ESCO Technologies Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2012. Dollar amounts are in millions unless otherwise noted.
Business context and results
ESCO operates through Utility Solutions Group (USG), RF Shielding and Test (Test), and Filtration/Fluid Flow (Filtration). Management says results reflect project timing and the wind-down of certain USG projects. It describes the company’s financial position as strong.
| Metric | Quarter 2012 | Quarter 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $169.4 | $176.3 | $496.2 | $503.0 |
| Net earnings | $13.8 | $13.1 | $29.2 | $37.1 |
| Diluted EPS | $0.51 | $0.49 | $1.08 | $1.38 |
| Consolidated EBIT (non-GAAP) | $20.1 | $20.8 | $46.0 | $58.9 |
| EBIT as a share of sales | 11.8% | 11.8% | 9.3% | 11.7% |
Financial position and cash flow
- Operating cash flow: $35.0 for the first nine months, versus $47.6 a year earlier. Management attributed the decline mainly to lower earnings and higher operating working-capital requirements.
- Investing and financing: Investing activities used $22.4, including $10.6 of capital expenditures and $10.4 of capitalized software spending. Financing activities used $11.7, including $6.4 of dividends and net debt principal payments of $5.0.
- Cash and liquidity: Cash was $32.2 at June 30, 2012. Working capital was $131.7, up from $122.5 at September 30, 2011. The company reported approximately $315 of additional borrowing availability under its revolving facility, plus a potential $250 increase option subject to lender acceptance.
- Debt: Total borrowings were $120.0, versus $125.0 at September 30, 2011. The company entered a new $450 five-year revolving credit facility in May 2012, replacing its former $330 facility. It reported compliance with all debt covenants.
Changes versus comparable periods
- Quarterly sales fell 3.9%, while net earnings rose to $13.8 from $13.1 and diluted EPS increased to $0.51 from $0.49. Other income included a $3.7 benefit from revaluation of the Xtensible acquisition earnout liability; this helped support quarterly earnings.
- For the first nine months, sales declined 1.3%, net earnings fell 21.3%, and diluted EPS declined to $1.08 from $1.38. EBIT fell to $46.0 from $58.9.
- USG sales fell 11.7% for the quarter and 16.1% year to date, primarily as AMI projects approached completion. USG year-to-date EBIT declined to $27.0 from $43.6.
- Test sales fell 8.8% for the quarter but increased 9.8% year to date. Test EBIT declined in both periods, reflecting lower margins, project delays, unexpected turnover of key employees in Germany, and added SG&A investment.
- Filtration sales increased 16.8% for the quarter and rose to $143.1 from $119.0 year to date. Year-to-date EBIT increased to $28.9 from $21.6, primarily on higher volume.
- Backlog rose to $430.9 at June 30, 2012 from $343.1 at September 30, 2011. Nine-month orders were $584.0 versus $529.5 in the prior-year period.
Outlook, risks, and notable items
- Management expected fiscal 2012 EPS to be relatively flat versus fiscal 2011 and maintained its prior revenue outlook of low-to-mid single-digit growth. These are forward-looking expectations, not reported results.
- Management estimated the fiscal 2012 annual effective tax rate at approximately 35%. The quarter’s 28.0% rate benefited from a $1.8 reduction in uncertain tax positions following a statute-of-limitations lapse; the filing says this reduced the quarterly effective rate by 9.6 percentage points.
- On August 8, 2012, the board authorized an expanded stock repurchase program through September 30, 2013, capped at the lesser of $100 or the credit agreement’s limit. A quarterly dividend of $0.08 per share was paid July 20, after quarter-end.
- Key risks identified include SoCalGas project execution and approvals, customer demand and contract timing, economic conditions, competition, suppliers and subcontractors, labor matters, regulation, litigation, environmental costs, and integration of acquired businesses. Management said claims and litigation were adequately reserved, insured, or not expected to have a material adverse effect.
- Other notable items: a $1.3 minority investment in Calico Energy; no outstanding derivative instruments at June 30; and an estimated $5.2 of U.S. tax, net of available foreign tax credits, if foreign earnings intended to be reinvested indefinitely were distributed.
Important facts for investors to verify
- Whether the USG project wind-down and delivery timing, including SoCalGas and other AMI programs, align with the revenue and EPS outlook.
- Whether the increased backlog converts to sales and cash flow on schedule, and whether Filtration growth offsets weakness or delays in USG and Test.
- How much quarterly earnings benefited from the Xtensible earnout revaluation and the tax-position lapse, and how results compare excluding these items.
- Whether inventory growth to $116.5 supports near-term demand or creates execution, obsolescence, or working-capital risk.
- Availability and terms of credit capacity, covenant compliance, and any constraints on the $250 facility expansion option or share repurchases.