ESCO Technologies Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2011; comparisons are with the quarter ended December 31, 2010. Dollar amounts are in millions except per-share data.
Business context and results
ESCO operates in Utility Solutions Group (USG), RF Shielding and Test (Test), and Filtration/Fluid Flow (Filtration). Management attributed the weaker consolidated results primarily to the timing of new projects and the wind-down of certain USG projects.
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $152.9 | $159.9 |
| Gross profit, calculated as sales less cost of sales | $60.2 | $62.5 |
| SG&A | $48.7 | $43.6 |
| EBIT, non-GAAP | $8.8 | $16.6 |
| Net earnings | $5.2 | $10.8 |
| Diluted EPS | $0.19 | $0.40 |
| Operating cash flow | $(0.5) | $19.1 |
Financial position and cash flow
- Cash was $28.6 at December 31, 2011, down from $34.2 at September 30, 2011. Total assets were $999.9 and shareholders’ equity was $602.6.
- Current assets were $318.2 and current liabilities $264.9; working capital was $53.2, versus $122.5 at fiscal year-end. The decline chiefly reflected classifying all outstanding debt as current because the credit facility matures in November 2012.
- Debt shown on the balance sheet was $129.6, all classified as current; this included $129.0 outstanding under the revolver and $0.6 of short-term borrowings. The company reported approximately $186.0 of additional facility availability, plus a $50.0 increase option subject to bank acceptance, and $14.4 of letters of credit. It was in compliance with debt covenants.
- Operating cash flow was negative $0.5, versus positive $19.1, mainly due to lower earnings and higher operating working-capital requirements. Investing cash use was $6.0, including $3.1 of capital expenditures and $2.9 of capitalized software. Financing provided $2.6; dividends paid were $2.1.
Material changes and segment performance
- Sales fell 4.4%; USG sales declined 23.6% to $70.3, while Test sales rose 23.1% to $39.4 and Filtration sales rose 21.0% to $43.2.
- USG EBIT fell to $5.0 from $15.4, principally as Aclara project deliveries wound down. Aclara sales declined $23.2, including lower deliveries for New York City water, PG&E gas, and Mexico CFE electric projects.
- Test EBIT was $1.9, approximately unchanged year over year. Increased European sales—including the EMV acquisition contribution and chamber projects—were offset by weaker results in Asian and U.S. operations and added spending.
- Filtration EBIT increased to $8.2 from $5.5, primarily on higher sales volumes. Consolidated EBIT margin declined to 5.8% from 10.4%.
- SG&A rose to 31.8% of sales from 27.3%, reflecting acquisition-related costs and investments in product development, engineering, and marketing. Net interest expense decreased to $0.5 from $0.8.
Outlook, risks, and unusual items
- Management maintained fiscal 2012 expectations previously disclosed: revenue growth in the low-to-mid single digits and EPS growth of 5%–10% over the prior year. It estimated a fiscal 2012 effective tax rate of approximately 34%.
- Orders were $203.7 versus $185.8 a year earlier; backlog increased to $393.9 from $343.1 at September 30, 2011. SoCalGas orders were $33.1 in the quarter, with approximately $53 million received cumulatively by quarter-end. The filing describes a planned AMI deployment to more than six million customers; most equipment orders depend on formal purchase orders.
- The company intended to refinance its credit facility during 2012. Management said operating cash flow and facility borrowings should meet foreseeable needs, but refinancing and access to the additional $50 million option were not assured.
- The effective tax rate increased to 37.6% from 31.6%. Loss of state research-credit carryforwards added $0.2 to tax expense; the prior-year quarter benefited from a $0.4 net research credit. The company expected a $1.8 reduction in unrecognized tax benefits within 12 months as statutes of limitations lapse.
- Foreign subsidiaries held $20.1 of cash and had $32.2 of accumulated unremitted earnings. If those earnings were distributed, estimated U.S. taxes, net of foreign tax credits, would be approximately $5.2; management intended to reinvest the earnings indefinitely.
- Other income included approximately $0.5 from the sale of technical drawings in each comparative quarter. Comprehensive income was $3.7 versus $10.6, with a $1.5 foreign-currency translation loss in the current quarter.
- Risks cited include SoCalGas project execution, approvals and customer requirements; project timing and contract awards; economic conditions and customer solvency; supplier and raw-material availability; competition; litigation and environmental matters; and integration of acquired businesses. Management said claims and litigation were adequately reserved, insured, or not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the planned 2012 credit-facility refinancing is completed on acceptable terms before the November 2012 maturity.
- Whether SoCalGas formal purchase orders and project execution support expected future revenue, and how quickly USG’s winding-down projects are replaced.
- Whether backlog converts to sales and cash on schedule, given the quarter’s negative operating cash flow and inventory increase.
- Whether SG&A investments and rising Filtration and Test activity improve profitability enough to offset USG weakness.
- Whether the fiscal 2012 revenue, EPS-growth, and tax-rate expectations remain achievable as subsequent results develop.