ESCO Technologies Inc. — Fiscal Q1 2013 Form 10-Q
Reporting period: Three months ended December 31, 2012; comparisons are with the three months ended December 31, 2011. The company supplies utility communications and diagnostic systems, RF shielding and test solutions, and filtration/fluid-flow products.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $145.3 million | $152.9 million | Down 5.0% |
| Gross margin | 35.3% | 39.4% | Down 4.1 percentage points |
| Consolidated EBIT (non-GAAP) | $0.9 million | $8.8 million | Down $8.0 million |
| Net earnings | $0.2 million | $5.2 million | Down $5.0 million |
| Diluted EPS | $0.01 | $0.19 | Down $0.18 |
| Operating cash flow | $1.7 million | $(0.5) million | Improved $2.2 million |
Gross margin percentages are calculated from reported sales and cost of sales. SG&A was $46.9 million, or 32.3% of sales, versus $48.7 million, or 31.8%. Interest expense was $0.6 million versus $0.5 million. The effective tax rate was 17.2%, compared with 37.6%; the current-period rate benefited from a 23.5-percentage-point reduction tied to the release of uncertain-tax-position accruals.
Segment results
- Utility Solutions Group (USG): Sales of $62.6 million, down 11.0%; EBIT loss of $2.2 million versus EBIT of $5.0 million. Lower Aclara AMI deliveries to electric cooperatives and Mexico were partly offset by the SoCalGas project ramp-up.
- Test: Sales of $36.3 million, down 7.7%; EBIT of $0.5 million versus $1.9 million. European chamber-project completions and lower volumes weighed on results.
- Filtration: Sales of $46.4 million, up 7.2%; EBIT of $8.8 million versus $8.2 million. Higher aerospace and defense-related shipments supported growth.
Financial position and liquidity
At December 31, 2012, cash was $33.5 million and total borrowings were $164.6 million, compared with $115.0 million at September 30, 2012. Current maturities were $51.6 million and long-term debt was $113.0 million. Working capital was $148.7 million, up from $139.2 million. The company reported approximately $273 million available under its revolving facility, plus a potential $250 million increase option subject to lender acceptance; it was in compliance with debt covenants.
Investing cash outflow was $37.6 million, including $28.2 million for acquisitions, $5.3 million of capital expenditures, and $4.0 million of capitalized software. Financing cash inflow was $38.3 million, including $53.6 million of debt proceeds, offset in part by $9.7 million of share repurchases, $4.0 million of debt principal payments, and $2.1 million of dividends. Cash ended the quarter at $33.5 million, up $3.3 million from the beginning of the period.
Material changes and notable items
- Backlog increased to $456.7 million from $406.9 million at September 30, 2012. Quarterly orders were $195.1 million versus $203.7 million a year earlier. SoCalGas orders totaled $44.2 million in the quarter; cumulative orders for its AMI gas project reached $138.6 million.
- ESCO acquired Metrum for $25 million cash plus revenue-based contingent consideration, recorded at $13.7 million; preliminary purchase accounting included approximately $25 million of goodwill and $11.2 million of amortizable intangibles. It also acquired Felix Tool for $1.2 million and Finepoint for $2.5 million. Metrum closed on December 31 and did not affect Q1 operating results.
- Test restructuring generated $1.0 million of Q1 costs. Total costs were expected to be approximately $3 million through March 31, 2013; management expected approximately $3 million in annual recurring savings from 2014 onward.
- ESCO repurchased approximately 270,000 shares for $9.7 million during the quarter. The authorization allowed repurchases up to $100 million, subject to credit-agreement limits, through September 30, 2013.
Outlook, commentary and risks
Management said Q1 results reflected the timing of USG projects and were consistent with expectations. Fiscal 2013 revenue and operational outlook remained unchanged: projected revenue growth of approximately 10% and adjusted EPS of $2.30–$2.50, excluding Test restructuring charges. Management estimated a fiscal 2013 tax rate of approximately 33%, including the expected research tax credit benefit.
Management said Doble’s Q1 weakness associated with storm-related utility maintenance delays was a timing issue not expected to affect full-year 2013 results. Key uncertainties include SoCalGas requirements and project timing, customer order timing or cancellations, market conditions, natural disasters, acquisition integration and contingent consideration, restructuring execution, litigation, and tax outcomes. The company stated that ordinary-course claims and litigation were adequately reserved or insured, or were not expected to have a material adverse effect. No derivatives were outstanding at quarter-end.
Important facts for investors to verify
- Whether USG deliveries recover as expected and the SoCalGas deployment generates orders and revenue on schedule.
- Whether the $456.7 million backlog converts to sales and whether the projected 10% revenue growth and adjusted EPS range remain achievable.
- Whether the sharp year-over-year decline in EBIT and earnings is primarily timing-related, and whether Test restructuring savings offset its costs.
- Final purchase accounting and performance-related contingent consideration for Metrum, and the integration and contribution of all three acquisitions.
- Debt, covenant headroom, and liquidity after acquisition spending, repurchases, and dividends; access to the additional facility option is not assured.
- The effect of the one-time tax benefit on comparability: Q1’s 17.2% effective rate included a substantial uncertain-tax-position release, while management estimated approximately 33% for fiscal 2013.