Q4 2019 Earnings Call
Yes, Gary Monster, Vice President and CFO and now to present the forward looking statement I would like to turn the call over to Kate <unk> Mallory director of Investor Relations. Please go ahead.
Thank you.
Maintenance made during this call regarding the amount and timing of 2020 and beyond revenues as adjusted EPS EBITDA adjusted EBITDA.
Gross profitability ROI see timing, if the divestiture tax rates shareholder value successfully completing additional 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 Law.
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 and existing accompanies operations and business environment, including but not limited to the risk factors reference in the Companys press release issued today, which will be included as an exhibit to the company's form eight.
Okay 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 and describing accompanies operating results. A reconciliation of these measures for the most comparable GAAP measures can be found in the press release issued today and found.
On the company's website at Www Dot ESCO technologies dotcom onto the link Investor Relations now turn call over to Vic.
Thanks, Jayson good afternoon.
Gary will describe our fourth quarter for your financial results in detail. After my comments. So we'll take a few minutes to discuss the sale of our technical packaging business as you're thinking around the strategic aspects of this divestiture.
Five or six months ago, we were not contemplating selling their packaging assets, who saw a clear path through this business to expand its contribution within ASCO.
Given their identify prospects for growth, we made some meaningful capital investments in 2019, both domestically internationally and internationally support this outlook.
Given the robust valuations we were seen in a market coupled with our strong presence in our medical.
One device and pharmaceutical markets, we knew hey, we had an attractive set of packaging to assets that would come at a solid valuation if offered for sale.
In yesterday's announcement of the transaction improve we were right.
After a thoughtful analysis of our options we came to the conclusion the monetizing our technical packaging assets had a strong valuation was strategically positive and financially prudent.
This transaction makes a lot of sense for a lot of reserves. It allows us to de lever, but rate paying down our outstanding debt, which creates additional debt capacity and liquidity for future M&A spending in our other segments.
The transaction also streamlined our business and simplifies our portfolio, which allows us to focus on our remaining core operating segments.
Both on organic growth and continued M&A around this core personal note I would like to think Randy logo and into our management team is a dedicated employees around the world work, so hard to make that packaging businesses success and I wish everyone. All the best in the future with Sunoco.
Now I'll turn it over to Gary for the financial discussion.
Thanks, David wrapped up the year and strong fashion compared to fiscal 18 by delivering solid topline growth coupled with 9% growth in adjusted EBITDA, 13% growth in adjusted EPS strong cash flow and record entered orders.
As all these items exceeded our previous expectations said earlier similar to the past our sales adjusted EBITDA and adjusted EPS, not only exceeded our expectations, but the deeply consensus estimate driven by continued strength across all three core segments.
On the segment basis filtration sales increased 14% over prior year.
Our 11% excluding globe. This growth was led by our aerospace businesses, where sales increased $32 million or 19%, resulting from continued strong demand across our extensive aero platforms, both OEM and aftermarket in both commercial and defense.
This growth was partially offset by that those navy business, which have lower sales in 2019, resulting from revenue recognition timing items on several large programs.
Global added approximately $9 million of sales in the three month three months that we own them.
Kesten Doble both grew sales are better than expected amounts.
Renewable energy business decreased in 2019, which mitigated our U.S.G. sales growth.
Our 2019, adjusted EBITDA was $151 million compared to $139 million in 2018, and our adjusted EPS was $3.13 a share compared to 77, a share in 2018, which reflects 13% growth.
These increases were accomplished through a combination a meaningful sales growth of favorable sales mix rigorous cost management, coupled with solid execution across the company and topped off with solid tax planning strategies.
Additionally, I think the strength of our 2019 results continues to demonstrate the earnings power that we can generate higher sales volumes and continues to support our multi segment multi industry strategy.
Our cash flow provided by operating activities for the year was $105 million, which resulted in $224 million of debt outstanding which reflects an extremely comfortable leverage ratio of 1.68 at September Thirtyth us.
Q4 cash from operating activities $68 million, reflecting our strongest our strongest quarterly cash flow in history. This was driven by solid earnings and enhance focus on working capital management and strong cash collections.
I'm also really pleased with our entered orders both in Q4 and for the year when we set a record by exceeding $900 million of new business for the first time.
It was also great to see how our order growth was spread nicely across the operating segments.
This order level resulted in an increase ending backlog of $92 million or 24% from the start of the year.
This gives us some comfort supporting our fiscal 20 growth outlook.
Looking forward to fiscal 2008, I'll provide a backdrop for our outlook that was detailed in the press release and point out that all comparisons between fiscal 20 in fiscal 19 are done excluding technical packaging from both periods.
We expect to grow our top line, 9% to 10% on a consolidated basis led by filtration, which is centered around 14% growth.
Followed by Us G, 7% to 8% with test growing 4% to 5%.
We expect adjusted EBITDA increased 12% to 13% with the corresponding margins increasing nearly a full point.
Noncash depreciation and amortization is expected to increase approximately $5 million, which negatively impacts projected EPS by 15 cents a share.
