ESCO Technologies Inc. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended December 31, 2023; comparisons are to the three months ended December 31, 2022. Amounts are in millions of dollars except per-share data. ESCO operates in Aerospace & Defense (A&D), Utility Solutions Group (USG), and RF Test & Measurement (Test).
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $218.3 | $205.5 |
| Net earnings | $15.2 | $14.7 |
| Diluted EPS | $0.59 | $0.57 |
| Consolidated EBIT (non-GAAP) | $22.1; 10.1% of sales | $20.6; 10.0% of sales |
| Operating cash flow | $8.7 | $(9.0) |
- Sales grew 6.2%. A&D sales were $94.7 million, up 14.1%; USG sales were $83.0 million, up 16.9%; Test sales were $40.6 million, down 21.2%.
- Segment EBIT: A&D $16.7 million (17.6% margin), versus $12.5 million (15.1%); USG $17.6 million (21.2%), versus $16.1 million (22.7%); Test $1.8 million (4.4%), versus $5.4 million (10.5%). Corporate costs were $13.9 million, versus $13.5 million.
- SG&A was $54.0 million, or 24.7% of sales, versus $51.3 million, or 25.0%. Amortization was $7.9 million, versus $6.9 million. Net interest expense rose to $2.7 million from $1.7 million; the weighted-average borrowing rate increased to 6.8% from 4.6%. The effective tax rate was 22.0%, compared with 22.1%.
- Cash and equivalents were $51.4 million at quarter-end, versus $41.9 million at September 30, 2023. Working capital was $298.5 million, versus $266.4 million. Operating cash flow improved year over year, primarily due to increased contract liabilities and lower receivables from collection timing.
- Investing cash outflow was $67.0 million, including $56.2 million for the MPE acquisition; capital expenditures were $7.8 million and capitalized software spending was $2.9 million. Financing cash inflow was $66.5 million.
- Total borrowings were $172.0 million, up from $102.0 million at September 30; $20.0 million was classified as current, although the company stated it had no contractual obligation to repay that amount within 12 months. The credit facility had approximately $322 million available, plus a $250 million increase option subject to lender consent. The company reported covenant compliance.
Material changes and notable items
- Sales growth came from higher A&D shipments and USG demand. A&D growth included approximately $4.7 million from the CMT acquisition; USG benefited from Doble offline testing products and services and strength in renewables.
- Test sales fell due primarily to timing of test and measurement chamber projects in U.S., Asian, and European operations. Test EBIT was also affected by $0.3 million of MPE inventory step-up charges.
- ESCO acquired U.K.-based MPE Limited on November 9, 2023, for approximately $56.2 million net of cash acquired. MPE results are included in the Test segment. The acquisition added $30.3 million of goodwill and $31.1 million of identifiable intangible assets, primarily customer relationships.
- Backlog/remaining performance obligations increased to $847.8 million from $772.4 million at September 30, 2023. First-quarter orders were $293.7 million, versus $228.9 million a year earlier; approximately 66% of remaining obligations were expected to convert to revenue in the next 12 months.
- Foreign currency translation generated $9.4 million of other comprehensive income, versus $11.5 million. No impairment was recorded in the quarter. The company did not repurchase shares.
Outlook, risks, and contingencies
- The filing provides no specific earnings or revenue guidance. Management said operating cash flow and credit-facility borrowings are expected to meet capital requirements and operating needs for the foreseeable future; quarterly results are not necessarily indicative of the full fiscal year.
- Management cited risks including order and government-funding timing, project delays, economic weakness in served markets, supply-chain and materials disruptions, interest-rate and foreign-exchange changes, cyber and other operational disruptions, and integration and performance of acquired businesses.
- ESCO reported ordinary-course claims, litigation, and environmental investigations/remediation. Management believes related costs are adequately reserved, insured, or would not materially adversely affect results, capital expenditures, or competitive position.
- A quarterly dividend of $0.08 per share was paid in October 2023; another $0.08 per share dividend was paid in January 2024.
Important facts for investors to verify
- Whether elevated A&D and USG orders and the $847.8 million backlog convert to revenue on the expected schedule.
- Whether Test project timing normalizes and the segment’s sales and margins recover.
- How MPE performs and integrates, including the effect of acquisition-related amortization, financing costs, and purchase-accounting charges.
- Debt repayment plans, borrowing costs, and continued compliance with credit-facility covenants.
- Developments in the disclosed litigation, environmental matters, supply-chain exposures, and other risk factors referenced in the company’s Form 10-K.