ESCO Technologies Inc. — Q2 FY2014 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2014. Unless noted, financial amounts are in millions. Continuing operations exclude Aclara, which was reported as discontinued operations following its sale.
Financial results and key metrics
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Continuing-operations sales | $124.8 | $118.0 | $249.2 | $228.6 |
| Continuing-operations net earnings | $9.3 | $5.5 | $18.1 | $10.9 |
| Continuing-operations diluted EPS | $0.35 | $0.21 | $0.68 | $0.41 |
| Consolidated net earnings (loss), including discontinued operations | $(33.7) | $1.6 | $(22.5) | $1.8 |
| Consolidated EBIT and margin | $13.9; 11.1% | $11.2; 9.5% | $28.3; 11.4% | $19.8; 8.7% |
- Continuing-operations sales increased 5.8% in Q2 and 9.1% for the six-month period. Q2 segment sales were Filtration $58.4 million, Test $41.0 million, and USG $25.3 million.
- Q2 segment EBIT was Filtration $10.1 million (17.3% margin), Test $3.5 million (8.6%), and USG $5.5 million (21.8%). Filtration margin fell year over year; Test and USG EBIT and margins improved.
- Q2 SG&A was $31.8 million, or 25.5% of sales, versus $31.6 million, or 26.8%, a year earlier. Q2 interest expense was $0.7 million. Continuing-operations effective tax rate was 29.9%, versus 47.6%.
- Six-month operating cash flow was $15.1 million overall, including $16.7 million from continuing operations and $(1.6) million from discontinued operations. Continuing-operations investing cash use was $9.8 million; total investing cash provided was $113.7 million, largely reflecting the divestiture. Financing cash use was $136.2 million.
- At March 31, cash was $36.4 million and total debt was $40.0 million, all current; the company reported net debt below $4 million. Working capital was $125.0 million, down from $163.6 million at September 30, 2013.
Material changes and unusual items
- ESCO completed the sale of Aclara Technologies LLC on March 28, 2014, to an affiliate of Sun Capital Partners. It received approximately $132 million gross at closing and used proceeds to repay a significant portion of revolving-credit debt. The company expected an approximately $5 million working-capital adjustment and an additional $10 million from retained Aclara receivables; approximately $10 million of these receivables had already been received before closing.
- The sale resulted in a $50.4 million after-tax loss, contributing to the reported consolidated net loss despite higher earnings from continuing operations. Aclara’s Q2 sales were $77.7 million and pretax earnings were $11.9 million; prior-year Q2 Aclara sales were $48.2 million and pretax loss was $7.0 million.
- Continuing-operations growth reflected higher Filtration shipments, including the Canyon acquisition and VACCO space products; increased U.S. Test projects; and higher Doble service revenue. Test EBIT benefited from prior-year facility-consolidation savings. Filtration EBIT was pressured by lower PTI volume and Crissair restructuring charges.
- The company recorded $0.5 million of Crissair consolidation charges in the first six months. It expected approximately $2 million of total fiscal 2014 charges to complete the relocation, with the move expected to finish by September 30, 2014.
Outlook, liquidity, and risks
- Management forecast fiscal 2014 continuing-operations EPS of $1.45–$1.55, or adjusted EPS of $1.50–$1.60 excluding the described restructuring charges. It estimated a fiscal 2014 continuing-operations effective tax rate of approximately 35%.
- Backlog from continuing operations was $272.8 million at March 31, 2014, compared with $272.1 million at September 30, 2013. Q2 orders were $136.4 million versus $118.4 million a year earlier.
- The $450 million revolving credit facility had approximately $402 million available, in addition to a potential $250 million increase option subject to lender acceptance. Letters of credit totaled $8.4 million. ESCO reported compliance with all debt covenants and expected operating cash flow and facility borrowings to meet foreseeable needs.
- Management said environmental, intellectual-property, and other matters were not expected, in aggregate, to materially adversely affect results, capital expenditures, or competitive position. Disclosed risks include order and contract timing or cancellations, customer and supplier performance, market conditions, raw-material costs, litigation and environmental matters, restructuring execution, and potential exposure on guarantees of certain Aclara contracts.
- Foreign subsidiaries held $29.3 million of cash and $33.4 million of accumulated unremitted earnings. ESCO intended to reinvest those earnings indefinitely; distribution could result in an estimated $6.0 million of U.S. tax, net of available foreign tax credits. Management anticipated a $1.1 million reduction in unrecognized tax benefits over the next 12 months.
Important facts for investors to verify
- Whether the expected Aclara working-capital adjustment and retained-receivable collections were received as estimated, and whether any remaining Aclara contract guarantees or obligations create exposure.
- Progress and final costs of the Crissair relocation, and whether fiscal 2014 EPS guidance was achieved on both reported and adjusted bases.
- Whether backlog converts to revenue and whether Test project timing, Filtration margins, and USG growth remain consistent with reported trends.
- Debt repayment, liquidity, covenant compliance, and availability of the credit-facility increase option; the filing notes that the option requires lender acceptance.
- Potential tax effects of foreign-earnings repatriation and changes in unrecognized tax benefits. The filing cautions that interim results are not necessarily indicative of full-year results.