We are projecting a 23 to a 24% effective tax rate, which is higher than our 2019 rate, which I noted earlier was favorably impacted by various tax strategies, which generated both cash and earnings benefits, which we do not expect to repeat in 2020 at the same level.
This higher tax rate differential negatively impacts 2020 projected EPS by 10 cents a share.
So we're bringing all this together we expect our 2020 adjusted EPS to be in the range of Threetwenty to Threethirty a share when excluding the packaging business.
This reflects a meaningful increase over the pro forma adjusted EPS of $2, a 95 cents a share for fiscal 2019.
So in closing given our new and expanded credit facility and available liquidity, we're well positioned to effectively execute on our M&A strategy and support future growth, both organically and through acquisitions across our core businesses. All of this while remaining focused on ROI see an increasing shareholder value.
And with that I'll turn it back over to Rick for a few additional comments. Thanks, Gary I'll update you on a few items that were process. We last spoke we officially moves in the Dole headquarters facility last week and everyone is really pleased to have this is sure option behind them and have seller into their new offices really have.
We have all of our Boston area employees in one location is uncertain. This will enhance collaboration and productivity and we'll certainly benefit our employee recruitment given its favorable association.
Also within do I see we continue to see solid progress and customer acceptance within rgs bad to turn products and given a strong support from all the stakeholders and a positive test results via documented we see this solution as a growth opportunity for the company.
We're excited about globes future as are off to a great start to fit with US is obvious synergies with the shared customer base are already paying off with expanded order flow.
As Gary mentioned, our aerospace and space businesses continue to see an uptick in order and sales activity.
Leads to see the block five awards on the Virginia class subs, being released which will benefit vacco Westland and globe.
I guess business outlook for 2000 is solid and we expect to see continued order strength throughout the year. Among other end markets Fiveg continue to gain momentum.
We continue to look for additional acquisition to support our organic growth and we plan to deliver on our commitments in both these areas to support longer term growth objectives in closing we remain focused.
And successfully executing our strategy and we're playing for successful 2020, now I'll be happy to take any questions.
As a reminder to ask a question you will need to press Star then one on your telephone to withdraw your question press the pound Keith.
Our first question comes from the line of Jon Tanwanteng with CJS Securities. Your line is now open.
Good afternoon, guys. Thanks for taking my question.
In Asia.
Gary can you give us the adjusted EBITDA number and that margins that you're working off of.
For basing the 12% to 13% and EBITDA margin expansion going off of for next year.
Yes, when we look at.
Where we're looking to go if we pro forma nineteena is that what you're what you're referring to.
Yes, I would say, it's about 139 million.
With that for 19, and then we're seeing the 12, 13% growth off of that number in that 139 is what correlates to the 295 or pro forma EPS adjusted pro forma EPS for 19.
Okay, great. Thank you and then.
Can you give us more color in terms of the timing of your backlog in the tip your forecasts in Q1 into Q2.
Yes, let me do it from the bottom and I'll refer to Vic if you want to start but the business side of it. So one thing I want to make sure everyone's aware as kind of what the profile of the year looks like.
How we tend to have significantly back half weighted.
Years seems like every other year this year in fiscal 20 looks a little bit more like fiscal 18, and so just give you a couple of statistics to say that amount.
In fiscal 18 in the first half of year, we did about 29% of our annual EPS, which means 71% came in the second half.
Total 20 arms, our fiscal 19 was a little flatter, we did 40% in the first half and 60%.
Second half in fiscal twenties cadence will look a little bit more like 18 will have somewhere between 30 and 33%.
Of our job.
EPS adjusted EPS will hit in the first half, which means 67% will hit in the second half so.
While the quarterly profile is backend weighted again, it looks pretty similar to the achievements that we that we realized in fiscal 18 on that kind of that kind of waiting and it's really just a function.
The bigger programs, we have crossed the test business across the submarine platforms Doble has some things in the back half of the year on some larger projects that.
That impact that across the aerospace business, it's usually a function of distributor restocking orders that come in and in fits and starts so theres nothing really unique to.
This year again, because what we've done this profile in the past and it's very achievable for us. So hopefully that answered your question from a financial perspective and that is that I may I think this thing to give me a lot of confidence is the backlog. We have you agree that backlog pretty significantly over this past year. So it's.
The these timing issues at quarter to quarter frustrating, but that's all they are of interest any issue though.
Great. Thanks for that color appreciate it.
Just a question on the backlog how much of the backlog today as part of the packaging business that that's going to be divested.
As I go back to with less periods of the press release, we head at the end of year, we were asked.
About 11 million.
Okay great.
Finally, just what's in the M&A pipeline now does is it appropriate to think about you guys.
Relatively quickly.
Facing the EBITDA that you're divesting without that assets the maybe pursuing that are.
What's synergistic with your European filtration businesses.
It's certainly our hope we are working number of issues right. Now is M&A pipelines that is tools. It's been for submitted that doesn't mean settled but half right away, but certainly there are number of really good opportunities that we're pursuing currently.
Okay. Thanks.
Finally, if I could it from a global and geopolitical.
