ESCO Technologies Inc. — Q3 FY2018 Form 10-Q
Reporting period: Fiscal third quarter ended June 30, 2018; year-to-date results cover the nine months ended June 30, 2018. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $192.2 million | $171.2 million | $540.5 million | $478.7 million |
| Consolidated EBIT | $25.6 million | $18.6 million | $56.2 million | $53.1 million |
| Net earnings | $19.0 million | $12.6 million | $63.7 million | $34.5 million |
| Diluted EPS | $0.73 | $0.49 | $2.45 | $1.33 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $53.9 million | $33.5 million |
Q3 sales rose 12.3% year over year, while EBIT margin increased to 13.3% from 10.9%. Nine-month sales increased 12.9%, but EBIT margin declined to 10.4% from 11.1%. Nine-month net earnings benefited substantially from a $14.0 million income tax benefit, including a $24.3 million net benefit attributed to the Tax Cuts and Jobs Act (TCJA); pretax earnings were $49.7 million versus $50.4 million a year earlier. Q3 effective tax rate was 18.4%, compared with 27.4%.
Cash and cash equivalents were $43.3 million at June 30, 2018, versus $45.5 million at September 30, 2017. Working capital was $210.0 million, up from $197.8 million. Total debt was $262.0 million, down from $275.0 million; $20.0 million was classified as current. The company reported approximately $180 million of unused credit-facility availability, plus a $250 million increase option subject to lender approval. It was in compliance with debt covenants. Nine-month investing cash outflow was $34.1 million and financing cash outflow was $22.1 million.
Material changes and business drivers
- USG led growth: Q3 sales increased 31.9% and nine-month sales 43.2%, reflecting contributions from NRG, Morgan Schaffer, Vanguard Instruments, and, in the year-to-date period, new Doble products and software. USG Q3 EBIT was $11.5 million versus $8.5 million.
- Test sales rose 19.9% in Q3 and 12.4% year to date, primarily from U.S. test and measurement chamber project timing.
- Filtration sales declined 2.0% in Q3 and 1.7% year to date, with lower shipments at VACCO, PTI, and, year to date, Westland partly offset by stronger aerospace shipments at Mayday and Crissair.
- Technical Packaging sales increased 7.7% in Q3 and 6.4% year to date; year-to-date EBIT declined, primarily due to product mix and lower-margin Plastique projects.
- Backlog was $425.5 million at June 30, 2018, versus $377.1 million at September 30, 2017. Q3 orders were $201.1 million, compared with $182.2 million.
- The company acquired Manta Test Systems for $9.5 million cash in March 2018; Manta had approximately $8 million in annualized sales and is included in USG.
Outlook, commentary, risks, and unusual items
- Management maintained FY2018 guidance of GAAP EPS of $3.55–$3.65 and Adjusted EPS of $2.65–$2.75. Adjusted EPS excludes incremental 2018 net tax benefits from U.S. tax reform and cost-reduction charges in USG and Filtration.
- Nine-month results included $2.1 million of charges primarily related to USG restructuring, including Doble facility consolidations; Filtration also recorded $0.5 million of PTI restructuring charges. USG charges included severance, professional fees, and asset impairments.
- TCJA tax accounting remained provisional, including estimates for deferred tax balances and taxes on cumulative foreign earnings. The company expected to be subject to GILTI and had not yet selected its accounting policy for that tax. Repatriation may also involve withholding and state taxes and foreign-exchange effects.
- Management said operating cash flow and credit-facility borrowings were expected to meet capital and operating needs for the foreseeable future. The facility matures December 21, 2020; the additional $250 million capacity is subject to lender acceptance.
- Identified risks include the timing of customer orders and government funding, contract cancellations, acquisition integration, customer or supplier performance, competition, raw-material availability and costs, interest rates, tax-law changes, environmental matters, and unresolved claims or litigation. Management said contingencies were adequately reserved, insured, or not expected to materially adversely affect the company.
- Adoption of the new revenue standard was expected to shift more Filtration and Technical Packaging contract revenue and earnings to recognition over time rather than at a point in time; management said this would affect timing, not total recognized revenue or operating earnings, and was still finalizing the impact.
Important facts for investors to verify
- How much FY2018 earnings and EPS guidance depends on provisional TCJA benefits, and the eventual tax treatment of foreign earnings and GILTI.
- Whether strong orders and backlog convert into sales and cash, particularly given project timing and elevated inventories.
- Acquisition contributions, integration progress, and whether USG growth and margins are sustainable after restructuring.
- Debt repayment plans, variable-rate exposure, and available credit capacity, including conditions on the facility increase option.
- The final revenue-standard transition effects and the status or financial impact of litigation, environmental matters, and other contingencies.