ESCO Technologies Inc.
Q2 2017 Earnings Call Transcript

Published: 5 May 2017

[Operator:]

Good day and welcome to the ESCO Second Quarter 2017 Conference Call. Today’s call is being recorded. With us today is Vic Richey, Chairman and CEO; Gary Muenster, Vice President and CFO. And now to present the forward-looking statement, I would like to turn the call over to Kate Lowrey, Director of Investor Relations. Please go ahead.

[Kate Lowrey:]

Thank you. Statements made during this call regarding 2017 and beyond EPS, EBITDA, EBIT, EBIT margin, growth, profitability, sales, cash flow, orders, success of new products, success in completing additional acquisitions, the results of recent acquisitions and other statements which are not strictly historical are forward-looking statements within the meaning of the safe harbor provisions of the federal securities laws. These statements are based on current expectations and assumptions, and actual results may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the company’s operations and business environment, including but not limited to the risk factors referenced in the company’s press release issued today, which will be included as an exhibit to the company’s Form 8-K to be filed. We undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, during this call, the company may discuss some non-GAAP financial measures in describing the company’s operating results. A reconciliation of these measures to the most comparable GAAP measures can be found in the press release issued today and found on the company’s website at www.escotechnologies.com under the link Investor Relations. Now I’ll turn the call over to Vic.

[Vic Richey:]

Thanks, Kate and good afternoon. Before I give my perspective on the quarter, I will turn it over to Gary for a few financial highlights.

[Gary Muenster:]

Thanks, Vic. When we laid out our detailed guidance for the beginning of the year, we noted that our quarterly earnings profile was once again back-end loaded from an EPS perspective. In that initial guidance, we also projected a more heavily weighted Q4 than previous years given the timing of several large projects across the company. As we sit here at the halfway point, the year is playing out a bit ahead of plan and the quarterly profile we projected at the start of the year is being delivered as expected. Moving on to the Q2 results. In February, Q2 EPS was projected to be in the range of $0.37 to $0.42 a share on a GAAP basis. And additionally, we indicated our GAAP earnings were impacted by some non-cash purchase accounting charges related to our recent acquisitions – when we described and quantified these incremental charges related to the inventory step up at Mayday as well as additional or incremental non-cash depreciation and amortization charges that were expected to be incurred as a result of our recent M&A activities. As noted in the release, we delivered Q2 GAAP EPS of $0.43 a share, which beat the top end of our expected range. The better-than-expected earnings were primarily driven by the continued strength of our commercial aerospace platform as well as significantly higher Navy and space products delivered in the quarter, coupled with lower corporate spending. Westland and Mayday delivered a combined $15 million in sales in Q2 along with solid EBITDA contributions. I’ll remind you in Q2 that we recognized the final piece of Mayday’s non-cash inventory step up charge, which was approximately $1 million. And as you can see from the financial tables within the release, depreciation and amortization increased $1.7 million in Q2 compared to the prior year. So, on an EBITDA basis we increased our Q2 contributions significantly despite incurring the noted inventory step-up charge. Our Q2 ‘17 EBITDA increased 19% to over $25 million compared to Q2 ‘16 as adjusted. A few other Q2 and year-to-date highlights include the continued strength of our entered orders and the resulting growth in our March 31 backlog, especially as noted in Technical Packaging and Test, where we recorded Q2 book-to-bill of 1.3x and 1.2x respectively. Doble also reported a favorable book-to-bill and Filtration’s 0.9x is not of concern as this reflects higher sales at VACCO and Westland related to the runoff of large multiyear procurements of some marine projects coupled with the continued delivery of VACCO space components for the SLS program. Year-to-date, I am pleased to report that all four operating segments delivered a positive book-to-bill, which increased our backlog by $42 million or 13% from the start of the year. The strength of our orders and the resulting $375 million in backlog provides additional confidence supporting our outlook for the back half of the year. Additionally in Q2, we delivered another strong quarter of cash flow, which brings our 6-month cash flow provided by operating activities to $37 million, which is well ahead of plan. At March 31, our net debt was $116.5 million with a very reasonable leverage ratio of approximately 1.5x. Given the solid position we are in at the halfway point, our EPS and EBITDA outlook for the balance of ‘17 remains consistent with the expectations communicated earlier. We continually expect ‘17 EBITDA to increase between 21% and 23% and to be in the range of $122 million to $124 million compared to ‘16’s adjusted EBITDA of $101 million. We remain well-positioned to achieve our financial goals as we continue to see meaningful sales, EBIT and EBITDA growth across each of our business segments. And in the longer term, we expect to exceed the growth rates of our defined peer group in the broader industrial market in total. Our Q3 EPS guidance is projected to be in the range of $0.46 to $0.51 a share on a GAAP basis. And as a reminder, this includes the quarterly impact of the incremental depreciation and amortization from M&A as communicated previously. Now I’d be happy to address any specific financial questions when we get to the Q&A. And now I will turn it back over to Vic.

[Vic Richey:]

Thanks, Gary. I also am pleased with our second quarter performance and with the way we were at with the first half of the year. Our second quarter sales came in on plan, and we exceeded our internal targets on EBIT, EPS, cash flow and orders. As Gary mentioned, our current backlog level is the highest it’s been in a number of years, especially in Test, which bodes well for meeting our commitments over the balance of the year. We continue to deliver on our results across the 4 operating segments, and I believe our 6 months results validate our strategy and demonstrate -- the major benefits of maintaining our multi-segment business platform. Given the diversity and strength of our end markets, it allows us to manage around the normal operational and project timing issues and provides us with several alternative paths to achieve success. Our results communicated today demonstrate what, I believe, we do best

[Vic Richey:]

Okay. Well, thank you for calling in today and we look forward to talking to you next quarter.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s call. This concludes today’s program. You may all disconnect. Everyone have a great day.