ESCO Technologies Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended December 31, 2022. Comparisons are with the three months ended December 31, 2021, unless otherwise noted. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $205.5 | $177.0 | Up 16.1% |
| Gross profit | $79.1 | $68.7 | Up 15.2% |
| Gross margin | 38.5% | 38.8% | Down 0.3 percentage points |
| Consolidated EBIT (non-GAAP) | $20.6 | $15.6 | Up 32.0% |
| EBIT margin | 10.0% | 8.8% | Up 1.2 percentage points |
| Net earnings | $14.7 | $11.5 | Up 27.8% |
| Diluted EPS | $0.57 | $0.44 | Up 29.5% |
| Operating cash flow | $(9.0) | $1.9 | Lower by $11.0 |
SG&A was $51.3 million, or 25.0% of sales, versus $46.6 million, or 26.3%. Interest expense rose to $1.7 million from $0.7 million, primarily reflecting higher average borrowing rates (4.56% versus 1.17%). The effective tax rate was 22.1%, compared with 22.3%.
Segments
| Segment | Sales | Year-over-year sales change | EBIT | EBIT margin |
|---|---|---|---|---|
| Aerospace & Defense | $83.0 | Up 18.2% | $12.5 | 15.1% |
| Utility Solutions Group | $71.0 | Up 11.8% | $16.1 | 22.7% |
| RF Shielding and Test | $51.5 | Up 18.9% | $5.4 | 10.5% |
Management attributed growth to stronger aerospace shipments and Navy sales in A&D; renewables demand at NRG and instrument/software sales at Doble in USG; and timing of U.S. and European test-chamber projects in Test. Segment EBIT improved year over year in all three segments. Corporate costs increased to $13.5 million from $11.7 million, including approximately $0.8 million of CEO-transition costs.
Cash, debt and liquidity
- Cash was $51.9 million at December 31, 2022, down from $97.7 million at September 30, 2022. Net cash decreased $45.8 million during the quarter.
- Working capital was $242.0 million, versus $254.5 million at fiscal year-end; the current ratio was approximately 1.83.
- Total borrowings were $132.0 million, down from $153.0 million at September 30; $20.0 million was classified as current. The company said it intends to repay that amount within 12 months but has no contractual obligation to do so.
- The $500 million revolving credit facility matures September 27, 2024. Approximately $360 million was available to borrow, in addition to a $250 million increase option subject to lender consent. Outstanding letters of credit were $8.2 million. The company reported compliance with all debt covenants.
- Operating cash flow was negative, mainly due to higher inventory, lower accounts payable and accrued expenses, and deferred-tax effects. Inventories rose $19.3 million from September 30, primarily on raw-material receipts and work in process.
- Investing cash outflow was $7.6 million, including $4.8 million of capital expenditures and $2.8 million of capitalized software. Financing cash outflow was $29.6 million, including $21.0 million of net debt repayment, dividends, and share repurchases.
Orders, outlook and notable items
- Backlog/remaining performance obligations were $718.4 million at December 31, up from $695.0 million at September 30. The company expects to recognize approximately 80% of the December backlog as revenue in the next 12 months. New orders were $228.9 million, compared with $224.4 million a year earlier.
- The filing provides no specific revenue or earnings guidance. Management said cash from operations and credit-facility borrowings are expected to meet capital and operating needs for the foreseeable future; access to the facility increase option depends on lender acceptance.
- On February 1, 2023, after quarter-end, ESCO acquired CMT Materials and affiliate Engineered Syntactic Systems for $18 million. The businesses have annualized sales of approximately $15 million and will join Globe in A&D.
- Q1 included approximately $0.2 million of A&D restructuring charges and higher-than-prior-year CEO-transition costs. Share repurchases totaled about 58,000 shares for $5.1 million; a $0.08-per-share dividend was paid.
- Comprehensive income was $26.2 million, including $11.5 million of foreign-currency translation gains. No impairment charges were recorded in the quarter.
Risks, contingencies and controls
The filing identifies risks including contract-award and government-funding timing, customer demand and economic conditions, supply and labor constraints, material-cost inflation, interest and foreign-exchange movements, acquisition integration, and environmental matters and litigation. Management stated that claims and environmental matters are adequately reserved, insured, or not expected to materially affect results, capital expenditures, or competitive position. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the strong sales and EBIT growth, particularly in A&D and Test, continues beyond project and shipment timing effects.
- Whether inventory converts to sales and operating cash flow improves after the quarter’s working-capital outflow.
- Backlog conversion, new-order trends, and the timing and profitability of the CMT acquisition’s integration.
- Debt repayment plans and refinancing or facility-extension arrangements ahead of the September 2024 credit-facility maturity.
- The impact of higher interest rates, input-cost inflation, supply constraints, and the identified legal and environmental matters.