ESCO TECHNOLOGIES INC quarterly report, Q1 FY2011

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ESCO Technologies Inc. — Fiscal 2011 First-Quarter 10-Q

Reporting period: Three months ended December 31, 2010; comparison is the three months ended December 31, 2009. Amounts below are in millions of dollars unless stated otherwise. ESCO reports three segments: Utility Solutions Group (USG), RF Shielding and Test (Test), and Filtration/Fluid Flow (Filtration).

Financial performance

  • Revenue: $159.9, up 41.9% from $112.7. Sales increased in all segments; USG grew 50.7% to $92.2, Test grew 18.5% to $32.0, and Filtration grew 45.7% to $35.7.
  • Profitability: Gross profit was $62.5, or approximately 39.0% of sales, versus $45.3, or 40.2%, a year earlier. SG&A was $43.6 (27.3% of sales), versus $39.2 (34.8%). EBIT, a non-GAAP measure, rose to $16.6 (10.4% of sales) from $2.2 (1.9%). Net earnings were $10.8 versus $0.4; diluted EPS was $0.40 versus $0.02.
  • Segment EBIT: USG $15.4 versus $4.6; Test $1.9 versus $0.7; Filtration $5.5 versus $2.4. Corporate costs increased to $6.2 from $5.5.
  • Cash flow: Operating cash flow was $19.1 versus $5.2. Investing cash use was $5.3, including $2.7 of capital expenditures and $2.7 of capitalized software additions. Financing cash use was $10.1, including $18.0 of debt principal payments and $2.1 of dividends. Cash increased $3.3 to $29.8.
  • Liquidity and debt: Working capital was $107.8, down from $109.4 at September 30, 2010. Total debt was approximately $145.5, including $51.5 classified as current; cash was $29.8. The company reported $171.5 available to borrow under its credit facility, plus a $50.0 increase option subject to outside-bank acceptance. It had $14.4 of outstanding letters of credit.
  • Other metrics: Backlog was $386.5 at quarter-end versus $360.6 at September 30, 2010. New orders were $185.8 versus $138.4. The effective tax rate was 31.6% versus 35.1%.

Changes and management commentary

  • Revenue and EBIT gains reflected stronger segment volumes. USG benefited particularly from Aclara PLS shipments to Mexico’s CFE and Puerto Rico’s PREPA, Aclara RF deliveries for New York City’s water project, and Doble shipments. Filtration’s sales included $5.7 from Crissair, acquired effective July 31, 2010.
  • Management attributed higher operating cash flow mainly to increased earnings and collections. Receivables declined $9.4, inventories increased $5.3 to support demand, and accounts payable declined $19.7 largely due to payment timing. Advance payments on long-term contracts rose $14.1, including $11.0 under VACCO’s Virginia Class contract.
  • The company received a $21.0 follow-on CFE order. PG&E project-to-date orders for Aclara AMI gas products were approximately 4.6 million units, or $258.0. SoCalGas had selected Aclara RF for negotiation of a definitive AMI agreement; management expected to finalize it during fiscal 2011, but no definitive agreement was reported in this filing.
  • Other income included approximately $0.5 from selling technical drawings; the prior-year quarter included approximately $0.9 of severance expense. The current-quarter result also benefited from a $0.4 research tax credit. Crissair contributed to year-over-year sales and SG&A increases.

Outlook, risks and contingencies

  • Management estimated a fiscal 2011 annual effective tax rate of approximately 36%. It said operating cash flow and credit-facility borrowings were expected to meet capital and operating needs for the foreseeable future. No revenue or earnings guidance was provided in the supplied filing text.
  • The company intended to repay $50.0 of debt within 12 months, although it had no contractual obligation to do so during that period. Credit-facility covenants include leverage and interest-coverage ratios. Approximately 40% of borrowings were effectively fixed through interest-rate swaps; management estimated a one-percentage-point increase in average rates would affect fiscal 2011 net earnings by less than 2%.
  • Risks cited include the outcome and timing of SoCalGas negotiations and approvals, execution of large AMI contracts, economic and customer-demand changes, competition, component and raw-material availability and costs, delivery or supplier issues, contract termination, acquisition integration, litigation, and regulatory or tax changes. Management said existing claims and litigation were adequately reserved, insured, or not expected to have a material adverse effect.

Important facts for investors to verify

  • Whether the SoCalGas negotiation produced a definitive contract, and its terms, timing, and expected economics.
  • How much of the reported revenue and backlog converts to cash and earnings, including the concentration and delivery schedules of large utility and government contracts.
  • The company’s progress toward its intended $50.0 debt repayment, ongoing covenant compliance, and actual availability under the credit facility.
  • Whether working-capital movements, including lower payables and higher inventories, reverse or persist in subsequent quarters.
  • The sustainability of the unusually large year-over-year earnings increase, including acquisition contributions and the effect of the drawing-sale gain and research tax credit.