ESCO Technologies Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. ESCO supplies engineered products and systems to utility, industrial, aerospace and commercial markets. It reported four segments: Filtration, RF Shielding and Test, Utility Solutions Group (USG), and Technical Packaging. Aclara is presented as discontinued operations; 2016 results below are from continuing operations unless noted.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $571.5 million | $537.3 million | +6.4% |
| Net earnings from continuing operations | $45.9 million | $41.7 million | +9.9% |
| Diluted EPS from continuing operations | $1.77 | $1.59 | +11.3% |
| EBIT (non-GAAP) | $69.7 million | $62.3 million | +11.9% |
| EBIT margin (non-GAAP) | 12.2% | 11.6% | +0.6 percentage points |
| Cash from operating activities, continuing operations | $73.9 million | $65.0 million | +13.7% |
Gross profit was approximately $220.7 million, or 38.6% of sales, versus approximately $202.4 million, or 37.7%, in FY2015. SG&A was $131.5 million (23.0% of sales), down from 24.2% of sales. The effective tax rate increased to 32.9% from 32.2%; interest expense rose to $1.3 million from $0.8 million.
At year-end, cash was $53.8 million, total debt $110.0 million and net debt approximately $56.2 million. Working capital was $165.4 million, up from $155.0 million. The company had approximately $335 million available under its $450 million revolving facility, plus a conditional $250 million increase option, and was in compliance with covenants. Net cash used in investing was $104.6 million, principally reflecting acquisitions; capital expenditures were $13.8 million and capitalized software expenditures $8.7 million. Dividends were $0.32 per share; FY2016 repurchases totaled $4.3 million.
Segments and changes versus prior year
| Segment | FY2016 sales | FY2016 EBIT | Reported performance drivers |
|---|---|---|---|
| Filtration | $207.8 million (+5.6%) | $45.2 million; 21.8% margin | Higher aerospace and space shipments; Westland contributed after its September acquisition. |
| Test | $161.5 million (-9.1%) | $13.9 million; 8.6% margin | Lower European and U.S. sales, partly offset by Asia; EBIT improved from FY2015 but included restructuring costs. |
| USG | $127.8 million (+3.4%) | $31.1 million; 24.3% margin | Higher software and service revenue and the Enoserv acquisition contribution. |
| Technical Packaging | $74.4 million (+88.8%) | $9.6 million; 12.9% margin | Growth primarily reflected Plastique and Fremont acquisitions and increased commercial shipments. |
FY2016 orders were $576.3 million, producing a 1.00x book-to-bill ratio. Backlog rose 2% to $332.4 million; approximately 76% was expected to be completed in FY2017. International customers represented about 29% of FY2016 sales, while U.S. Government and contractor sales were about 14%.
Outlook, commentary and risks
- Management projected FY2017 sales of $675–$685 million, up 18%–20%, and diluted EPS of $2.16–$2.26. The EPS outlook includes an expected $0.08-per-share after-tax impact from a one-time, non-cash Mayday inventory step-up charge and a $0.22-per-share after-tax impact from additional acquisition-related depreciation and amortization. Management also forecast interest expense of $3.6 million and a 35% effective tax rate.
- Management expected growth across all segments, with FY2017 sales growth driven in part by the acquisitions of Westland, Mayday and Hi-Tech. The Mayday and Hi-Tech acquisition closed November 7, 2016, after year-end, for approximately $75 million cash; the businesses were expected to join Filtration in FY2017. Management anticipated a more second-half-weighted year.
- FY2016 diluted EPS was $1.77; management also reported adjusted EPS of $2.03, excluding $6.9 million after tax ($0.26 per share) of restructuring-related items. These adjusted and EBIT measures are non-GAAP.
- Restructuring included Test facility closures and U.S. headcount reductions, and closure of Doble’s Brazil office. Other expenses included $4.9 million of Test restructuring costs and $2.2 million of USG restructuring costs. Management cited lower Test costs after restructuring as an FY2017 margin driver.
- Key risks include dependence on government funding and contracts that may be terminated for convenience; order timing and backlog conversion; economic and foreign-exchange exposure; supplier concentration and materials availability/cost; acquisition integration and increased debt; competition and project execution; product liability, litigation and environmental remediation; and continuing guarantees of certain Aclara contracts.
- Management stated environmental and litigation matters were reserved for, insured, or not expected to materially affect results, while acknowledging uncertainty. Foreign earnings of $46.3 million were intended to remain reinvested; estimated U.S. tax if repatriated was approximately $7.4 million.
Most important facts for investors to verify
- How much FY2017 growth and margin improvement is organic versus attributable to acquisitions, and whether the $2.16–$2.26 EPS outlook is achieved after the identified purchase-accounting charges.
- Integration, cash generation and returns from Westland, Plastique, Fremont, and the post-year-end Mayday/Hi-Tech acquisition; related borrowing and amortization effects.
- Test segment recovery, delayed-order conversion, and backlog fulfillment, including any government-program changes or cancellations.
- Debt repayment, revolving-facility capacity and covenant headroom, alongside working-capital needs and ongoing dividends or repurchases.
- Exposure from Aclara contract guarantees, supplier concentration, environmental matters and pension assumptions. KPMG issued unqualified opinions on the financial statements and internal controls; the previously identified material weakness was reported remediated, although controls at Plastique and Westland were excluded from management’s assessment.