ESCO Technologies Inc. — Q2 FY2023 Form 10-Q
Business context and period: The company reports three segments: Aerospace & Defense (A&D), Utility Solutions Group (USG), and RF Shielding and Test (Test). The second quarter and six-month periods ended March 31, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in millions except per-share data and percentages.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $229.1 | $204.9 | $434.6 | $381.9 |
| Net earnings | $17.9 | $16.6 | $32.6 | $28.1 |
| Diluted EPS | $0.69 | $0.64 | $1.26 | $1.08 |
| Consolidated EBIT (non-GAAP) | $25.6 | $22.7 | $46.2 | $38.3 |
| EBIT margin | 11.2% | 11.1% | 10.6% | 10.0% |
| Net margin | 7.8% | 8.1% | 7.5% | 7.4% |
| Operating cash flow | Not provided by quarter | $(5.5) | $23.0 |
Gross margin was approximately 37.9% in Q2 versus 37.4% a year earlier, and 38.2% for the first six months versus 38.0%. Q2 sales grew 11.8%; six-month sales grew 13.8%. Higher interest expense—$2.3 million for Q2 and $3.9 million year to date—reflected higher average borrowing rates. The effective tax rate was 23.4% in Q2 and 22.8% year to date, broadly similar to 2022.
Segment results
| Segment | Q2 sales, YoY change | Q2 EBIT, YoY change | Six-month sales, YoY change |
|---|---|---|---|
| A&D | $99.0; +16.7% | $18.8; up from $14.3 | $182.0; +17.3% |
| USG | $79.2; +23.4% | $14.1; up from $11.3 | $150.2; +17.6% |
| Test | $51.0; −8.8% | $7.2; down from $8.5 | $102.5; +3.3% |
A&D and USG growth reflected higher volumes, including commercial aerospace recovery and stronger Doble condition-monitoring shipments and services. Test’s Q2 decline was primarily linked to COVID-related disruptions in China and lower U.S. and Asian sales, partly offset by European project strength.
Balance sheet, liquidity and capital allocation
- At March 31, 2023, cash was $48.2 million, total debt was $161.0 million ($20.0 million classified as current), and working capital was $273.1 million. The company had $332 million available under its $500 million revolving credit facility, plus a potential $250 million increase subject to lender consent; it reported compliance with covenants.
- Cash declined $49.5 million from September 30, 2022. Six-month operating cash flow was negative $5.5 million, mainly due to higher working-capital needs, including increased receivables and inventory. Investing cash use was $34.1 million, including $17.9 million for the CMT acquisition, $10.3 million in capital expenditures and $5.9 million in capitalized software.
- Inventories rose $23.4 million and receivables rose $16.2 million from September 30, 2022. The company attributed inventory growth mainly to raw-material timing and work in process for existing orders.
- Six-month financing cash use was $10.7 million; the company repurchased about 138,000 shares for $12.2 million and paid $4.1 million in dividends. A $0.08-per-share dividend was paid after quarter-end.
Material developments, outlook and risks
- Acquisition: CMT Materials and affiliate Engineered Syntactic Systems were acquired February 1, 2023, for approximately $18 million net of cash acquired. CMT is included in A&D; the acquisition added $5.7 million of goodwill and $7.3 million of identifiable intangible assets. Q2 A&D EBIT included a $0.6 million inventory step-up charge.
- Orders and backlog: Backlog/remaining performance obligations were $740.9 million at March 31, up from $695.0 million at September 30, 2022. Management expected to recognize approximately 79% within the next 12 months. Six-month orders were $480.5 million versus $460.9 million.
- Outlook: The filing does not provide numerical full-year guidance. Management stated that operating cash flow and credit-facility borrowings are expected to meet capital and operational needs for the foreseeable future.
- Costs and unusual items: SG&A increased, with management citing executive-transition costs, professional fees, and higher Doble sales, marketing and event expenses. There were no significant or unusual items affecting the reported tax rate; no impairment was recorded in the period.
- Risks and contingencies: Risks include COVID-related disruption, supply and labor constraints, inflation, interest-rate changes, customer order and government-funding timing, acquisition integration, and environmental matters, litigation and claims. Management believes outstanding matters are adequately reserved, insured, or not expected to materially affect results, capital expenditures or competitive position.
Investor verification priorities
- Assess the drivers and sustainability of negative operating cash flow and rising working-capital balances.
- Track Test segment recovery, particularly the effects of China-related disruption and project timing.
- Evaluate CMT integration, acquired contribution, and related amortization and inventory step-up charges.
- Verify backlog conversion, order trends, and the timing of government appropriations and customer awards.
- Monitor borrowing costs, debt repayment intentions, credit-facility availability and covenant headroom.
- Review the full risk-factor disclosures and developments in environmental matters, claims and litigation.