ESCO Technologies Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2010. Financial amounts below are in U.S. dollars; income statement and cash-flow amounts are unaudited. ESCO reports Utility Solutions Group (USG), RF Shielding and Test (Test), and Filtration/Fluid Flow (Filtration).
Financial performance
| Metric | Three months ended June 30, 2010 | Prior-year quarter | Nine months ended June 30, 2010 | Prior-year period |
|---|---|---|---|---|
| Net sales | $157.6 million | $148.1 million | $399.6 million | $449.6 million |
| EBIT | $24.0 million; 15.2% of sales | $16.0 million; 10.8% | $36.1 million; 9.0% | $45.3 million; 10.1% |
| Net earnings from continuing operations | $14.5 million | $11.1 million | $21.0 million | $27.5 million |
| Diluted EPS from continuing operations | $0.55 | $0.42 | $0.79 | $1.04 |
| Operating cash flow | Not separately presented | Not separately presented | $15.9 million | $37.1 million |
- Quarterly sales rose 6.4% year over year, while continuing-operations earnings increased about 31%. Higher sales in Test and Filtration and stronger USG EBIT contributed to the quarterly improvement.
- Nine-month sales fell 11.1% and continuing-operations earnings fell about 24%. Net earnings were $21.0 million versus $27.6 million in the prior-year period, which included $0.1 million of discontinued-operations earnings.
- Quarterly results included income tax expense of $8.7 million and a 37.3% effective rate, versus 23.1% a year earlier. The nine-month effective rate was 36.6%, versus 30.1%; the company estimates approximately 36% for fiscal 2010.
- Interest expense was $0.8 million for the quarter and $3.0 million year to date, down from $1.6 million and $6.0 million, respectively. The company attributed the year-to-date reduction to lower average borrowing rates and balances.
- For the nine months, investing activities used $17.6 million, including $10.1 million of capital expenditures and $6.2 million of capitalized software additions. Financing activities used $19.3 million, including $28.5 million of net debt principal repayments and $4.2 million of dividends paid.
Balance sheet and liquidity
- At June 30, 2010, cash was $20.3 million, total assets $915.6 million, and working capital $111.8 million, down from $116.2 million at September 30, 2009. Cash declined $24.3 million from fiscal year-end.
- Credit-facility borrowings totaled $164.0 million, including $50.0 million classified as current and $114.0 million as long-term. Management intended to repay the current-classified amount within 12 months, but disclosed no contractual obligation to do so during that period.
- The company reported approximately $154.0 million available under its credit facility, plus a $50.0 million increase option subject to acceptance by participating or other outside banks. Letters of credit outstanding were $12.5 million. Management said operating cash flow and facility borrowings were expected to meet foreseeable needs.
- Operating cash flow of $15.9 million was substantially below the prior-year $37.1 million, with changes in current assets and liabilities using $25.6 million of cash.
Material changes and operating trends
- USG quarterly sales were nearly flat at $91.7 million; nine-month sales fell 17.7% to $225.0 million, primarily because Aclara RF sales declined, including lower PG&E advanced metering infrastructure deliveries as that project neared completion. USG quarterly EBIT rose to $20.4 million, while nine-month EBIT declined to $35.6 million.
- Test quarterly sales increased 18.9% to $34.6 million, but nine-month sales declined 5.3% to $93.1 million. Nine-month EBIT fell to $6.2 million from $10.4 million, reflecting lower volumes and higher SG&A.
- Filtration quarterly sales increased 12.2% to $31.3 million and nine-month sales increased 4.6% to $81.5 million. Quarterly EBIT rose to $6.1 million; nine-month EBIT eased to $11.4 million.
- Backlog increased to $406.8 million at June 30 from $299.4 million at September 30, 2009. Nine-month orders rose to $507.0 million from $453.8 million; third-quarter orders were $150.0 million versus $157.6 million.
Outlook, risks, and unusual items
- Management provided an estimated fiscal 2010 effective tax rate of approximately 36%, but no specific sales or earnings forecast. It stated that interim results are not necessarily indicative of the full fiscal year.
- Beginning in fiscal 2010, the company reassessed the remaining useful life of Aclara PLS TWACS NG software to ten years. This reduced nine-month amortization by $6.0 million and benefited reported results; investors should distinguish this accounting estimate change from underlying operating improvement.
- On August 4, 2010, after quarter-end, ESCO announced its acquisition of Crissair, an aerospace components manufacturer with approximately $27 million in annual revenue, for inclusion in Filtration. The filing does not provide the purchase price or financing terms.
- VACCO negotiated an approximately $40 million contract for seven ship-sets of valves and manifolds for the U.S. Navy Virginia Class submarine program, with deliveries expected to begin in fiscal 2010 and continue through fiscal 2014 as purchase orders are placed. Initial orders increased backlog by $7.7 million in July. SoCalGas selected Aclara RF for negotiations on an AMI project; a definitive agreement was not disclosed.
- Approximately 50% of variable-rate debt was not hedged by swaps. Management estimated a one-percentage-point increase in average market rates would affect fiscal 2010 net earnings by less than 2%. Principal risks cited include contract awards and execution, customer demand and credit, economic conditions, competition, supply and delivery issues, regulatory approvals, litigation, and acquisition integration.
- Management said ordinary-course claims and litigation were adequately reserved, insured, or not expected to have a material adverse effect. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the higher quarterly EBIT and earnings are sustainable given the lower nine-month sales and EBIT, and the $6.0 million TWACS NG amortization reduction.
- PG&E project timing and remaining AMI deliveries, along with the status and terms of the proposed SoCalGas agreement.
- Backlog conversion, including timing and purchase orders for the approximately $40 million VACCO contract.
- Cash conversion and working-capital trends, particularly receivables, collections, and operating cash flow.
- Debt repayment plans, credit-facility covenant headroom, and the availability conditions for the additional $50 million option.
- Crissair acquisition price, funding, integration, and its subsequent contribution to results.