NEWS FROM

 

For more information contact:

Kate Lowrey

Director, Investor Relations

ESCO Technologies Inc.

(314) 213-7277

 

 

ESCO ANNOUNCES THIRD QUARTER 2014 RESULTS

 

 

ST. LOUIS, August 7, 2014 – ESCO Technologies Inc. (NYSE: ESE) (ESCO or the “Company”) today reported its operating results for the third quarter ended June 30, 2014.

 

The 2014 results and earnings guidance are presented on a Continuing Operations –As Adjusted basis, consistent with the 2013 presentation. The 2014 outlook excludes approximately $2 million, or $0.05 per share, of anticipated charges to complete the exit and relocation of Crissair’s Palmdale, California (Filtration segment) operation into the Canyon Engineering facility in Valencia, California. This move is expected to be completed by September 30, 2014. The move costs incurred through June 30, 2014 impacted third quarter results by ($0.01) per share, and cumulatively, ($0.03) per share for the nine months year-to-date.

 

Management believes EPS from Continuing Operations –As Adjusted is more representative of the Company’s 2014 ongoing performance and allows shareholders better visibility into the Company’s underlying operations.

 

All references to Continuing Operations exclude Aclara Technologies LLC, which was divested on March 28, 2014. Aclara’s results for all periods presented are included as Discontinued Operations as described below.

 

EPS Summary

 

EPS from Continuing Operations –As Adjusted for the quarter ended June 30, 2014 was $0.44 per share and reflects the add-back of $0.01 per share of non-operating charges related to the Crissair consolidation. This compares to EPS from Continuing Operations –As Adjusted of $0.33 per share in the third quarter of 2013, which reflects the add-back of $0.09 per share related to prior year’s actions.

 

Management previously provided EPS guidance from Continuing Operations – As Adjusted in the range of $0.36 to $0.41 per share for the third quarter of 2014.

 

For the nine months ended June 30, 2014, EPS from Continuing Operations – As Adjusted was $1.14 per share, which reflects a $0.03 per share add-back of non-operating charges, compared to EPS from Continuing Operations – As Adjusted of $0.88 per share in the comparable nine months of 2013, which reflects a $0.23 per share add-back of non-operating charges.

 

 

Continuing Operations Highlights

 

·

Q3 2014 sales increased $14 million, or 12 percent to $130 million compared to $116 million in Q3 2013. During 2014, Q3 Filtration sales increased $4 million (7 percent), Test sales increased $9 million (23 percent), and Utility Solutions Group (USG, or Doble) sales increased $1 million (4 percent) compared to prior year Q3;

·

Q3 2014 gross margin was 39 percent compared to 40 percent in Q3 2013 resulting from the increased Test segment sales which carry a lower margin compared to Filtration and Doble;

·

Q3 2014 SG&A increased $1.9 million compared to Q3 2013. This is the result of the addition of Canyon Engineering and higher engineering (new product development), and sales and marketing (market expansion opportunities) costs incurred at Doble and Test;

·

The effective tax rate in Q3 2014 was 24 percent compared to an expected rate of 32 percent. The lower rate is due to the favorable impact of additional research credits and foreign tax credits recognized;

·

The effective tax rate in Q3 2013 used for calculating EPS from Continuing Operations – As Adjusted was 33 percent. The Q3 2013 GAAP effective tax rate of 39 percent included $2.2 million of Doble-Lemke restructuring charges (German facility closure) with very little corresponding tax benefits;

·

GAAP EPS from Continuing Operations was $0.43 per share in Q3 2014, compared to $0.24 per share in Q3 2013;

·

Through June 30, 2014, net cash provided by operating activities (continuing operations) was $23 million, resulting in $40 million of cash on hand and $48 million of debt outstanding for a net debt position of $8 million;

·

Orders received in Q3 2014 were $150 million resulting in a book-to-bill ratio of 1.15x, and an order backlog of $293 million (7 percent increase in Q3 2014) at June 30, 2014;

·

Each operating segment posted a positive book-to-bill and increased its June 30, 2014 backlog during the current quarter and nine month year-to-date periods.

