ESCO Technologies Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2011. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise.
Business context
ESCO operates through Utility Solutions Group (USG), RF Shielding and Test (Test), and Filtration/Fluid Flow (Filtration). The period included contributions from acquisitions: Crissair, acquired in July 2010, and EMV, acquired in February 2011.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net sales | $176.3; up 11.9% from $157.6 | $503.0; up 25.9% from $399.6 |
| Net earnings | $13.1, down from $14.5 | $37.1, up from $21.0 |
| EPS, diluted | $0.49, versus $0.55 | $1.38, versus $0.79 |
| EBIT and margin | $20.8; 11.8%, versus $24.0 and 15.2% | $58.9; 11.7%, versus $36.1 and 9.0% |
| Operating cash flow | Not presented by quarter | $47.6, versus $15.9 |
Quarterly sales growth came from Test and Filtration; USG sales fell 5.3%. Nine-month sales increased in all three segments. For the quarter, USG EBIT declined to $12.4 from $20.4, while Test EBIT rose to $4.6 from $3.4 and Filtration EBIT to $9.6 from $6.1. Nine-month EBIT improved across all segments.
Quarterly SG&A rose to $47.5 from $38.1 and increased to 26.9% of sales from 24.2%. Nine-month SG&A was $134.6 versus $114.2, but declined as a share of sales to 26.8% from 28.6%. Interest expense declined, reflecting lower average borrowing rates and balances. The effective tax rate was 35.3% for the quarter and 35.0% year to date; management estimated approximately 36% for fiscal 2011.
Cash, debt, and liquidity
- Cash was $31.8 at June 30, 2011, compared with $26.5 at September 30, 2010. Working capital rose to $119.2 from $109.4.
- Operating activities provided $47.6 for the nine months. Investing used $24.6, including $10.4 of capitalized software, $9.3 of capital expenditures, and $5.0 for acquisitions. Financing used $20.0, including $48.0 of debt principal payments and $6.4 of dividends.
- Debt under the credit facility was approximately $139.0, with $13.9 of letters of credit outstanding. The balance sheet classified $50.4 as current and $89.0 as long-term. The company had approximately $177.0 available under the facility, plus a potential $50.0 increase subject to lender acceptance.
- Management intended to repay $50.0 within twelve months, but disclosed no contractual requirement to do so. Cash flow and credit-facility borrowings were expected to meet foreseeable capital and operating needs.
Orders, outlook, and notable developments
- Backlog was $387.1 at June 30, compared with $360.6 at September 30, 2010. Third-quarter orders were $176.6, versus $150.0; nine-month orders were $529.5, versus $507.0.
- ESCO finalized its SoCalGas agreement during the quarter, covering a proposed AMI deployment to approximately six million residential and most commercial natural-gas customers. It recorded about $15.0 of entered orders under the agreement in the quarter; most equipment is expected to be ordered through formal purchase orders.
- PG&E AMI gas orders were lower as that project neared completion: $4.0 in the quarter and $16.4 year to date, versus $20.8 and $47.3 in the comparable 2010 periods.
- Management maintained its fiscal 2011 outlook for sales and EPS growth of 10%–15% over the prior year, as previously stated in the 2010 Form 10-K.
- Other income included a $1.1 reduction in the Xtensible acquisition earnout liability in the quarter and year to date; year-to-date other income also included approximately $0.5 from a sale of technical drawings. The EMV acquisition added approximately $4.8 of goodwill.
Risks and contingencies
Forward-looking risks include changes to SoCalGas project requirements, regulatory approvals and project execution, the near-completion of major AMI projects, the Japanese earthquake’s effects, weaker served markets, customer demand or solvency, contract timing or termination, competition, component and raw-material availability and costs, supplier or subcontractor performance, litigation, and acquisition integration. Management stated that ordinary-course claims and litigation were adequately reserved, insured, or not expected to have a material adverse effect. About 40% of borrowings were effectively fixed through interest-rate swaps; management estimated a one-percentage-point increase in rates would reduce fiscal 2011 net earnings by less than 2%.
Investor facts to verify
- Whether SoCalGas formal purchase orders, approvals, and deployment proceed as expected, and how orders convert into revenue and cash.
- The pace of the PG&E project wind-down and its effect on USG sales and EBIT, especially given the quarter’s USG profit decline.
- Whether backlog converts on schedule and whether inventory growth supports demand without creating obsolescence or working-capital pressure.
- The basis for the maintained 10%–15% full-year sales and EPS growth outlook, including acquisition contributions and quarterly earnings trends.
- Credit-facility covenant headroom, planned debt repayment, and the availability of the optional facility increase.