ESCO Technologies Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2013; comparisons are with the quarter ended December 31, 2012. Financial amounts below are in U.S. dollars.
Business context
ESCO operates in Filtration/Fluid Flow, RF Shielding and Test, and Utility Solutions Group (USG). Aclara Technologies, formerly part of USG, is classified as discontinued operations and held for sale following the Board’s approval of a sale process in fiscal 2013.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Continuing-operations sales | $124.5 million | $110.5 million |
| Continuing-operations EBIT | $14.4 million; 11.6% margin | $8.6 million; 7.8% margin |
| Continuing-operations earnings | $8.8 million; $0.33 per diluted share | $5.3 million; $0.20 per diluted share |
| Discontinued-operations earnings (loss), net of tax | $2.4 million | $(5.1) million |
| Total net earnings | $11.2 million; $0.42 per diluted share | $0.2 million; $0.01 per diluted share |
| Operating cash flow, continuing operations | $4.3 million | $(6.6) million |
| Total operating cash flow, including discontinued operations | $(6.7) million | $1.7 million |
Sales increased 12.6%. Gross margin was approximately 40.3%, compared with 39.6%. Continuing-operations net margin was approximately 7.1%, compared with 4.8%. Continuing-operations earnings benefited from higher sales and margins associated with project timing and product mix.
Segment sales and EBIT were: Filtration, $55.5 million and $9.5 million; Test, $39.5 million and $3.6 million; and USG, $29.5 million and $7.6 million. Test EBIT improved substantially as savings from domestic facility consolidation were realized. Filtration sales rose on higher aerospace and space-product shipments, while USG benefited from higher service revenue, shipments, and favorable product mix.
Liquidity, debt and cash flows
- Cash and cash equivalents were $34.4 million at December 31, 2013, down from $42.9 million at September 30, 2013. Total assets were $1.084 billion and total liabilities were $472.7 million.
- Working capital was $176.7 million, up from $163.6 million at September 30, 2013.
- Total borrowings were $177.5 million, including $50.5 million current and $127.0 million long-term. The filing separately reports $186 million outstanding under the credit facility, including $9.0 million of letters of credit, plus $0.5 million of foreign short-term borrowings.
- ESCO reported approximately $264 million available under its credit facility and a further $250 million expansion option subject to lender acceptance. The company was in compliance with its debt covenants.
- Continuing-operations investing cash outflow was $4.0 million, including $2.1 million of capital expenditures and $1.8 million of capitalized software costs. Financing cash flow was $3.4 million; dividends paid were $2.1 million.
Material changes and unusual items
- Aclara generated $51.9 million of sales and $3.7 million of pretax earnings in the quarter, versus $34.7 million of sales and a $7.7 million pretax loss a year earlier. Its sales increase was attributed mainly to higher advanced metering infrastructure deliveries to SoCalGas. These results are excluded from continuing-operations results.
- Continuing-operations orders were $113.5 million, down from $128.9 million. Backlog was $261.2 million at quarter-end, compared with $272.1 million at September 30, 2013.
- Q1 2014 included $0.2 million of Filtration restructuring costs. The prior-year quarter included $1.0 million of Test restructuring costs and a $0.8 million gain on equipment sales.
- The effective tax rate on continuing operations was 35.7%, versus 33.4%. The prior-year rate benefited from a release of uncertain-tax-position accruals; the current quarter did not have that benefit.
Outlook, risks and contingencies
- Management forecast fiscal 2014 continuing-operations EPS of $1.50–$1.60 “as adjusted,” excluding restructuring charges, and $1.45–$1.55 including those charges. The forecast assumes Aclara is presented as discontinued operations.
- ESCO expected approximately $2 million, or $0.05 per share, of charges to consolidate Crissair’s Palmdale operation into the Canyon Engineering facility in Valencia by September 30, 2014.
- The Aclara sale process remained underway. Management expressed confidence in completing a divestiture but gave no assurance on completion, timing, price, or terms. Proceeds, if received, were expected to accelerate debt repayment and support acquisitions around core businesses.
- Management said cash flow and available credit were expected to meet capital and operating needs for the foreseeable future. The filing identifies risks including sale approvals and financing, order and contract timing, customer and supplier performance, economic conditions, competition, restructuring execution, litigation, environmental matters, and tax changes.
- Management did not expect environmental, intellectual-property, and general corporate matters under investigation or remediation to have a material adverse effect based on information then available. No derivatives were outstanding at December 31, 2013; management reported no material change in market risk.
Important facts for investors to verify
- Progress, terms, timing, approvals, and expected proceeds of the Aclara divestiture; the filing does not specify a sale price or completion date.
- Whether order intake and backlog stabilize or continue to decline, and whether project timing and product mix gains persist.
- Execution and total costs of the Crissair consolidation, and delivery of the stated EPS outlook.
- Cash generation from continuing operations, cash use by discontinued operations, and debt levels after any Aclara transaction.
- Any material developments in the disclosed legal, environmental, tax, or other contingencies.