 

Chairman’s Commentary – FY 2014

 

Vic Richey, Chairman and Chief Executive Officer, commented, “With three quarters of the year behind us, I’m pleased with our operating performance as we’ve met, or exceeded nearly all of our financial goals set at the beginning of the year. When compared to prior year, our sales, EBIT, EPS, cash flow and orders have all shown meaningful increases, and each of our operating segments has contributed to this success.

 

“With our current mix of businesses, we have far less volatility and considerably better visibility, which allows us to focus our full attention on execution and growth. As our third quarter and year-to-date results validate, we continue to prove that the Company can be more profitable and more predictable than in the past.

 

 

“We recently completed our July operational meetings at all our business units and I came away pleased with our outlook for the remainder of 2014 and our future growth opportunities. As we wrap up 2014, I believe our market leadership positions across the three segments, along with the breadth of our new product offerings, have allowed us to grow organically at a meaningful level.

 

“We intend to supplement our organic growth through disciplined acquisitions around our existing core, and we continue to prudently explore acquisition opportunities. Additionally, we continue to invest in new products and solutions which will allow us to retain and expand our leadership positions in all of our operations.

 

“I continue to maintain a favorable view of our future and our goal remains the same – to increase long-term shareholder value.”

 

Dividend Payment

 

The next quarterly cash dividend of $0.08 per share will be paid on October 16, 2014 to stockholders of record on October 2, 2014.

 

Business Outlook – Fiscal Year 2014

 

Based on current expectations, Management believes 2014 EPS from Continuing Operations – As Adjusted will be at the high end of the previously communicated range of $1.50 to $1.60 per share.

 

Fourth quarter 2014 EPS from Continuing Operations – As Adjusted is expected to be in the range of $0.44 to $0.48 per share. The 2014 annual effective tax rate is expected to be approximately 33 percent as a result of the favorable impacts recognized in Q3 2014.

 

Discontinued Operations

 

As previously announced the Company completed the Aclara divestiture on March 28, 2014 and used the proceeds to significantly pay-down its outstanding debt. The results of operations for Aclara prior to its divestiture, and the net loss on sale are reflected in the financial statements as Discontinued Operations and Assets Held for Sale. The Company and the buyer have not yet reached agreement on the final working capital adjustment.

 

Capital Allocation – Share Repurchase

 

The Company has sufficient available liquidity under its existing credit facility to support its strategy of profitable organic growth, accretive acquisitions around its existing core businesses, and opportunistic repurchases of outstanding shares. The Company expects to accelerate the realization of shareholder value through these various means.

 

The Company’s Capital Allocation Strategy includes allocating approximately 40 percent of annual free cash flow to provide a cash return to shareholders through ongoing dividends and opportunistic share repurchases. The balance will be used to support growth initiatives such as research and development, capital spending, and merger and acquisition initiatives. The existing credit facility will also be used to support acquisition activities where the purchase price exceeds annual free cash flows.

 

 

The goal of this strategy is to continue investing in growth, supplemented by prudently returning cash to shareholders, while maintaining reasonable levels of debt.

 

During the quarter ended June 30, 2014, the Company has spent $3.6 million to repurchase 106,000 shares on the open market. Subsequent to quarter-end, in July 2014, the Company spent an additional $5.0 million on share repurchases, bringing the total to $8.6 million and 253,000 shares.

 

Additionally, the Board of Directors has extended the repurchase authorization through September 30, 2015.

 

Corporate Governance Update – New Board Member

 

To further enhance Corporate Governance and to facilitate board refreshment and director succession, as well as seeking new and relevant experience to supplement existing director oversight, the Company has added one additional board member effective August 5, 2014, as described in a separate release dated August 7, 2014.

