ESCO Technologies Inc. — fiscal third quarter 2022
The Form 10-Q covers the quarter and nine months ended June 30, 2022, compared with the corresponding 2021 periods. ESCO operates in Aerospace & Defense (A&D), Utility Solutions Group (USG), and RF Shielding and Test (Test). Amounts below are in millions of dollars unless stated otherwise.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $219.1 | $181.4 | $601.0 | $510.0 |
| EBIT, non-GAAP | $30.8 | $19.4 | $69.1 | $57.1 |
| EBIT margin | 14.1% | 10.7% | 11.5% | 11.2% |
| Net earnings | $23.2 | $14.9 | $51.3 | $43.1 |
| Diluted EPS | $0.89 | $0.57 | $1.97 | $1.65 |
For the nine months, operating cash flow was $41.7 versus $75.4; investing cash outflow was $50.8 versus $29.1, including $25.9 of capital expenditures and $9.4 of capitalized software. Cash was $61.0 at June 30. Working capital was $261.4, up from $191.2 at September 30, 2021. Management attributed weaker operating cash flow mainly to higher working-capital needs.
Total borrowings were $201.0, up from $154.0 at September 30, 2021; $20.0 was classified as current. Net debt was approximately $140.0. The company reported $291.0 available under its $500 million revolving facility, plus a potential $250 million increase subject to lender approval, and said it was compliant with facility covenants. Nine-month average borrowing rates were 1.57%, versus 1.33% a year earlier.
Changes and operating drivers
- Q3 sales grew 20.8%; nine-month sales grew 17.8%. Q3 growth came from USG (+40.9%), Test (+23.3%), and A&D (+8.2%).
- Nine-month segment sales were A&D $247.7 (+5.5%), USG $194.9 (+37.4%), and Test $158.5 (+18.7%). USG’s increase included $36.5 of nine-month revenue from Altanova and Phenix acquisitions.
- Q3 EBIT margin improved to 14.1% from 10.7%. Nine-month margin rose to 11.5% from 11.2%. Higher segment sales and operating performance supported results; acquisition-related amortization and higher interest expense partly offset gains.
- Backlog/remaining performance obligations increased to $706.8 at June 30 from $592.0 at September 30, 2021. The company expected to recognize approximately 80% as revenue within the next 12 months. Nine-month orders were $715.8 versus $537.7.
- Foreign-currency translation reduced nine-month comprehensive income by $17.2, compared with a positive $6.0 in 2021; accumulated other comprehensive loss was $19.4 at quarter-end.
Outlook, risks, and other matters
No specific numerical earnings or revenue guidance is provided in the supplied filing text. Management described liquidity as strong and expected operating cash flow and available borrowing capacity to meet capital and operating needs for the foreseeable future. It cited recovery in commercial aerospace, electric utility, and renewable-energy markets, and solid Navy, defense aerospace, space, and Test end-markets.
Management continued to identify pandemic-related supply-chain constraints and uncertainty, labor and material shortages, transportation delays, inflation, interest-rate changes, customer orders and government funding, and integration of recent acquisitions as risks. It reported no impairment for the periods presented and no material change in market risk since September 30, 2021. Ordinary-course claims, litigation, and environmental investigations/remediation were described as adequately reserved, insured, or not expected to materially affect results, capital expenditures, or competitive position.
During the first nine months, ESCO repurchased approximately 257,000 shares for about $20.0. It paid quarterly dividends of $0.08 per share, including a July 2022 payment subsequent to quarter-end. The filing reports no material change in internal control over financial reporting and states that disclosure controls were effective.
Important facts for investors to verify
- How much of sales and earnings growth reflects organic demand versus acquisitions, particularly Altanova and Phenix in USG.
- Whether elevated inventory, receivables, and contract assets convert into cash, given the year-over-year decline in operating cash flow.
- Backlog conversion, order trends, and the timing of government-funded and long-term projects.
- Debt levels, borrowing costs, covenant compliance, and availability of the optional credit-facility increase.
- Exposure to supply-chain, inflation, labor, foreign-exchange, and acquisition-integration risks; monitor the effect of currency translation on equity and reported results.