Risk standpoint, I have you any seats have you seen any changes and the risk or headwinds that that might be out there or maybe from a large individual programs standpoint.
That really I mean, I would say that we probably are far enough down the food chain, where we where we participate there is not really been an issue.
We watch China closely just because we do some business there, particularly with the test business somewhat dolbeau, although that not that much of global these days.
But the test business certainly what we do have a location there so that helps us alive and we're actually.
Net net exporter, rather than an importer from John as we don't actually bring anything back here.
From our Chinese operations, we won't have a tariff issues come into this direction.
Great Thanks, and congrats on the sale again.
Thank you thanks, Joe.
Our next question comes from Robert Mccarthy with Stephens. Your line is now open.
Good afternoon can you hear me.
Yes, we can.
Great well first.
I want to just go on record as saying this is a tremendous quarter really good strength.
Obviously, the divestiture activity.
You should be applauded for the price you got so I just want to make sure that I'm going to record on that okay.
Thanks.
So with that being said could we talk about the bridge a little bit.
That was very helpful. In terms the incremental guidance, but maybe we could just kind of run through the math one more time to just kind of level set everybody, where we are because fundamentally the outlook looks.
Remains very strong right, but I want to just make sure I'm getting the bridging aspects.
Correct.
Okay and.
From a top line obviously it really just.
Impacts the packaging business. So the results that we've included on that last page of the.
For the segment page of the press release don't have the pages number here, but you can see that.
From a revenue perspective, we're talking about.
86 $87 million for the packaging business and then we're taking out adjusted.
Adjusted EBIT there of about 7.3.
How about for there's about 4 million of DNA okay.
So you add that big and so thats kind of two it takes you down to the number that I referenced at about a 130 940, there's a little bit at corporate that goes away, where we carry a little bit of amortization of some purchase accounting stuff. So that will reconcile you back to the 130 940 of EBITDA, Okay Thats it.
And then so kind of stepping across on the top line that would kind of referred to each of that as we as we level set us obviously filtration is growing at a very solid amount.
See globes in there for 12 months versus three but absent that we're still growing in the in the high single digits. There. So we're really pleased with that the packaging business Im sorry, the test business, it's kind of at the higher end of our historical range will kind of the net four or 5% and us GE is getting a little bit of a rebound the fact.
The renewable space was soft to be polite in 2019, and so we're kind of at the bottom of the lead in this matter how wide the bottom and they'll be is but we're seeing pretty decent growth there as victor alluded to in his comments on the the bat deterrent situation in a few other new products, we put out so that's going to be.
Adding it's the law small numbers, but thats, 8% to 10% growth in that business again coming off of the base the pieces that help.
No Thats very helpful and I was actually just if you wouldn't mind, just indulging me and just walking through that bridge again, EPS bridge, which is basically level setting us to what should be the comparable number year over year, which she did allude to and then just highlighting the the incremental tax.
And the incremental.
The other adjustment just so we understand what the bridge was I think yes.
Equates back to about like I said $2.95 a share the tax rate.
On a consolidated basis was impacted our consolidated rate was lower because lot of tax strategies, we put in place were incurred domestically and so the rate that we level set for the packaging business being excluded is back to our statutory rate of essentially 20, 323.5%.
So as you looked at that EBITDA and you backed that out and then you take a tax effect of what they would be that should bring you right down to 295, a share we tried to keep it as simple as possible. Obviously, when we do discounts hopefully at the end of Q1 when that closes we will have a very comprehensive bridge.
In those financials, but hopefully that gives you enough information gets you back to 295.
Yes, I think I think the other things maybe you were talking about our tax rate and the lumber you referenced is about 15 cents and any other things amortization intangibles, another 10% 10 cents EPS year over year.
Now that's that's very helpful now into in terms of.
The cash in association.
With the deal first of all when do you expect close on this.
Our hope you know the we have to regulatory approvals HSR and then we have to get approval in Poland, because we both have operations, there and that one's a little bit.
Unknown, just because we've not done that before but certainly our targeted to try to get this done.
By the end of the fiscal year the calendar year.
Okay and then.
In terms of in terms of the cash generation of the existing technical packaging business help us kind of square that circle because obviously.
Concerned about the free cash flow generation, but it sounds like you're selling a business that has been a bit of the cash grain so going forward given what we're seeing actually this will probably be.
Pretty material benefit fundamentally in optically the your free cash flow generation.
Yes, and I think it will robin and just to take that kind of conversion of the EBIT number I gave you at about 7.3, they generally run in the 85% to 90% conversion to cash so in that case that would be somewhere in the neighborhood of.
Five or 6 million this past year, but I want to point out as <expletive> mentioned in his prepared remarks. During 19, we made substantial capital investments that we built our under the facility.
Put some extrusion lines in place, which created value and we put clean rooms in.
A couple of places so we made about 13 12 $13 million a capital investment so.
The packaging group in total is a negative cash, but it's because of that that one off where he spent 13. We wouldn't have spent $13 million every year and so that's the kind of where you ought to think about the cash when you're looking at 19.