 

Analyst and Investor Day

 

ESCO will host its first Analyst & Investor Day in New York City on September 9, 2014. The meeting will feature presentations by Executive and Operating management related to corporate strategy, segment operations and growth initiatives. Analysts and institutional investors are invited to attend the meeting, which will be held from 9:00 a.m. to 12:00 p.m. Eastern Time. The meeting will be webcast live and available for replay following the event on the company’s website at www.escotechnologies.com. For more information or if you would like to register to attend the event, please contact Kate Lowrey at Reservations@escotechnologies.com.

 

Conference Call

 

The Company will host a conference call today, August 7, at 4:00 p.m. Central Time, to discuss the Company’s third quarter 2014 results from Continuing Operations. A live audio webcast will be available on the Company’s website at www.escotechnologies.com. Please access the website at least 15 minutes prior to the call to register, download and install any necessary audio software. A replay of the conference call will be available for seven days on the Company’s website noted above or by phone (dial 1-888-843-7419 and enter the pass code 37618976).

 

Forward-Looking Statements

 

Statements in this press release regarding the amount of the Company’s expected 2014 growth, tax rates, and EPS from Continuing Operations – “As Adjusted”, EPS, the costs and timing of the exit and relocation of Crissair’s operations, the Company’s ability to increase shareholder value, the success of acquisition efforts, the success of new products and solutions, the size, number and timing of growth opportunities in the future, the specific actions initiated as a result of the Capital Allocation Strategy including but not limited to the declaration of dividends and share repurchases, the long-term success of the Company, and any other statements which are not strictly historical are “forward-looking” statements within the meaning of the safe harbor provisions of the federal securities laws. Investors are cautioned that such statements are only predictions and speak only as of the date of this release, and the Company undertakes no duty to update them except as may be required by applicable laws or regulations. The Company’s actual results in the future 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: those described in Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013; and the following: the success of the Company’s competitors; site readiness issues with Test segment customers; weakening of economic conditions in served markets; changes in customer demands or customer insolvencies; competition; intellectual property rights; technical difficulties; unforeseen charges impacting corporate operating expenses; delivery delays or defaults by customers; the performance of the Company’s international operations; material changes in the costs and availability of certain raw materials; termination for convenience of customer contracts; timing and content of future contract awards and customer orders; containment of engineering and development costs; performance issues with key customers, suppliers and subcontractors; labor disputes; the impacts of natural disasters on the Company’s operations and those of the Company’s customers and suppliers; changes in laws and regulations, including but not limited to changes in accounting standards and taxation requirements; costs relating to environmental matters arising from current or former facilities; financial exposure in connection with Company guarantees of certain Aclara contracts; uncertainty regarding the ultimate resolution of current disputes, claims, litigation or arbitration; and the Company’s successful execution of profit improvement initiatives and restructuring activities.

 

 

Non-GAAP Financial Measures

 

The financial measures EBIT, EBIT margin, EPS – “As Adjusted” and EPS – from Continuing Operations “As Adjusted” are presented in this press release. The Company defines EBIT as earnings before interest and taxes from continuing operations, EBIT margin as a percent of net sales, EPS – “As Adjusted” and EPS – from Continuing Operations “As Adjusted” as GAAP EPS less the Filtration segment restructuring charges (representing $0.01 per share during the third quarter of 2014, and $0.03 per share during the first nine months of 2014). EBIT, EBIT margin, EPS – “As Adjusted” and EPS – from Continuing Operations “As Adjusted” are not recognized in accordance with U.S. generally accepted accounting principles (GAAP). However, Management believes that EBIT and EBIT margin are useful in assessing the operational profitability of the Company’s business segments because they exclude interest and taxes, which are generally accounted for across the entire Company on a consolidated basis. EBIT is also one of the measures used by Management in determining resource allocations within the Company as well as incentive compensation. The Company believes that the presentation of EBIT, EBIT margin, EPS – “As Adjusted” and EPS – from Continuing Operations “As Adjusted” provides important supplemental information to investors by facilitating comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. The use of non-GAAP financial measures is not intended to replace any measures of performance determined in accordance with GAAP.

