ESCO Technologies Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 31, 2019. Dollar amounts are U.S. dollars; financial statement amounts are generally in millions unless noted. The company reports three continuing segments: Aerospace & Defense (A&D), Test, and Utility Solutions Group (USG).
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales, continuing operations | $171.7 million | $163.4 million |
| EBIT, continuing operations | $16.8 million | $25.4 million |
| EBIT margin | 9.8% | 15.5% |
| Earnings from continuing operations | $10.8 million | $17.4 million |
| Diluted EPS from continuing operations | $0.41 | $0.66 |
| Net earnings, including discontinued operations | $86.8 million | $17.3 million |
| Diluted EPS, including discontinued operations | $3.32 | $0.66 |
Sales increased 5.1%. A&D sales rose 17.1% to $77.5 million, Test sales were essentially flat at $41.4 million, and USG sales fell 5.4% to $52.8 million. Segment EBIT was $12.5 million for A&D, $4.7 million for Test, and $9.3 million for USG. SG&A was $42.1 million, or 24.5% of sales, versus $38.5 million, or 23.6%, a year earlier. Interest expense increased to $2.4 million from $1.9 million. The continuing-operations effective tax rate was 25.1%, compared with 26.2%.
Operating cash flow was $3.3 million from continuing operations and $2.7 million including discontinued operations. Continuing-operations capital expenditures were $12.6 million, including about $6 million for improvements to Doble’s new headquarters. Cash and cash equivalents were $96.7 million at quarter-end. Total borrowings were $150 million, down from $285 million at September 30, 2019; net of cash, debt was approximately $53.3 million. Working capital from continuing operations was $246.3 million.
Material changes and unusual items
- ESCO completed the sale of its Technical Packaging segment on December 31, 2019. It received approximately $184 million in net proceeds and recognized a $76.6 million after-tax gain. The business’s results are presented as discontinued operations; its prior-year quarter sales were $19.2 million.
- Reported net earnings and EPS were therefore substantially boosted by the disposal gain and are not representative of continuing operating performance. Continuing earnings declined, primarily reflecting the prior-year $8 million gain on sale of the Doble Watertown property, alongside higher SG&A, amortization, and interest expense.
- Backlog from continuing operations increased to $500.3 million from $451.6 million at September 30, 2019. Orders were $220.4 million, compared with $181.1 million in the prior-year quarter. Management said approximately 76% of remaining performance obligations were expected to be recognized as revenue in the next 12 months.
- ESCO adopted the new lease standard on October 1, 2019, recording approximately $20 million of operating lease right-of-use assets and liabilities, with no significant effect on earnings or cash flows.
Outlook, liquidity, and risks
Management maintained its FY2020 adjusted EPS outlook of $3.20–$3.30 and forecast Q2 adjusted EPS of $0.70–$0.75. These are forward-looking estimates, not guarantees.
The company had about $341 million available under its $500 million revolving credit facility, plus a potential $250 million increase subject to lender approval, and $96.7 million of cash. It was in compliance with its financial covenants. Management said operating cash flow and facility borrowings should meet foreseeable capital and operating needs.
Management stated that ordinary-course claims, litigation, and environmental investigations and remediation are adequately reserved, insured, or not expected to have a material adverse effect. Disclosed risks include changes in government funding and contract awards, economic and customer demand conditions, raw-material availability and costs, acquisition integration, interest and foreign-exchange movements, and unresolved legal or environmental matters. The filing reported no material change in market risks since September 30, 2019.
Important facts for investors to verify
- Separate the $76.6 million disposal gain from recurring continuing-operations earnings and assess the ongoing earnings base.
- Track whether A&D growth, Test margins, and USG performance persist, including the impact of Doble facility move costs and lower Doble sales.
- Compare future cash generation and capital spending with the $500.3 million backlog and management’s adjusted EPS guidance.
- Monitor debt repayment, facility availability, covenant compliance, and the cash impact of taxes associated with the Technical Packaging sale.
- Review developments in litigation, environmental matters, government contracts, and other risks identified in the filing.