ESCO Technologies Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended December 31, 2016; comparisons are with the three months ended December 31, 2015. Amounts are in U.S. dollars unless noted.
Business context and performance
ESCO operates in Filtration/Fluid Flow, RF Shielding and Test, Utility Solutions Group (USG), and Technical Packaging. It acquired aerospace suppliers Mayday Manufacturing and Hi-Tech Metals on November 7, 2016, for $75 million cash; their results are included in Filtration from the acquisition date.
- Net sales rose 10.2% to $146.4 million. Growth in Filtration and Technical Packaging was partly offset by lower Test sales.
- Filtration sales grew 38.9% to $58.8 million, including contributions from Mayday and Westland and higher VACCO shipments. Test sales fell 20.9% to $33.8 million, primarily due to project timing and lower domestic shielding volume. USG sales increased 3.0% to $35.6 million; Technical Packaging sales rose 37.7% to $18.2 million, largely from Plastique.
- Orders were $182.9 million versus $142.7 million; backlog was $368.9 million at December 31, up from $332.4 million at September 30, 2016.
Financial results and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $146.4 million | $132.8 million |
| Net earnings | $10.7 million | $8.8 million |
| Diluted EPS | $0.41 | $0.34 |
| Consolidated EBIT | $16.8 million; 11.5% of sales | $13.2 million; 9.9% of sales |
| Operating cash flow | $15.7 million | $1.3 million |
- Net earnings increased 21.5%; diluted EPS increased 20.6%. Gross margin was approximately 36.5%, versus 39.7% a year earlier; SG&A was 23.1% of sales versus 25.1%.
- Cash and equivalents were $51.8 million at December 31, 2016, compared with $53.8 million at September 30. Working capital was $183.3 million, up from $165.4 million.
- Capital expenditures were $7.0 million; investing cash flow was negative $83.4 million, including the $75 million Mayday acquisition. Financing cash flow was positive $67.8 million, including $90 million of debt proceeds and $20 million of principal payments.
- Total borrowings were $180 million, up from $110 million at September 30; $20 million was classified as current, although the company said it had no contractual obligation to repay that amount within 12 months. The company had approximately $265 million available under its credit facility, plus a $250 million increase option subject to lender acceptance, and was in compliance with debt covenants.
Changes, outlook, and notable items
- Filtration EBIT rose to $10.7 million; USG EBIT rose to $9.7 million. Test EBIT was $2.4 million, with lower sales partly offset by the absence of prior-year restructuring costs. Technical Packaging EBIT fell to $1.0 million, reflecting lower TEQ shipments and higher SG&A.
- Other income was $0.8 million versus other expense of $3.6 million in the prior-year quarter. Current-period other income included $0.4 million of death-benefit insurance proceeds; prior-year expense included restructuring costs.
- Interest expense increased to $0.7 million from $0.2 million, reflecting higher average borrowings and rates. The effective tax rate was 33.5%, versus 31.9%; management estimated a fiscal 2017 rate of approximately 34%.
- Management expected fiscal 2017 revenue and EPS to follow a profile similar to 2016, with EPS more weighted to the second half. Guidance was $0.37–$0.42 EPS for Q2 FY2017 and $2.16–$2.26 for fiscal 2017.
- Foreign subsidiaries held $47.4 million of accumulated unremitted earnings and $42.4 million of cash. No deferred tax was provided because the earnings were intended to be reinvested indefinitely; distribution could result in estimated U.S. taxes of approximately $7.7 million.
- The company reported ongoing claims, litigation, and environmental investigations/remediation, which management believed were adequately reserved, insured, or not expected to have a material adverse effect. Key disclosed risks include order and contract timing or termination, market conditions, customer and supplier performance, raw-material costs, interest and currency rates, litigation, environmental costs, and execution of restructuring plans.
Important facts for investors to verify
- Whether acquired Mayday and other recent acquisitions sustain growth and meet expected profitability, given the increased debt and acquisition-related amortization.
- Whether Test’s sales recover from project timing and lower shielding volumes, and whether Technical Packaging improves after lower TEQ shipments and weaker EBIT.
- Whether order growth and the larger backlog convert to sales and cash flow on schedule.
- Whether fiscal 2017 EPS guidance and the approximately 34% tax-rate estimate remain achievable, including the effects of foreign earnings and tax treatment.
- Debt repayment plans, covenant compliance, facility availability, and the lender-dependent $250 million increase option.