 

ESCO, headquartered in St. Louis, provides engineered filtration products to the aviation, space and process markets worldwide and is the industry leader in RF shielding and EMC test products. In addition, the Company provides diagnostic instruments, services and the world’s premier library of statistically significant apparatus test results for the benefit of energy generation, transmission, and delivery companies and industrial power users worldwide. Further information regarding ESCO and its subsidiaries is available on the Company’s website at www.escotechnologies.com.

 

- tables attached –

 

 

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(Dollars in thousands, except per share amounts)

 

		Three Months Ended June 30, 2014				Three Months Ended  June 30, 2013
Net Sales			130,495				116,922
Cost and Expenses:
Cost of sales			79,608				69,556
Selling, general and administrative expenses			33,492				31,546
Amortization of intangible assets			1,682				1,506
Interest expense			147				778
Other (income) expenses, net			283				2,903
Total costs and expenses			115,212				106,289
Earnings before income taxes			15,283				10,633
Income taxes			3,693				4,119
Net earnings from continuing operations			11,590				6,514
Loss from discontinued operations, net of tax
benefit of $1,171 in 2013			0				(1,617	)
Net loss from discontinued operations			0				(1,617	)
Net earnings		$	11,590				4,897
Earnings (loss) per share:
Diluted - GAAP
Continuing operations			0.43				0.24
Discontinued operations			0.00				(0.06	)
Net earnings		$	0.43				0.18
Diluted - As Adjusted Basis
Continuing operations		$	0.44	(1)			0.33	(2)
Average common shares O/S:
Diluted			26,702				26,749

 

(1)

Adjusted basis includes $0.2 million (or $0.01 per share) of add back adjustments for restructuring charges incurred at Crissair during the third quarter of fiscal 2014.

(2)

Adjusted basis includes $2.7 million (or $0.09 per share) of add back adjustments for restructuring charges incurred at ETS and Doble Lemke during the third quarter of fiscal 2013.

  

 

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(Dollars in thousands, except per share amounts)

 

		Nine Months Ended June 30, 2014				Nine Months Ended June 30, 2013
Net Sales			379,707				345,478
Cost and Expenses:
Cost of sales			231,325				209,204
Selling, general and administrative expenses			99,182				96,799
Amortization of intangible assets			5,047				4,541
Interest expense			1,493				1,997
Other (income) expenses, net			423				3,748
Total costs and expenses			337,470				316,289
Earnings before income taxes			42,237				29,189
Income taxes			12,551				11,810
Net earnings from continuing operations			29,686				17,379
Earnings (loss) from discontinued operations,
net of tax expense (benefit) of $5,713
and $(6,825), respectively			9,858				(10,677	)
Loss on sale of discontinued operations,
net of tax benefit of $9,499			(50,442	)			0
Net loss from discontinued operations			(40,584	)			(10,677	)
Net (loss) earnings		$	(10,898	)			6,702
Earnings (loss) per share:
Diluted - GAAP
Continuing operations			1.11				0.65
Discontinued operations			(1.52	)			(0.40	)
Net (loss) earnings		$	(0.41	)			0.25
Diluted - As Adjusted Basis
Continuing operations		$	1.14	(1)			0.88	(2)
Average common shares O/S:
Diluted			26,718				26,752

 

(1)

Adjusted basis includes $0.7 million (or $0.03 per share) of add back adjustments for restructuring charges incurred at Crissair during the first nine months of fiscal 2014.

(2)

Adjusted basis includes $5.6 million (or $0.23 per share) of add back adjustments for restructuring charges incurred at ETS and Doble Lemke during the first nine months of fiscal 2013.

