ESCO Technologies Inc. — Q1 FY2022 10-Q
Reporting period: Three months ended December 31, 2021. The company operates in Aerospace & Defense (A&D), Utility Solutions Group (USG), and RF Shielding and Test (Test). Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance
- Revenue: $177.0 million, up 8.8% from $162.7 million. A&D revenue was $70.2 million (+5.4%), USG $63.5 million (+16.4%), and Test $43.3 million (+4.2%). USG growth included $14.5 million from the Altanova and Phenix acquisitions.
- Profit: Net earnings were $11.5 million, down 10.1% from $12.8 million. Diluted EPS was $0.44 versus $0.49. Pretax earnings declined to $14.8 million from $16.5 million.
- Margins and expenses: Consolidated EBIT, a non-GAAP measure, was $15.6 million (8.8% of sales), versus $17.1 million (10.5%). SG&A rose to $46.6 million, or 26.3% of sales, from $41.0 million, or 25.2%. Intangible amortization increased to $6.5 million from $4.9 million, mainly reflecting acquisitions. The effective tax rate was 22.3%, compared with 22.5%.
- Segment EBIT: A&D rose to $10.0 million from $8.3 million; USG increased to $13.4 million from $12.7 million; Test fell to $4.0 million from $5.3 million. Corporate costs increased to $11.7 million from $9.3 million.
- Cash flow and investment: Operating cash flow was $1.9 million, down from $24.8 million, primarily due to higher working-capital requirements. Investing used $31.7 million, including $15.6 million for an acquisition and $14.1 million of capital expenditures; capex included approximately $10 million for the NRG building. Cash declined $0.5 million during the quarter to $55.7 million.
- Liquidity and debt: Working capital was $218.9 million, up from $188.4 million at September 30, 2021. Total borrowings were $198 million, including $20 million classified as current and $178 million long-term. Approximately $291 million remained available under the $500 million revolving facility, plus a potential $250 million increase subject to lender approval. The company was in compliance with debt covenants.
- Other metrics: Backlog was $639.4 million, up from $592.0 million at September 30, 2021; orders were $224.4 million versus $157.6 million a year earlier. The company repurchased approximately 116,000 shares for $10.0 million and paid $2.1 million in dividends.
Material changes and notable items
- Revenue increased across all three segments. Acquisition contributions lifted USG sales, while Test profitability weakened due to lower U.S. and European project volumes and higher material and labor costs.
- Supply constraints reduced A&D sales at VACCO and Globe. Inventory rose $17.9 million from September 30, 2021, partly due to raw-material timing and work in process.
- On November 4, 2021, ESCO acquired NEco for approximately $15.2 million, net of cash acquired. NEco supplies miniature electro-explosive devices for defense and aerospace applications and was included in A&D.
- The filing revised prior-year Q1 figures for immaterial Westland errors: adjusted 2021 revenue was $162.674 million, net earnings $12.818 million, and diluted EPS $0.49, compared with previously reported revenue of $162.949 million, net earnings of $13.686 million, and EPS of $0.52.
Outlook, risks, and contingencies
- Management said commercial aerospace and electric utility markets had begun to stabilize and expected strong growth in the second half of FY2022, while emphasizing uncertainty about the pace and timing of recovery. This is not formal numerical guidance.
- Management cited continuing COVID-19 effects, supply-chain disruption, labor and material shortages, transportation delays, customer and government order timing, and acquisition integration as risks. Navy, defense aerospace, space, and Test end-markets remained solid, and entered orders were strengthening in commercial aerospace, electric utility, and renewable energy.
- Management reported no impairment for the quarter and did not then anticipate material COVID-related asset impairments. It cautioned that estimates and actual outcomes may differ.
- Routine claims, litigation, and environmental investigations and remediation are ongoing. Management believes related costs are adequately reserved, insured, or not expected to materially affect results, capital expenditures, or competitive position.
- Previously disclosed material weaknesses at an A&D reporting unit involved revenue-recognition and inventory controls. Management said remediation was tested and effective during the quarter and concluded the weaknesses were remediated as of December 31, 2021. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether order growth and the $639.4 million backlog convert to revenue as expected, including the expected 77% recognition over the next 12 months.
- Whether supply-chain, labor, and cost pressures ease and whether commercial aerospace and utility-market recovery supports management’s second-half growth expectation.
- How acquired businesses contribute to ongoing sales and profit after acquisition-related amortization and inventory step-up charges.
- Whether operating cash flow improves as working-capital needs, especially inventory, evolve; and how borrowing levels change given acquisitions, capital spending, repurchases, and dividends.
- Whether the remediated A&D controls remain effective and whether any further effects arise from the corrected prior-period errors.