rose to $70.1 million from $58.7 million. Growth reflected aerospace shipments, acquired Globe sales, and higher shipments at several businesses.
- USG: Sales of $211.9 million, down 1.0%; EBIT increased to $52.2 million from $43.2 million. Doble growth and an approximately $8 million gain on sale of its Watertown facility helped offset NRG weakness in renewable energy.
- Test: Sales increased 3.0% to $188.4 million; EBIT rose 7.6% to $25.6 million, mainly on higher U.S. and Asian project activity.
- Technical Packaging: Sales fell 1.1% to $86.9 million and EBIT declined to $5.9 million from $8.1 million, including restructuring costs.
- Orders were $905.3 million, giving a 1.11x book-to-bill ratio. Backlog rose 24.1% to $475.1 million; about 90% was expected to be completed in FY2020.
Cash, debt and liquidity
- Cash and cash equivalents were $61.8 million; total debt was $286.3 million, resulting in net debt of approximately $224.5 million. Debt increased from $220.0 million, primarily associated with the Globe acquisition.
- Working capital was $243.6 million, up from $195.5 million. The company had approximately $207 million of borrowing availability under its $500 million revolving facility, plus a potential $250 million commitment increase; it reported covenant compliance.
- Investing cash outflow was $125.1 million, including $96.8 million for acquisitions. Capital expenditures were $37.2 million, compared with $20.6 million.
- Dividends were $0.32 per share for the year, totaling $8.3 million. No shares were repurchased in FY2019.
Outlook, transactions and risks
- Management forecast FY2020 continuing-operations sales growth of 9%–10%: Filtration 13.5%–14.5%, USG 7%–8%, and Test 4%–5%. It projected adjusted EPS of $3.20–$3.30, excluding Technical Packaging and the accounting impact of terminating and annuitizing the pension plan; first-quarter adjusted EPS guidance was $0.35–$0.40. Management expected a second-half-weighted year and a 23%–24% effective tax rate.
- After year-end, ESCO agreed to sell Technical Packaging to Sonoco for $187 million cash, subject to customary adjustments and regulatory and closing conditions. The company expected closing in late 2019 or early 2020 and planned to use proceeds to reduce debt and fund, terminate, and annuitize its frozen defined-benefit pension plan. The segment was expected to be reported as discontinued operations in FY2020.
- Unusual FY2019 items included the Doble facility-sale gain, Globe purchase-accounting charges, and restructuring charges. The July 2019 Globe acquisition cost approximately $95 million net of cash acquired.
- Key risks include U.S. government funding and contract termination, reliance on limited or sole-source suppliers, raw-material costs and tariffs, foreign-market and currency exposure, project execution and contract-cost estimates, product liability, and litigation or environmental remediation. A critical audit matter involved estimating costs to complete long-term Filtration contracts recognized over time.
- ESCO adopted ASC 606 in FY2019 using the modified retrospective method; prior-year comparisons were not restated. The filing reports that adoption increased FY2019 net earnings by approximately $0.8 million compared with prior accounting rules. A previously identified deferred-revenue-controls material weakness was reported remediated; management and KPMG gave unqualified opinions on internal control, with Globe excluded from the control assessment.
Investor verification priorities
- Confirm the Technical Packaging sale’s closing, final proceeds and adjustments, discontinued-operations treatment, and actual use of proceeds.
- Track whether FY2020 sales and adjusted-EPS guidance was achieved, including the effect of pension termination and annuitization accounting.
- Assess backlog conversion, particularly government-linked orders, and the assumptions underlying long-term contract cost estimates and contract assets.
- Monitor debt repayment, borrowing capacity, covenant headroom, and pension funding or settlement costs.
- Separate recurring operating performance from the Doble building gain, acquisition-related charges, restructuring costs, and FY2018 tax-reform effects.