ESCO Technologies Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2011; comparisons are with the corresponding 2010 periods. Amounts below are in U.S. dollars unless stated otherwise.
Business context
ESCO operates through Utility Solutions Group (USG), RF Shielding and Test (Test), and Filtration. Its products and services include utility communications and diagnostic systems, electromagnetic shielding and testing, and specialty filtration products. The company acquired German testing-systems provider EMV on February 28, 2011, for approximately $5.0 million, including cash acquired; EMV is included in Test.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $166.7 million | $129.3 million | $326.7 million | $242.0 million |
| EBIT | $21.6 million | $9.9 million | $38.2 million | $12.1 million |
| EBIT margin | 12.9% | 7.7% | 11.7% | 5.0% |
| Net earnings | $13.2 million | $6.0 million | $24.0 million | $6.4 million |
| Diluted EPS | $0.49 | $0.22 | $0.90 | $0.24 |
| Interest expense, net | $0.5 million | $0.8 million | $1.3 million | $2.2 million |
Q2 sales rose 29.0%, while six-month sales rose 35.0%. Management attributed growth to higher sales across all three segments. Q2 results also benefited from improved segment profitability; lower interest expense helped, while the effective tax rate was 37.2% versus 34.7% a year earlier. The six-month effective tax rate was 34.8% in both years.
Six-month segment sales and EBIT were: USG, $177.2 million and $31.2 million; Test, $74.1 million and $7.1 million; Filtration, $75.4 million and $12.0 million. Higher volumes drove improved EBIT in each segment. Filtration sales and profits also included Crissair, acquired in July 2010.
Cash flow, balance sheet, and liquidity
- Six-month operating cash flow was $36.0 million, compared with $2.8 million in the prior-year period. Net investing cash use was $17.2 million, including $7.9 million of capitalized software, $5.6 million of capital expenditures, and $3.7 million for an acquisition. Financing cash use was $13.8 million. Cash increased by $6.1 million to $32.6 million.
- At March 31, 2011, working capital was $111.0 million, versus $109.4 million at September 30, 2010. Current assets were $309.0 million and current liabilities were $198.0 million.
- Total debt was approximately $143.5 million, down from $154.0 million at September 30, 2010. The company had $173.8 million available under its credit facility, plus a $50 million increase option subject to outside-bank acceptance, and $32.6 million in cash. Outstanding letters of credit were $14.2 million.
- The company classified $50 million of debt as current because it intended to repay it within 12 months, although repayment was not contractually required in that period. The credit facility includes leverage and interest-coverage covenants.
Changes, outlook, and risks
- Backlog was $386.8 million at March 31, compared with $360.6 million at September 30. Six-month orders were $352.9 million versus $357.0 million; Q2 orders fell to $167.1 million from $218.6 million.
- Management expected fiscal 2011 consolidated revenue and EPS to increase approximately 10%–15% versus 2010. It expected Q3 EPS to be below Q2, citing the timing of previously communicated USG Smart Grid spending and customer deliveries that occurred earlier than planned and lifted first-half results.
- Management expected to finalize a definitive SoCalGas AMI agreement during fiscal 2011; negotiations were not yet complete. PG&E AMI gas orders were lower year over year as that project neared completion.
- Other income in the first six months included a $0.5 million gain from selling technical drawings; prior-year other expense included $0.9 million of severance. Management estimated a fiscal 2011 effective tax rate of approximately 36%.
- Risks cited include SoCalGas negotiations and approvals, performance on large AMI contracts, impacts from the Japanese earthquake, economic and customer demand changes, competition, component and raw-material availability and costs, contract awards and cancellations, supplier performance, litigation, and acquisition integration. Management said ordinary-course claims and litigation were adequately reserved, insured, or not expected to have a material adverse effect. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether the expected SoCalGas agreement is finalized, and its terms, timing, and required approvals.
- Whether the unusually strong first-half sales and earnings convert into sustained growth, given management’s warning for lower Q3 EPS and the timing of Smart Grid spending.
- Backlog conversion and order trends by segment, including the transition from the PG&E project.
- Debt repayment plans, covenant headroom, and availability of the optional credit-facility increase.
- Potential effects of the Japanese earthquake, supply constraints, and integration of recent acquisitions.