 

  

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

Condensed Business Segment Information (Unaudited)

(Dollars in thousands)

 

		Three Months Ended June 30, GAAP								Adjustments								Three Months Ended June 30, As Adjusted
		2014				2013				2014				2013				2014				2013
Net  Sales
Filtration		$	57,733				53,763												57,733				53,763
Test			45,029				36,562												45,029				36,562
Utility Solutions Group			27,733				26,597												27,733				26,597
Totals		$	130,495				116,922				0				0				130,495				116,922
EBIT
Filtration		$	10,294				10,689				216	(1)							10,510				10,689
Test			5,775				3,844								506	(2)			5,775				4,350
Utility Solutions Group			5,725				5,132								695	(3)			5,725				5,827
Corporate			(6,364	)			(8,254	)							1,500	(4)			(6,364	)			(6,754	)
Consolidated EBIT			15,430				11,411				216				2,701				15,646				14,112
Less: Interest expense			(147	)			(778	)											(147	)			(778	)
Earnings before income
taxes from Cont Ops		$	15,283				10,633				216				2,701				15,499				13,334

 

Note: The above table is presented on a continuing operations basis.

Note: Depreciation and amortization expense was $4.1 million and $3.9 million for the quarters ended June 30, 2014 and 2013, respectively.

 

(1)

Includes $0.2 million (or $0.01) of restructuring charges at Crissair during the third quarter 2014.

(2)

Includes $0.5 million (or $0.01) of restructuring charges for ETS during the third quarter 2013.

(3)

Includes $0.7 million (or $0.03) of restructuring charges for Doble Lemke during the third quarter 2013.

(4)

Includes $1.5 million (or $0.05) of restructuring charges for Doble Lemke during the third quarter 2013.

  

 

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

Condensed Business Segment Information (Unaudited)

(Dollars in thousands)

 

		Nine Months Ended June 30, GAAP								Adjustments								Nine Months Ended June 30, As Adjusted
		2014				2013				2014				2013				2014				2013
Net  Sales
Filtration		$	171,608				153,741												171,608				153,741
Test			125,531				112,678												125,531				112,678
Utility Solutions Group			82,568				79,059												82,568				79,059
Totals		$	379,707				345,478				0				0				379,707				345,478
EBIT
Filtration		$	29,878				30,384				723	(1)							30,601				30,384
Test			12,883				6,922								3,370	(2)			12,883				10,292
Utility Solutions Group			18,891				14,735								695	(3)			18,891				15,430
Corporate			(17,922	)			(20,855	)							1,500	(4)			(17,922	)			(19,355	)
Consolidated EBIT			43,730				31,186				723				5,565				44,453				36,751
Less: Interest expense			(1,493	)			(1,997	)											(1,493	)			(1,997	)
Earnings before income
taxes from Cont Ops		$	42,237				29,189				723				5,565				42,960				34,754

 

Note: The above table is presented on a continuing operations basis.

Note: Depreciation and amortization expense was $12.2 million and $11.6 million for the nine-month periods ended June 30, 2014 and 2013, respectively.

 

(1)

Includes $0.7 million (or $0.03) of restructuring charges at Crissair during the first nine months of 2014.

(2)

Includes $3.4 million (or $0.08) of restructuring charges for ETS during the first nine months of 2013.

(3)

Includes $0.7 million (or $0.03) of restructuring charges for Doble Lemke during the first nine months of 2013.

(4)

Includes $1.5 million (or $0.05) of restructuring charges for Doble Lemke during the first nine months of 2013.

 

  

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in thousands)

 

		June 30, 2014				September 30, 2013
Assets
Cash and cash equivalents		$	40,215				42,850
Accounts receivable, net			92,165				91,980
Costs and estimated earnings on
long-term contracts			22,643				20,717
Inventories			93,965				90,228
Current portion of deferred tax assets			19,473				23,349
Other current assets			18,544				15,930
Assets held for sale - current			0				108,867
Total current assets			287,005				393,921
Property, plant and equipment, net			74,585				75,536
Intangible assets, net			181,683				180,217
Goodwill			283,317				282,949
Other assets			8,949				9,469
Assets held for sale - other			0				150,236
		$	835,539				1,092,328
Liabilities and Shareholders' Equity
Current maturities of long-term debt		$	20,000				50,000
Accounts payable			30,327				38,537
Current portion of deferred revenue			18,377				17,508
Other current liabilities			59,077				60,726
Liabilities held for sale - current			0				63,585
Total current liabilities			127,781				230,356
Deferred tax liabilities			78,202				99,795
Other liabilities			19,530				22,437
Long-term debt			28,000				122,000
Liabilities held for sale - other			0				16,026
Shareholders' equity			582,026				601,714
		$	835,539				1,092,328