And again I get that raises the question around Capex as a company for 19, you may not guide to that but maybe does that obviously government work inform what you could capex is going to be at the corporate level for 20.
I would say if you if you looked at the Capex up the cash or you can you can take 13 out of that right away because that won't repeat obvious because because we don't want on the business for the year sure I would say we had a couple other kind of one off things, where we did some things on some facilities that won't repeat so I would think if you started with what we reported back up 13 in it.
Golf, maybe another two to three.
That should give optics of generally what capex looks like.
As we step forward into 20.
Would you expect core capex to be flat organ increase slightly or.
Tough to now generally flat, we're very generous we don't we do focus on ROI see in if one of the operating guys brings us.
Planned to put some additional automation and were big fans of that because it improves efficiency. So I would say.
And again, you don't repeat these things if we go to Chris Air and put in a million dollar piece of equipment that may or may not be another million next year, we've kind of deferred to the operating guys. There. So I would say if you held it flat and I don't mean flat like were constraining, it's flat because we've been making a sizable amount of capital investments both in the hard capital in the software over the past.
Last five years.
One of the issues were rolling into these days and they think it's probably hear this from a or the company to recover that you saw just.
Difficulty in finding qualified people, particularly.
The success Texan days like data. So we have been working very hard to automate as much as we can just because it's hard to fine.
Qualified employees working as side of the but yes, I agree with variable probably kind of flattish on capital equipment, because we have been fairly aggressively several years.
And help me on the filtration side I mean, obviously at a very good quarter there.
Aided by the recent acquisition, but level set us what your expectation is for acquired revenues.
For 2020, because I think.
Well I'm not a math major so probably I just was late this slow off but my number for filtration was way often you really handily beat it. So maybe just any kind of color around acquisition contribution for 2020 would be helpful.
And really what we do is we don't we don't we have a lot of things in the works as Vic. So we don't put those in because obviously the success rate is hit or Miss So just to give you. The one that's in there when we announced globe in July we pivoted at roughly 37 million in revenue on an annual basis.
So we we did about nine in round terms. So if you use that 37 million for 20, because again thats. What we were you are guiding by words, so 37 versus the nine is the net debt differential 28 million is yes.
Acquisition growth would be.
In 20, and then the balance of it comes from.
A combination of the strength of arrow the strength of submarines because the order profiles picking up so some of the block five and some other legacy things are coming through so thats, where the the inorganic growth comes from from a onetime path.
I guess the last question and then I'll pick more of the questions offline.
Your guidance looks very sound. The backlogs there you have green line of sight, you're executing well, whereas the where's the biggest area of maybe incremental concern or opportunity, even just thinking about your kind of forecasting I mean, obviously.
On the utility side, one could speculate that obviously off a low base with some of the concerns around.
Alternative energy.
You are well positioned and obviously there has been.
Based on the top down view lot more interest in grid hardening and transmission and distribution investment now I know Youre degrade you more.
Bigger and distribution true excuse me our transmission transformers more of that in terms to spend the testing, but thinking about the prevailing environment, where could we see more upside surprise and 20 or more risk in terms of how you're thinking about the outlook versus something on the May Navy side, where you probably have pretty good line of sight.
So I would say the area. If we are fortunate to have a concern, which I try not to on days that we issue earnings.
We are fortunate to have a concern the really the capital budgets and utilities are always.
Tenuous I think were broad enough now between.
The number of companies that we own in that space and renewables and non renewable fuels and all of that that I think there will be okay. I mean, obviously took a hard look into a bottoms up review of the forecast that we have in that business, but that's one thing that always as utilities come back off selling but again I think we're going up.
Utilities that it would have to be something dramatic to have a big issue, there, but probably more risks there than some of the other businesses I think the thing that we haven't gotten our arms around the that from an upside perspective is with our navy business working really hard.
Global obviously to be successful on the surface water treatment of their offer great start with that featured more opportunities with into navy because the vendor base.
Within the Navy is not as robust I think is but a lot of people might expect or what the navy were blinded. So we we've developed you'd almost $100 million business in that area now so we're seeing as a larger.
Contributor larger vendor that we had been historically, so we're looking for opportunities to take advantage of.
Having goals and have been Westland and haven't vacco and so we really think we can go to to a.
To the customer and say look we're here.
Our Navy business is part of a larger corporation and we really want to.
Be a big vendor for years, so let's work together and figure out what else. We can do for you. So I think there's some real upside there, but we just haven't had an opportunity to to flush it out completely.
Well I'll take care of the rest of my questions offline, but congratulations again on a very successful transaction, great valuation and very strong quarter.
I think they launch.
Okay.
Good.
Hi, guys say im showing no further questions in queue.
Okay. Thanks, so much appreciate everybodys interest and we'll talk to you next quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Good day and welcome to Echo fourth quarter 2018 earnings Conference call today's call is being recorded.
With us today, our Vic Richey, Chairman and CEO , Gary muster, Vice President and CFO and now to present the forward looking statement I would like to turn the call Liberty Kate <unk> Mallory director of Investor Relations. Please go ahead.
