ESCO Technologies Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, the three months ended December 31, 2014. Comparatives are the three months ended December 31, 2013. The quarter’s statements reflect continuing operations; Aclara, sold in March 2014, is presented as discontinued operations.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $120.5 million | $124.5 million |
| Gross profit | $50.1 million | $50.2 million |
| EBIT from continuing operations | $15.0 million; 12.4% of sales | $14.4 million; 11.6% of sales |
| Net earnings from continuing operations | $10.8 million | $8.8 million |
| Net earnings, including discontinued operations | $10.8 million | $11.2 million |
| Diluted EPS from continuing operations | $0.41 | $0.33 |
| Diluted EPS, total | $0.41 | $0.42 |
| Operating cash flow, continuing operations | $(0.4) million | $4.3 million |
Sales decreased 3.1%. Continuing-operations net earnings rose about 23%, and continuing-operations diluted EPS increased from $0.33 to $0.41. Total net earnings and EPS were lower than the prior year, which included $2.4 million of after-tax earnings from discontinued operations. Gross margin was approximately 41.6%, compared with 40.3% a year earlier. The effective tax rate declined to 26.7% from 35.7%, benefiting from the extended research credit and a higher foreign tax-rate benefit.
Segments and operating trends
- Filtration: Sales fell 14.4% to $47.5 million; EBIT declined to $7.1 million from $9.5 million. Management cited lower volumes, including delivery timing and first-article inspection approvals at Crissair, lower VACCO space-product shipments, lower TEQ probe-cover shipments, and timing of PTI aerospace shipments.
- Test: Sales were essentially flat at $39.4 million. EBIT increased to $3.8 million from $3.6 million, supported by product mix and facility-consolidation savings.
- Utility Solutions Group (USG): Sales increased 13.9% to $33.6 million; EBIT rose to $10.0 million from $7.6 million. Higher F Series shipments, international revenue, software and service revenue, and favorable mix contributed.
New orders were $152.2 million versus $113.5 million in the prior-year quarter. Backlog was $334.6 million at December 31, 2014, up 10.5% from $302.9 million at September 30, 2014.
Balance sheet, cash flow and capital
- Cash and cash equivalents were $38.6 million at December 31, 2014, up from $35.1 million at September 30, 2014. Total debt was $60.0 million, including $20.0 million current and $40.0 million long-term; debt had been $40.0 million at September 30.
- About $379 million was available under the $450 million revolving credit facility; an additional $250 million expansion option is subject to lender acceptance. Letters of credit outstanding were $11.4 million. The company reported compliance with all debt covenants.
- Working capital, calculated from reported current assets and liabilities, was approximately $169.6 million at December 31, versus $148.9 million at September 30. The MD&A text refers to a different date for the $169.6 million figure, so the date should be verified.
- Operating cash flow from continuing operations was negative $0.4 million, mainly due to higher operating working-capital needs. Capital expenditures were $3.5 million and capitalized software expenditures were $1.6 million.
- Financing activities included $20.0 million net debt proceeds, $2.1 million of dividends, and $6.4 million of share repurchases. The quarterly dividend was $0.08 per share. The company reported an additional $3.5 million of repurchases in January 2015.
Outlook, material items and risks
- Management maintained fiscal 2015 diluted EPS guidance of $1.70–$1.80 and expected second-quarter EPS of $0.27–$0.32. It anticipated a 2015 revenue and EPS profile similar to 2014, with EPS weighted toward the second half, and revised expected fiscal 2015 effective tax rate to approximately 34%.
- On January 28, 2015, ESCO acquired the assets of ENOSERV LLC, a utility-software provider with approximately $8 million in annual revenue. Its results will be included in Doble within USG; purchase price is not stated in the provided filing text.
- The buyer of Aclara proposed adjustments to the sale’s final working-capital calculation. The parties initiated arbitration; the amount and outcome were not determined. The company considered the risk in its financial statements.
- Management said claims, litigation and environmental matters were adequately reserved, insured, or not expected to materially harm results, capital expenditures or competitive position. Forward-looking risks include customer order timing and cancellations, contract awards, economic conditions, supply and delivery issues, raw-material costs, environmental matters, litigation, and successful execution of restructuring plans.
- The company reported no outstanding derivative instruments at December 31, 2014 and no material change in market risks since September 30, 2014. Disclosure controls were assessed as effective.
Key facts for investors to verify
- Progress and financial impact of arbitration over Aclara’s final working-capital adjustment, including any exposure under Aclara-related contract guarantees.
- Whether Filtration delivery and inspection delays resolve, and whether backlog converts to sales as expected.
- Cash conversion and working-capital requirements, given negative quarterly operating cash flow despite higher earnings.
- Execution, integration and purchase terms for ENOSERV, which are not specified in the filing text.
- Achievement of the $1.70–$1.80 fiscal 2015 EPS guidance and the approximately 34% full-year tax-rate expectation.
- Clarification of the MD&A working-capital date reference; reported balance-sheet amounts indicate $169.6 million at December 31, 2014.