 

 

 

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

		Nine Months Ended June 30, 2014
Cash flows from operating activities:
Net loss		$	(10,898	)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Net loss from discontinued operations			40,584
Depreciation and amortization			12,234
Stock compensation expense			3,695
Changes in current assets and liabilities			(18,210	)
Pension contributions			(2,080	)
Change in uncertain tax position liability			(1,694	)
Other			(995	)
Net cash provided by operating activities - continuing operations			22,636
Net cash used by operating activities -  discontinued operations			(1,629	)
Net cash provided by operating activities			21,007
Cash flows from investing activities:
Capital expenditures			(8,116	)
Additions to capitalized software			(6,305	)
Net cash used by investing activities - continuing operations			(14,421	)
Net cash provided by investing activities - discontinued operations			123,512
Net cash provided by investing activities			109,091
Cash flows from financing activities:
Proceeds from long-term debt			62,000
Principal payments on long-term debt			(186,000	)
Dividends paid			(6,378	)
Purchases of common stock into treasury			(3,607	)
Other			14
Net cash used by financing activities			(133,971	)
Effect of exchange rate changes on cash and cash equivalents			1,238
Net decrease in cash and cash equivalents			(2,635	)
Cash and cash equivalents, beginning of period			42,850
Cash and cash equivalents, end of period		$	40,215

 

  

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

Other Selected Financial Data (Unaudited)

(Dollars in thousands)

 

Backlog And Entered Orders - Q3 FY 2014			USG				Test				Filtration				Total
Beginning Backlog - 4/1/14		$	23,375				93,338				156,125				272,838
Entered Orders			32,779				54,544				63,057				150,380
Sales			(27,733	)			(45,029	)			(57,733	)			(130,495	)
Ending Backlog - 6/30/14		$	28,421				102,853				161,449				292,723
Backlog And Entered Orders - YTD Q3 FY 2014			USG				Test				Filtration				Total
Beginning Backlog - 10/1/13		$	24,047				90,427				157,675				272,149
Entered Orders			86,942				137,957				175,382				400,281
Sales			(82,568	)			(125,531	)			(171,608	)			(379,707	)
Ending Backlog - 6/30/14		$	28,421				102,853				161,449				292,723

 

Note: The above table is presented on a continuing operations basis and excludes Aclara.

 

 

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

Reconciliation of Non-GAAP Financial Measures (Unaudited)

 

EPS – Adjusted Basis Reconciliation – Q3 FY 2014
EPS from Continuing Ops – GAAP Basis – Q3 2014		$	0.43
Adjustments (defined below)			0.01
EPS from Continuing Ops – As Adjusted Basis – Q3 2014		$	0.44
Adjustments exclude $0.01 per share consisting of restructuring costs
associated with the Filtration segment facility consolidation.
EPS – Adjusted Basis Reconciliation – YTD Q3 FY 2014
EPS from Continuing Ops – GAAP Basis – YTD Q3 2014		$	1.11
Adjustments (defined below)			0.03
EPS from Continuing Ops – As Adjusted Basis – YTD Q3 2014		$	1.14
Adjustments exclude $0.03 per share consisting of restructuring costs
associated with the Filtration segment facility consolidation.
EPS – Adjusted Basis Reconciliation – FY 2014
EPS from Continuing Ops – GAAP Basis – FY 2014		$	1.45				1.55
Adjustments (defined below)			0.05				0.05
EPS from Continuing Ops – As Adjusted Basis – FY 2014		$	1.50				1.60
Adjustments exclude $0.05 per share consisting of restructuring costs
associated with the Filtration segment facility consolidation.