Thank you.
It's made during this call regarding the amounts and timing of 2020 I'd be on revenues, if yes, adjusted EPS EBITDA adjusted EBITDA.
Gross profitability, Oh, I see China, the divestiture catchphrase shareholder value successfully completing additional acquisitions and other statements, which are not strictly historical are forward looking statements within the meaning of the safe Harbor provisions of the federal security thought.
These statements are based on current expectations and assumptions and actually guilty differ materially from those projected any forward looking statements due to risks and uncertainties, an existing a company operations and there's nothing bar, including but not limited to the risk factors referencing the Companys press release issued today, which will be completed doesn't exhibited the company's form eight.
Hey 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 non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures are the most comparable GAAP measures can be found in the press release issued today and found.
On the company's website at Www Dot TESSCO technologies Dot com under the link Investor Relations now I'll turn call over to that.
Thanks, Jayson good afternoon.
Gary will describe our fourth quarter for your financial results in detail. After my comments, so would it take a few minutes to discuss the sale of our technical packaging business as you're thinking around the strategic aspect of this divestiture.
Five or six months ago, we were not contemplating selling or packaging assets as we saw a clear path for this business to expand its contribution within ESCO.
Getting their identified prospects for growth, we made some meaningful capital investments in 2019, both domestically internationally and internationally support this outlook.
But given the robust valuations we were seen in a market coupled with our short presidents in a medical.
One device and pharmaceutical markets when you Hey, we had an attractive said.
<unk> packaging to assets that would command a solid value valuation if offered for sale.
And yesterday's announcement of the transaction prove were right.
After a thoughtful analysis of our options we came to the conclusion that monetizing our technical packaging assets at a strong valuation was strategically positive and financially prudent.
This transaction makes a lot of sets for a lotta research it allows us to de lever badly paying down our outstanding debt, which creates additional debt capacity liquidity for future M&A spending in or other segments.
The transaction also streamlines, our business and simplifies our portfolio, which allows us to focus on our remaining core operating segments.
Both inorganic growth and continued M&A around this core a personal note I would like to think Randy logo, and it's our management team and the dedicated employees around the world work, so hard to make the packaging business the success and I wish everyone. All the best in the future with Sunoco.
Now I'll turn it over to Gary for the financial discussion.
Thanks, David let the beer and strong fashion compared to fiscal 18 by delivering solid topline growth coupled with 9% growth in adjusted EBITDA up 13% growth in adjusted EPS strong cash flow and record entered orders.
There's all these items exceeded our previous expectations set earlier similar to the past our sales adjusted EBITDA and adjusted he.
Not only exceeded our expectations, but they beat the consensus estimate driven by continued strength across all three core segments.
On the second basis filtration sales increased 14% over prior year.
11% excluding globe.
This growth was led by our aerospace businesses, where sales increased $32 million or 19%.
Hoping from continued strong demand across our extensive aero platforms, both OEM and aftermarket in both commercial and defense.
This growth was partially offset by that goes maybe goes most which had lower sales in 2019, resulting from revenue recognition timing items on several large programs.
Logo added approximately 9 million of sales in the three month three months that we own them.
Custom doble, both through sales at better than expected a mobs.
Doable energy business decreased in 2019, which mitigated the U.S.G. sales growth.
The 2019, adjusted EBITDA was $151 million compared to $139 million in 2018, and adjusted EPS was $3.13 a share compared to 277, a share in 2018, which reflects 13% growth.
These increases were accomplished through a combination a meaningful sales growth of favorable sales mix rigorous cost management, coupled with solid execution across the company and topped off with solid tax planning strategies.
Additionally, I think the strength of our 2019 results continues to demonstrate the earnings power.
Well, we can generate at higher sales volumes and continues to support a multi segment multi industry strategy.
Our cash flow provided by operating activities for the year was $105 million, which resulted in $224 million of debt outstanding which reflects an extremely comfortable leverage ratio of 1.68 at September thirtyth.
Q4 cash from operating activities was $68 million, reflecting our strongest our strongest quarterly cash flow in history.
This was driven by solid earnings and enhance focus on working capital management and strong cash collections.
Also really pleased with their entered orders both in Q4 and full year, what we set a record by exceeding $900 million a new business for the first time.
There's also great to see how our order growth was spread nicely across the operating segments.
This order level resulted in increased ending backlog of $92 million or 24% from the start of the year.
This gives us some comfort supporting our fiscal 20 growth outlook.
Looking forward to fiscal 20, I'll provide a backdrop for our outlook that was detailed in the press release.
Not that all comparisons between fiscal 20 in fiscal 19 are done excluding technical packaging from both periods.
We expect to grow our top line, 9% to 10% on a consolidated basis led by filtration, which is centered around 14% growth.
Followed by U.S.G., 7% to 8% the test growing 4% to 5%.
We expect adjusted EBITDA increased 12% to 13% with the corresponding margins increasing nearly a full point.
Noncash depreciation and amortization is expected to increase approximately $5 million, which negatively impacts projected EPS by 15 cents a share.
