ESCO Technologies Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the fiscal second quarter and six months ended March 31, 2017. ESCO operates in Filtration/Fluid Flow, RF Shielding and Test, Utility Solutions Group (USG), and Technical Packaging.
Financial performance
| Metric | Three months ended March 31, 2017 | Three months ended March 31, 2016 | Six months ended March 31, 2017 | Six months ended March 31, 2016 |
|---|---|---|---|---|
| Net sales | $161.2 million | $138.9 million | $307.5 million | $271.8 million |
| Net earnings | $11.2 million | $8.6 million | $21.9 million | $17.4 million |
| Diluted EPS | $0.43 | $0.33 | $0.84 | $0.67 |
| EBIT (non-GAAP) | $17.7 million | $14.0 million | $34.5 million | $27.2 million |
| EBIT margin | 11.0% | 10.1% | 11.2% | 10.0% |
Quarterly sales rose 16.0%; six-month sales rose 13.2%. Quarterly net earnings increased 29.6%, while diluted EPS increased from $0.33 to $0.43. Gross margin, calculated from reported sales and cost of sales, was approximately 34.6% in Q2 2017 versus 36.6% in Q2 2016; Mayday inventory step-up charges contributed to Filtration margin pressure. The six-month effective tax rate was 33.6%, compared with 34.4%; management estimated a full-year 2017 rate of approximately 34%.
Segment trends
- Filtration: Q2 sales increased 40.5% to $68.9 million and EBIT rose to $11.6 million. Acquisitions, including Westland and Mayday, and higher VACCO shipments drove growth; acquisition-related inventory step-up reduced margin.
- Test: Q2 sales fell 5.5% to $38.4 million, primarily due to lower European sales. EBIT increased to $3.8 million; the prior-year comparison included restructuring costs.
- USG: Q2 sales increased 8.9% to $32.7 million; EBIT was $7.4 million. Growth reflected new products and software solutions at Doble.
- Technical Packaging: Q2 sales rose 10.2% to $21.2 million, while EBIT declined to $2.2 million, mainly due to lower TEQ sales volumes and higher SG&A.
Backlog was $374.6 million at March 31, 2017, up from $332.4 million at September 30, 2016. Orders were $166.9 million in Q2 and $349.8 million for the six months, compared with $129.9 million and $272.6 million, respectively, in the prior-year periods.
Cash flow, liquidity and debt
- Six-month operating cash flow was $36.7 million, versus $9.1 million in 2016; management attributed the improvement to higher earnings and lower working-capital requirements.
- Investing cash outflow was $91.6 million, including $75.0 million for acquisitions and $15.4 million of capital expenditures. Financing cash inflow was $55.8 million. Cash declined $0.3 million to $53.5 million.
- At March 31, 2017, total borrowings were $170.0 million, including $20.0 million classified as current. The company had approximately $276 million available under its credit facility, plus a potential $250 million increase option subject to lender acceptance. It was in compliance with debt covenants.
- Working capital was $181.2 million, compared with $165.4 million at September 30, 2016. Current assets were $343.5 million and current liabilities were $162.3 million.
Material changes, outlook and risks
ESCO acquired Mayday Manufacturing and affiliate Hi-Tech Metals on November 7, 2016, for $75 million in cash; their results are included in Filtration. The acquisition added approximately $30.1 million of goodwill and $32.8 million of amortizable identifiable intangible assets in the preliminary purchase allocation. On May 8, 2017, after quarter-end, ESCO acquired NRG Systems, with annualized sales of approximately $45 million, for inclusion in USG. The filing does not provide the NRG purchase price or quantified contribution to 2017 results.
Excluding NRG, management expected 2017 EPS of $2.16–$2.26 and Q3 EPS of $0.46–$0.51. Management said the NRG contribution and related purchase accounting were still being finalized and planned to update guidance. It expected EPS to be more weighted toward the second half of the year. These are forward-looking estimates, not guarantees.
Other notable items: 2017 six-month results included $0.4 million of income from life-insurance proceeds; the prior-year period included $5.0 million of restructuring and related expenses. Foreign subsidiaries had $49.8 million of accumulated unremitted earnings; estimated U.S. tax upon distribution, net of available credits, was approximately $4.8 million. The company reported ongoing litigation, claims, and environmental investigation/remediation matters, which management said were reserved, insured, or not expected to have a material adverse effect. No impairment was recorded in the quarter or six-month period.
Risks identified include order and contract timing or cancellation, economic conditions, customer and supplier performance, acquisition integration, competition, raw-material costs, labor disputes, regulation and taxes, interest and foreign-exchange movements, environmental matters, and litigation. The company used forward contracts to hedge deferred Plastique acquisition payments; it reported no material change in market risks since September 30, 2016.
Important facts for investors to verify
- How much of revenue and earnings growth reflects acquired businesses versus organic growth, and whether Mayday integration and inventory step-up costs evolve as expected.
- Whether backlog converts to revenue and cash on schedule, particularly given weaker Test sales and lower Technical Packaging EBIT.
- The final NRG purchase accounting, financing, and contribution to sales and EPS, and any revised 2017 guidance.
- Cash generation, working-capital needs, acquisition spending, debt repayment intentions, and continued compliance with credit-facility covenants.
- The status and potential financial impact of litigation, environmental matters, and possible U.S. tax on foreign earnings repatriation.