ESCO Technologies Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. Dollar amounts are in millions unless noted. The quarter’s results reflect continuing operations unless stated otherwise.
Business context and key results
ESCO supplies products and services to aerospace and defense, electromagnetic testing and shielding, and utility markets. Its continuing reportable segments are Aerospace & Defense (A&D), Test, and Utility Solutions Group (USG). The former Filtration/Fluid Flow segment was renamed A&D; its operations were unchanged.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $180.5 | $171.2 | $352.2 | $334.6 |
| Continuing-operations earnings | $17.8 | $17.8 | $28.6 | $35.2 |
| Diluted EPS, continuing operations | $0.68 | $0.68 | $1.09 | $1.34 |
| Consolidated EBIT, non-GAAP | $21.3 | $22.0 | $38.1 | $47.3 |
| EBIT margin | 11.8% | 12.8% | 10.8% | 14.1% |
Q2 sales increased 5.4% year over year, while continuing-operations earnings and diluted EPS were unchanged. For the six months, continuing-operations earnings declined; management cited the approximately $8 million gain on sale of a Doble property in the prior-year period as a principal comparison factor. Reported six-month net earnings were $104.6 million, including a $76.6 million after-tax gain on the Technical Packaging sale; the comparable 2019 figure was $36.1 million.
Segment performance and material changes
- A&D: Q2 sales rose 19.6% to $95.1 million and EBIT increased to $21.7 million from $17.4 million. Growth included contributions from Globe, acquired in 2019, and higher sales at VACCO and PTI.
- Test: Q2 sales fell 3.0% to $41.6 million; EBIT was $5.7 million versus $5.6 million. Management attributed sales pressure in part to a temporary China facility shutdown and project timing.
- USG: Q2 sales fell 10.4% to $43.8 million and EBIT declined to $4.9 million from $8.8 million. Doble faced delayed customer orders, lower sales of higher-margin products and software, and timing of its annual client conference.
Backlog was $565.4 million at March 31, up from $451.6 million at September 30, 2019. The company reported $245.6 million of Q2 orders, versus $209.4 million a year earlier. It expected to recognize approximately 68% of remaining performance obligations over the next 12 months.
Cash flow, debt and liquidity
- Cash and cash equivalents were $100.2 million at March 31, compared with $61.8 million at September 30, 2019.
- Six-month cash from operating activities was $36.7 million from continuing operations; total operating cash flow, including discontinued operations, was $22.0 million. Continuing-operations capital expenditures were $21.2 million, up from $10.1 million a year earlier.
- Total borrowings were $150.0 million, down from $285.0 million at September 30, 2019. The company repaid $145.0 million of long-term debt during the six months.
- ESCO reported approximately $341 million available under its revolving credit facility, plus a potential $250 million increase subject to lender approval. Management described total liquidity as nearly $700 million, including cash, and said no debt maturities or repayment obligations were due and payable before September 2024. The company was in compliance with credit covenants.
- Working capital from continuing operations was $260.6 million, versus $229.8 million at September 30. The quarterly dividend remained $0.08 per share.
Outlook, risks and unusual items
- ESCO suspended fiscal 2020 guidance, citing uncertainty over the extent and duration of COVID-19 disruptions; it said the effects could not then be reasonably estimated.
- Management reported that businesses remained operational and designated essential, and that supply chains had not been materially affected to date. It nevertheless expected slower commercial aerospace deliveries; defense activity was expected to track forecasts based on backlog and delivery timing. Test and USG faced project access constraints and customer spending delays. Management expected USG softness to continue for several months.
- COVID-19 responses included deferring some executive compensation, reducing discretionary and capital spending, freezing hiring and salaries, and emphasizing free cash flow. Management reported no anticipated material asset impairments at that time and no material liquidity impact to date.
- The Technical Packaging business was sold on December 31, 2019, generating approximately $184 million in net proceeds and a $76.6 million after-tax gain. The working-capital adjustment remained subject to finalization, expected in Q3 2020.
- Six-month results included a favorable $2.8 million release of a valuation allowance for foreign net operating losses, reducing the reported effective tax rate. Other items included derivative losses and approximately $0.6 million of Doble facility-move costs.
- The filing discusses possible pandemic-related contract delays or cancellations, facility closures, supply-chain disruption and weaker served markets, as well as ordinary-course claims and environmental matters. Management said reserves, insurance or expected outcomes made those matters not expected to have a material adverse effect; outcomes remain uncertain.
Important facts for investors to verify
- Subsequent COVID-19 effects on demand, customer-site access, supply chains, facility operations and the timing or cancellation of contracts.
- Whether backlog converts to revenue as expected, especially the stated 68% expected within 12 months.
- USG and Doble recovery, and the durability of A&D growth as commercial aerospace conditions change.
- Use of sale proceeds, debt reduction, cash generation and capital spending relative to management’s liquidity priorities.
- Final Technical Packaging working-capital adjustment and any changes to tax benefits, contingencies or asset-impairment assessments.