We are projecting at 23 to a 24% effective tax rate, which is higher than our 2019 rate, which I noted earlier was favorably impacted by various tax strategies, which generated both cash and earnings benefits, which we do not expect to repeat in 2020 at the same level.
This higher tax rate differential negatively impacts 2020 projected EPS by 10 cents a share.
So we're bringing all this together we expect our 2020 adjusted EPS to be in the range of Threetwenty. The 330, a share when excluding the packaging business.
This reflects a meaningful increase over the pro forma adjusted EPS of $2, a 95 cents a share for fiscal 2019.
So in closing given our new and expanded credit facility and available liquidity, we're well positioned to effectively execute on our M&A strategy and support future growth, both organically and through acquisitions across our core businesses. All of this while remaining focused on our wisely and increasing shareholder value.
And with that I'll turn it back over to Rick for a few additional comments. Thanks, Gary I'll update you on a few items that were process. We last spoke we officially moves into the Dole headquarters facility last week and everyone is really pleased to have this disruption behind it have cell lines that are new offices really.
Happy to have all of our Boston area employees in one location is uncertain. This will enhance collaboration and productivity and we'll certainly benefit our employee recruitment given as favorable location.
Also within the U.S.G., we continue to see solid progress and customer acceptance within Rgs bad to turn product.
Given a strong support from all the stakeholders and a positive test results being documented we see this solution as a growth opportunity for the company.
I'm excited about globes future as you're off to a great start.
Fit with US is obvious synergies with the shared customer base are already paid off with expanded order flow.
As Gary mentioned, our aerospace and space businesses continue to see an up tick in order and sales activity I'm pleased to see the block five awards under Virginia class subs being or at least which will benefit vacco Westland and globe.
I guess business outlook for 20 is solid and we expect to see continued order strength throughout the year. Among other end markets Fiveg continued to gain momentum.
We continue to look for additional acquisitions to support our organic growth.
Plan to deliver on our commitments in both these areas to sport longer term growth objectives in closing we remain focused.
Gone successfully executing our strategy and we're playing for a successful 2020 now I'll be happy take any questions.
As a reminder to ask a question you will need to press Star then one on your telephone to withdraw your question press the pound Keith.
Our first question comes from the line of Jon Tanwanteng with CJS Securities. Your line is now open.
Good afternoon, guys. Thanks for taking my question.
Yes.
Gary can you give us the adjusted EBITDA number and that margins that you're working off of.
Basing the 12% to 13% and EBITDA margin expansion growth off of for next year.
Yes, when we look at.
We're looking to go if we pro forma nineteena is that what you're what you're referring to yep.
Yes, I would say, it's about 139 million huh.
For 19, and then we're seeing the 12% to 13% growth off of that number and that 139 is what correlates to the 295, a pro forma adjusted pro forma EPS for 19.
Okay, great. Thank you and then.
Can you give us a bit more color in terms of the timing of your backlog in the tip. Your forecasts in Q1 in Q2.
Yes, let me do it from the bottom ill refer to Vic if you want to start to what the business side of it. So one thing I want to make sure everyone is aware as kind of what the profile of the year looks like.
How we tend to have significantly back half weighted years seems like every other year this year.
Fiscal 20 looks a little bit more like fiscal 18, and so just give you a couple of statistics the saving the map.
Fiscal 18 in the first half of year, we did about 29% of our annual EPS, which means 71% came in the second half fiscal 2000 or Im sorry fiscal 19 was a little flatter we did 40% in the first half and 60%.
The second half in fiscal 2000 is cadence will look a little bit more like 18 will have somewhere between 30 and 33%.
Of our.
EPS adjusted EPS will hit in the first half, which means 67% will hit in the second half so.
Well the quarterly profile is backend weighted again, it looks pretty similar to the achievements that we.
Realized in fiscal 18 on that kind of that kind of waiting and it's really just a function.
The bigger programs, we have crossed the test business across the submarine platforms Doble has some things in the back half of your on some larger projects that.
That impact that across the aerospace business, it's usually a function of distributor restocking orders that come in and in fits and starts so there's nothing really unique too.
This year again, because what we've done this profile in the past and it's very achievable far so hopefully that answered your question from a financial perspective, and the reality is that it may I think that thing to give me a lot of confidence is the backlog. We have you agree that backlog pretty significantly over this past year. So it's.
The these timing issues at quarter to quarter frustrating, but that's all they are pictures any issue at all.
Great. Thanks for that color appreciate it.
Just a question on the backlog how much of the backlog today as part of the packaging business that that's going to be divested.
As I go back to that last page of the press release, we said at the end of year, we were asked.
About 11 million.
Okay great.
Finally, just what's in the M&A pipeline now.
Is it appropriate to think about you guys.
Relatively quickly, replacing the EBITDA that you're divesting with other assets the maybe pursuing that are.
What's synergistic with you and filtration businesses.
It's certainly our hope we are working and number of issues right now is M&A pipelines that as full as it's been for submitted that doesn't mean sort of half right away, but certainly there are number really good opportunities that we're pursuing currently.
