Business context and reporting period
ESCO Technologies Inc. filed this unaudited Form 10-Q for its fiscal second quarter and six months ended March 31, 2022. The company operates in Aerospace & Defense (A&D), Utility Solutions Group (USG), and RF Shielding and Test (Test). Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Quarter ended March 31, 2022 | Prior-year quarter | Six months ended March 31, 2022 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $204.9 | $165.9 | $381.9 | $328.6 |
| Net earnings | $16.6 | $15.4 | $28.1 | $28.2 |
| Diluted EPS | $0.64 | $0.59 | $1.08 | $1.08 |
| Consolidated EBIT | $22.7 | $20.6 | $38.3 | $37.7 |
| EBIT margin | 11.1% | 12.4% | 10.0% | 11.5% |
- Quarterly sales rose 23.5%; six-month sales rose 16.2%. Net earnings increased 7.7% for the quarter but declined slightly for the six-month period. EPS was flat year over year for the six months.
- Approximate gross margin, calculated from reported sales and cost of sales, was 37.4% for the quarter versus 37.6% a year earlier, and 38.0% for the six months versus 38.2%. Approximate net margin was 8.1% and 7.4%, respectively, compared with 9.3% and 8.6%.
- Quarterly segment sales/EBIT: A&D $84.8/$14.3; USG $64.2/$11.3; Test $55.9/$8.5. USG and Test grew sales and EBIT; A&D EBIT declined. Consolidated EBIT is a non-GAAP measure.
- Operating cash flow was $23.0 for the six months, down from $57.3. Capital expenditures were $20.7, including the approximately $10 million purchase of the NRG building; capitalized software additions were $4.7. Operating cash flow less capital expenditures was approximately $2.3, versus $44.2 in the prior-year period.
Liquidity, debt and capital
- At March 31, cash was $54.3; current assets were $513.4 and current liabilities $277.8, implying a current ratio of approximately 1.85. Working capital was $235.6, up from $191.2 at September 30, 2021.
- Total borrowings were $196.0, up from $154.0 at September 30; cash less borrowings implies net debt of approximately $141.7. The company had $296 million available under its revolving facility, plus a $250 million expansion option subject to lender approval. The facility matures September 27, 2024; the company reported compliance with covenants.
- Six-month financing included $42.0 net borrowing proceeds, $17.9 of treasury-stock purchases, and $4.2 of dividends paid. The company repurchased approximately 229,000 shares for about $18.0 million in the six months. The quarterly dividend was $0.08 per share.
Material changes, outlook and risks
- USG sales growth included $10.4 of second-quarter and $25.0 of six-month revenue from the Altanova and Phenix acquisitions. The company acquired NEco in November 2021 for approximately $15.2 million, net of cash acquired.
- Backlog/remaining performance obligations were $670.9 at March 31, versus $592.0 at September 30. Orders were $236.5 in the quarter and $460.9 in the six months, both above the respective prior-year periods. Management expects to recognize approximately 77% of remaining obligations as revenue in the next 12 months.
- Management reported strengthening entered orders and said it expected strong growth in the second half of fiscal 2022, while noting uncertainty around the timing and pace of commercial aerospace and electric utility recovery. COVID-19-related supply constraints continued; the company also identified risks including labor and material shortages, transportation delays, inflation, changing end-market demand, interest rates, and acquisition integration.
- Operating cash flow fell mainly because of higher working-capital requirements. Inventories increased $28.0 since fiscal year-end, primarily due to raw-material receipts and work in process. Interest expense rose with higher average borrowings.
- No impairment was recorded in the quarter or six-month period. Management said it did not currently anticipate material pandemic-related asset impairments. Routine claims, litigation, and environmental investigations/remediation were described as adequately reserved, insured, or not expected to have a material adverse effect.
- The filing disclosed an immaterial correction to second-quarter 2021 Westland results: adjusted prior-year sales were $165.9 (from $166.6 as reported), and adjusted net earnings were $15.4 (from $16.3). The 2021 comparative figures in the statements reflect the adjustment.
Important facts for investors to verify
- Whether order growth and the $670.9 backlog convert to revenue on the expected schedule, particularly the forecast 77% within 12 months.
- Whether margins and cash generation recover as supply-chain constraints, inventory needs, and acquisition-related costs evolve.
- How much of USG’s growth is sustained organically versus attributable to acquisitions, and the integration and financing effects of those acquisitions.
- Credit-facility capacity, covenant headroom, and the company’s intended repayment of the $20 million classified as current debt; the filing says repayment is intended but not contractually required within 12 months.
- Developments in commercial aerospace and electric utility markets, inflation and labor/material availability, and the company’s routine litigation and environmental matters.