ESCO Technologies Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014. ESCO designs and manufactures engineered products for utility, industrial, aerospace, defense and commercial markets. Continuing operations comprised Filtration/Fluid Flow, RF Shielding and Test, and Utility Solutions Group (Doble). Aclara was sold in March 2014 and is reported as discontinued operations.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Continuing-operations sales | $531.1 million | $490.1 million |
| Continuing-operations net earnings | $42.6 million | $31.3 million |
| Diluted continuing-operations EPS | $1.60 | $1.17 |
| Adjusted diluted continuing-operations EPS | $1.65 | $1.47 |
| Continuing-operations operating cash flow | $44.9 million | $37.1 million |
| EBIT and EBIT margin | $63.8 million; 12.0% | $52.3 million; 10.7% |
| Cash / total debt at year-end | $35.1 million / $40.0 million | $42.9 million / $172.0 million |
| Working capital | $148.9 million | $163.6 million |
- Sales rose 8.4%; continuing earnings increased 36%. Adjusted EPS excludes $0.05 per share of Crissair relocation and exit costs. Adjusted EPS is a non-GAAP measure.
- Segment sales were Filtration $233.7 million (+9.2%), Test $181.8 million (+9.1%), and USG $115.6 million (+5.8%). Segment EBIT was $41.4 million, $21.1 million and $26.6 million, respectively. Filtration EBIT declined 2.4%, while Test and USG EBIT increased 29.4% and 23.1%.
- Gross orders were $561.9 million, a 1.06 book-to-bill ratio; continuing-operations backlog rose 11% to $302.9 million. About 79% of backlog was expected to be completed in FY2015.
- Capital expenditures were $12.7 million; capitalized software additions were $8.6 million. Dividends were $0.32 per share, and the company repurchased approximately 350,000 shares for $12.0 million.
- The $135 million gross Aclara sale proceeds were used primarily to reduce revolving debt. The $42.2 million FY2014 discontinued-operations net loss included a $52.1 million after-tax loss on sale; continuing results therefore differ materially from total reported net earnings of $0.4 million.
Material changes and unusual items
- FY2014 sales growth reflected higher VACCO space-product shipments, Crissair/Canyon aerospace activity, a large U.S. automotive chamber project in Test, and increased Doble service revenue.
- Test profitability benefited from savings following FY2013 facility consolidation; USG benefited from higher Doble sales and lower restructuring costs. Filtration results included $1.7 million of Crissair relocation-related costs.
- Working capital declined chiefly following the Aclara sale. Cash flow from continuing operations improved year over year, partly due to lower working-capital requirements.
- The final Aclara working-capital adjustment remained unresolved. The company had received approximately $8.5 million of retained Aclara receivables, with $1.5 million still outstanding; the adjustment’s ultimate impact was unclear.
Outlook, risks and contingencies
- Management forecast FY2015 sales growth of 2%–5% and EPS of $1.70–$1.80, with a 35% expected effective tax rate. FY2015 growth was expected to be below normal because of program timing and higher taxes; earnings were expected to be weighted to the second half.
- Management maintained its FY2015–FY2017 goals of 10% compound annual sales growth and 15% compound annual EPS growth, with approximately 80% of growth targeted organically and 20% through future acquisitions.
- NASA’s smoothed SLS spending timeline was expected to reduce VACCO FY2015 revenue by about $10 million, with approximately $10 million more in 2016 and $5 million more in 2017 than previously expected. TEQ’s KAZ project was extended, increasing expected total revenue from about $50 million to $80 million, though design changes were expected to defer about $3 million of sales.
- Key risks include dependence on government funding and customer order timing; international economic and political exposure; sole- or limited-source suppliers (including one supplier producing about 90% of Doble products); raw-material availability and pricing; fixed-price contract cost overruns; competition, product development, and project execution; and environmental, litigation and Aclara-guarantee exposures.
- Management said environmental and legal matters were adequately reserved, insured, or not expected to materially affect continuing results. ESCO remained guarantor of certain Aclara contracts. The company reported covenant compliance, no off-balance-sheet arrangements, and approximately $399 million available under its $450 million revolving facility, plus a $250 million expansion option.
Important facts for investors to verify
- Track FY2015 sales and EPS against guidance, particularly the timing and realization of VACCO SLS and TEQ KAZ revenues.
- Confirm the final Aclara working-capital adjustment, retained receivable collections, and performance of contracts guaranteed by ESCO.
- Monitor continuing-operations cash conversion, receivables, inventory, backlog conversion and the effect of the planned $20 million debt repayment.
- Assess whether Test and USG margin improvements persist and whether Filtration absorbs relocation costs without further disruption.
- Review the effect of the forecast higher tax rate, supplier concentration and input-cost changes, and any developments in environmental or legal contingencies.