Okay. Thanks, Eric.
Finally, if I could it from a global and geopolitical.
Risk standpoint, I have you any have you seen any changes and the risk of headwinds that that might be out there or maybe from a large individual programs standpoint.
Not really I mean, I would say that we probably are far enough down the food chain, where we where we participate as that really been an issue.
We watch China closely just because we do some business there, particularly with the test business somewhat though although that not that much at doble. These days.
But the test business, certainly, but we do have a location there so that helps us a lot and we're actually.
Net net exporter rather than imported from jives, we don't actually bring anything back here.
From our Chinese operation. So we don't have a tariff issues coming in this direction.
Great Thanks, and congrats on the sale again.
Thank you. Thank you.
Our next question comes from Robert Mccarthy with Stephens. Your line is now open.
Good afternoon can you hear me.
Yes, we can.
Great well first.
I want to just go on record as saying this is a tremendous quarter really good strength.
Obviously, the divestiture activity.
You should be applauded for the price you got so I just want to make sure that I'm going to record on that okay.
Nick.
So with that being said.
But the bridge a little bit.
That was very helpful. In terms of the incremental guidance, but maybe we could just kind of run through the math one more time to just kind of level set everybody, where we are because fundamentally the outlook looks.
Remains very strong right, but I want to just make sure I'm getting the bridging aspects.
Correct.
Okay and.
From a top line obviously it really just.
Impacts the packaging business so.
Insults that we've included on that last page of the.
For the segment page of the press release don't have the pages number here, but you can see that.
From a revenue perspective, we're talking about.
86 $87 million for the packaging business and then we're taking out adjusted.
Adjusted EBIT there of about 7.3.
Hi, Bob Ford and there's about 4 million of DNA Okay.
So you add that big and so thats kind of two it takes it down to the number that I referenced at about 139, 104, and there's a little bit at corporate that goes away, where we carry a little bit of amortization of some purchase accounting stuff. So that will reconcile you back to the 130 940 of EBITDA, Okay Thats it.
And then so kind of stepping across on the top line that kind of referred to each of that as we as we level set us obviously filtration is growing at a very solid amount.
See globes in there for 12 months versus three but absent that we're still growing in the in the high single digits. There. So we're really pleased with that the packaging business Im sorry, the test business, it's kind of at the higher end of our historical range will come in in that four or 5% and you as GE is getting a little bit of a rebound the fact.
The renewable space was soft to be flight in 2019, and so we're kind of at the bottom of the lead and it's just a matter how wide the bottom gonna be is what we're seeing pretty decent growth there as Vic alluded to in his comments on the WPTE insurance situation and a few other new products, we put out so that's going to be.
Adding it's the last small numbers, but thats, 8% to 10% growth in that business again coming off of the base of the B. So does that help.
No. That's very helpful and I was actually just if you wouldn't mind, just indulging me and just walking through that bridge again, the EPS bridge, which is basically level setting as to what should be the comparable number year over year, which you did allude to and just highlighting that the incremental tax.
And the incremental.
The other Jasmine just so we understand what the bridge was I think yes.
Equates back to about like I said $2.95 a share the tax rate on a consolidated basis was impacted our consolidated rate was lower because lot of tax strategies, we put in place we're.
Incurred domestically and so the rate that we level set for the packaging business being excluded is back to our statutory rate of essentially 20, 323.5%. So as you looked at that EBIT and you back that out and then you take a tax effect of what that would be that should bring you.
Right down to 295, a share we tried to keep it as simple as possible obviously, when we do disc ops hopefully at the end of Q1 that when that closes we will have a very comprehensive bridge.
And those financials, but hopefully that gets you have enough information gets you back to 295.
Yes, I know that I think I think the other things maybe what you were talking about what tax rate and the number you referenced is about 15 cents right and then the other thing as amortization intangibles, another 10% 10 sets, yes, you're right yeah.
Now that's that's very helpful now into in terms of.
The cash and association.
With the deal first of all when do you expect close on this.
Yeah, I hope you know the we have to regulatory approvals HSR and then we have to get approval in Poland, because we both have operations, there and that one's a little bit.
Unknown just goes we've not done that before about certain are targeted to try to get this done.
By the end of this fiscal year.
Calendar year.
Okay and then.
In terms of in terms of the cash generation of the existing technical packaging business help us kind of square that circle because obviously.
Concerned about the free cash flow generation, but it sounds like you're selling business that has been a bit of the cash grain so going forward given what we're seeing actually this will probably be.
Pretty material benefit fundamentally in optically the your free cash flow generation.
Yeah, and I think it will Robyn and just to take that kind of conversion of the EBIT number that gave you at about 7.3, they generally run in the 85% to 90% conversion of cash so in that case that would be somewhere in the neighborhood of.
Five or 6 million this past year, but I want to point out as <expletive> mentioned in his prepared remarks. During 19, we made substantial capital investments that we've built garner the facility.
Put some extrusion lines in place, which created value and we put the clean rooms in.
A couple of places so we made about 13 12 $13 million of capital investments. So.
