ESCO Technologies Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended March 31, 2013. The company supplies utility communications and diagnostic systems, RF shielding and test solutions, and filtration and fluid-flow products through its USG, Test and Filtration segments. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Net sales | $166.2 | $173.9 | $311.4 | $326.8 |
| EBIT | $4.2 | $17.1 | $5.1 | $25.9 |
| Net earnings | $1.6 | $10.2 | $1.8 | $15.4 |
| Diluted EPS | $0.06 | $0.38 | $0.07 | $0.57 |
| Operating cash flow | Not stated separately | Not stated separately | $2.1 | $10.9 |
- Revenue declined 4.4% in Q2 and 4.7% year to date. Management attributed lower results primarily to project timing and product mix, alongside previously announced inventory write-downs and restructuring costs.
- Consolidated EBIT margin was 2.5% in Q2 versus 9.8% a year earlier, and 1.6% year to date versus 7.9%. Gross margin was approximately 33.4% in Q2 versus 39.0%; year-to-date gross margin was approximately 34.3% versus 39.2%.
- Q2 net earnings included a 56.0% effective tax rate; the year-to-date rate was 53.0%, versus 38.6% and 38.2% in the comparable 2012 periods. A foreign valuation allowance adjustment increased the 2013 rates; the research credit extension partly offset the impact.
- Operating cash flow fell to $2.1 from $10.9 year to date, reflecting lower earnings and higher working-capital needs. Investing cash outflow was $46.0, including $28.2 for acquisitions, $10.1 of capital expenditures and $7.7 of capitalized software. Financing provided $50.4, including $77.7 of debt proceeds; cash ended at $35.9.
- At March 31, cash was $35.9 and total debt was $177.7, up from $115.0 at September 30, 2012. Working capital was $162.1, compared with $139.2 at September 30. The company reported approximately $260 of available borrowing capacity plus a $250 increase option subject to lender acceptance, and was in compliance with debt covenants.
Segment and period comparisons
- USG: Q2 sales fell 2.3% to $72.7; EBIT was a $2.4 loss versus $9.1 profit. Results reflected lower AMI deliveries to cooperatives, product mix and a $5.0 inventory write-down related mainly to Acendant Network inventory after a customer selected an alternative back-haul system. SoCalGas project sales partly offset the weakness.
- Test: Q2 sales fell 21.2% to $39.8 and EBIT declined to $2.6 from $4.8. Lower sales followed completion of a large satellite-chamber project in the prior-year quarter; restructuring and disruption-related costs also weighed on results.
- Filtration: Q2 sales rose 9.6% to $53.6 and EBIT increased to $10.9 from $9.5, supported by higher shipments, including space products and defense spares.
- Backlog was $465.2 at March 31, up from $406.9 at September 30, 2012. Q2 orders were $174.6 versus $185.3; six-month orders were $369.7 versus $389.0.
Outlook, material events and risks
- Management forecast fiscal 2013 adjusted EPS of $1.60–$1.80 and an effective tax rate of approximately 37%. The filing does not provide a clear reconciliation of the adjusted EPS measure to GAAP EPS.
- Management cited continued growth in Filtration, Test performance generally on plan, and slightly lower Doble revenue. Aclara water and cooperative markets were expected to be below prior plans because of delayed customer decisions and lower distributor demand; management characterized these issues as timing-related.
- On April 17, 2013, after quarter-end, the company announced closure of Doble Lemke’s German manufacturing operation, with about $4 of expected non-operational costs during the balance of 2013. It also announced a transition of Aclara RF manufacturing to outsourcing, expected to take 9–12 months, with about $3 of costs through early 2014 and approximately $4 of expected annual savings once completed.
- The Test facility consolidation was expected to incur about $3.5 of total restructuring costs, with approximately $3.0 incurred in the first half; management projected approximately $3 of recurring annual savings from 2014 onward.
- In December 2012, ESCO acquired Metrum for $25 cash plus revenue-based contingent consideration, acquired Felix Tool for $1.2, and acquired Finepoint for $2.5. Metrum’s contingent consideration was valued at $13.7.
- Management said liquidity was sufficient for foreseeable capital and operating needs. Risks identified include customer order timing or cancellation, market weakness, execution of restructuring and integration plans, customer and supplier performance, competition, raw-material costs, litigation and tax changes. Management stated that existing claims and litigation were adequately reserved, insured or not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the expected recovery in Aclara’s water and cooperative markets occurs, and how project timing affects revenue and margins.
- Whether the $5.0 inventory write-down and announced restructuring transitions lead to the projected cost savings without additional charges or disruption.
- Progress, order conversion and customer commitments under the SoCalGas AMI deployment; the filing reported $150.7 of cumulative SoCalGas AMI orders and $37.7 of cumulative revenue through March 31.
- Operating cash flow, working-capital requirements, debt levels and compliance with credit-facility covenants as acquisitions and restructuring continue.
- Delivery of the $1.60–$1.80 adjusted EPS outlook and the assumptions and reconciliation underlying that non-GAAP guidance.