The packaging group in total was a negative cash, but it's because of that but one off when I have spent 13, we wouldn't have spent $13 million every year and so that's the kind of where you ought to think about the cash when you're looking at 19.
And I get that raises the question around Capex as a company for 19, you may not guide to that but maybe does that obviously governing that work inform what you could capex is going to be at the corporate level for 20.
Yes, I would say if you if you looked at the Capex up the cash or you can you can take 13 out of that right away because that won't repeat obvious is because we don't want owned the business for the year I would say we had a couple other kind of one off things, where we did some things on some facilities that won't repeat so I wouldn't think if you started with what we reported back up 13 and.
Backdrop, maybe another two to three.
That should give optics of generally what capex looks like.
As we step forward into 20 do you expect core capex to be flat organ increased slightly or.
Tufting, though I'd say generally flat, we're very generous we don't we do focus on ROI C and if one of the operating guys brings us a plan to put some additional automation in were big fans of that because it improves efficiency. So I would say.
And again you don't repeat these things if we go to Chris Aaron put in a million dollar piece of equipment that may or may not be another million next year, we kind of deferred to the operating guys. There. So I would say if you held it flat and I don't mean flat like were constraining. It it's flat because we've been making a sizable amount of capital investments both in the hard capital in the software over the past.
Five years, yes, the one of the issues were running into these days and I think it's probably hear this summer or the company to cover that you saw just.
Difficulty in finding qualified people, particularly machinists test Texan days. They data. So we have been working very hard to automate as much as we can just because it's hard to fine.
Qualified employees.
Working as side of the but yes, I agree with variable probably kind of flattish on capital equipment, because we have been fairly aggressively several years.
And help me on the filtration side I mean, obviously you had a very good quarter there.
Aided by the recent acquisition, but level set us what your expectation is for acquired revenues.
For 2020, because I think you know well I'm not a math major so probably I just was laziness swath, but my number for filtration was way off and you really handily beat it. So maybe just any kind of color around acquisition contribution for 2020 would be helpful.
Yeah, and really what we do is we don't we know we have a lot of things in the works is mix. So we don't put those in because obviously the success rate is hit or Miss So just to give you. The one that's in there.
We announced globe in July we have good at roughly 37 million in revenue on an annual basis.
So we we did about nine in round terms. So if you use that 37 million for 20, because again thats. What we were we're guiding by words, so 37 versus the nine is the net debt differential 28 million is yes.
Acquisition growth would be.
In 2000, and then the balance of it comes from.
A combination of the strength of arrow the strength of submarines because the order profiles picking up so some of the block five and some other legacy things are coming through so thats, where the the inorganic growth comes from from a onetime Bob.
I guess the last question and then I'll take more of the questions offline.
Your guidance looks very sound the backlog there you have green line of sight executing well where's the whereas the biggest area of maybe incremental concern or opportunity, even just thinking about your kind of forecasting I mean, obviously.
On the utility side, one one could speculate that obviously off a low base with some of the concerns around.
Alternative energy.
You are well positioned and obviously, there's been a at least on the top down view lot more interest in grid hardening and transmission and distribution investment now I know you Dr., Greg Martin your on bigger distribution traffic excuse me our transmission transformers more of that in terms of the spend the testing, but thinking about the prevailing environment, where could we see.
More upside surprise and 20 or more risk in terms of how you're thinking about the outlook versus something on the Navy Navy side, where you probably have pretty good line of sight.
So I would say the area unit for your unfortunately have an answer which I try not to on days that we issue earnings but they are fortunate to have a concern you really the capital budgets and utilities are always.
Little tenuous I think were broad enough now between.
The number of companies that we own and AD space and renewables and not renewables and all of that that I think there will be okay. I mean.
So you took a hard look into a bottoms up review of the forecast that we have in that business, but.
That's one thing that always the utilities come back office on but again, I think where it up utilities that.
I would have to be something dramatic to have a big issue, there, but probably more risks there that some of the other businesses I think the thing that we haven't got our arms around yet from an upside perspective is with our navy business working really hard.
Global obviously to be successful on the surface of all treatment of their offer great start with that featured more opportunities with into navy because the vendor base.
Within the Navy is not as robust I think is but a lot of people you might expect or what the navy with one it's a week, we've developed you'd almost $100 million of business in that area. Now so we're seeing as a larger contributor larger vendor. There we had been historically so we're looking for opportunities to take advantage.
Joe.
Having goals and have an westward and haven't vacco and so we really think we can go to to a.
To the cash burn say look we're here.
Our Navy business is part of a larger corporation and we really want to.
Be a big vendor for you so let's work together and figure out what else. We can do for you. So I think there's some real upside there, but we just haven't had an opportunity to flush it out completely.
Well I'll take care of the rest of my questions offline, but congratulations again on a very successful transaction a great valuation in the very strong quarter.
I think thanks much.
Okay.
Good.
Hi, guys say I'm showing no further questions. Thank you.
Okay. Thanks, so much appreciate surveys Anderson, we'll talk to you next quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.