Q1 2020 Earnings Call
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Good day and welcome to the ESCO Technologies Q1, 2020 earnings Conference call today's call is being recorded.
With us today, our Vic Richey, Chairman and CEO Grandmaster, Vice President and CFO.
And now to present the forward looking statement I would like to turn the call over to cake laundry director of Investor Relations. Please go ahead.
Thank you.
It's made during this call regarding the amount and timing of 2020 and beyond revenues TPS adjusted EPS EBITDA adjusted EBITDA growth profitability, our large he shareholder value future block five orders success in completing additional acquisitions and other statements, which are not strictly historical are forward looking statements.
Within the meaning of the Safe Harbor provisions 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 existed in the company's operations and business environment, including but not limited to the respective referenced in the company's press release issued.
Today, which will be included as an exhibit to the Companys 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 Companys operating results. A reconciliation of these measure to the most comparable GAAP measures can be found in the press release issued today and fund in the company's website at Www Dot ESCO technologies Dotcom under the link Investor Relations now kind of call over to Vic Grace.
Before I hand, it over to Gary to discuss the first quarter financials I'll make a few comments clearly the highlight of Q1 was completed in the sell the packaging business.
Even $191 million and cash before the quarter end.
Jerry will discuss the gain from the sale as well as other accounting matters related to this is Chad discontinued operations noted and financials as you saw in the release, we renamed our filtration fluid flow group Aerospace and defense.
Sure referred to as a in the going forward.
Following the Globe acquisition last July and in conjunction with the divestiture of the packaging segment, we decided to make this change.
Aerospace and defense better reflects the products in markets and customers in this segment.
Additionally, we believe this is a more direct comparison to some of our peers in these markets. We've not changed the group's legal fees reporting structure or management relationships. What was previously presented filtration.
Moving on to our operations and we're pleased with our start to the year as we delivered a solid first quarter by beating expectations on sales adjusted EBITDA and adjusted EPS, which beat the top of our guidance by three cents.
We did better than planned in a in the end test as both businesses delivered higher sales volumes, along with the favorable sales mix, which drove increased profits.
You asked you sales were impacted by the monthly timing of orders, which move some of the expected Q1 sales ended Q2, you guys to orders in December were strong.
And we expect this trend to continue which supports our outlook for the balance of the year.
I think it's safe to assume that disruption and inefficiencies surrounded the Q1 move to Dobles New headquarters building also contributed to the shortfall.
Within a indeed the summary market continues its solid outlook and we expect to show meaningful growth over the balance of the year.
A significant amount of walked five orders have been received as reflected in our Q1 orders with more expected over the balance of the year.
Vacco Westland and global benefit from these orders as of Virginia class continues to expand its build rate in our content on these boats continues to expand.
We anticipate orders for the quarter Reclass subs in the back half of the year on the headwind side, we called out the impact is 737, Max production issue and how it impacts us in total.
Certainly that good news given our role given our relatively modest dollar content on that platform. We can absorb the earnings impact with other well defined opportunities within a Andy.
Our outlook for the year remains the same as communicated November it was good start here a little stronger than expected is that takes a little pressure off of our second half ramp up.
On M&A front, we continue to evaluate several actionable deals and there's a lot of activity underway in this area.
The news of the packaging sell also brought US few new opportunities for investment bankers and we continue to pursue ideas that we've identified through our operating units. We continue to look for complimentary businesses to acquire in the aerospace and defense and us the U.S.G. segments.
Segment, where we can add to our global distribution network.
Additionally, we'll look to expand our U.S.G. solutions offerings into adjacent markets through a combination of internally developed products and software supplemented with acquisitions. Our board is very supportive of our M&A strategy and our current balance sheet provides us with plenty of liquidity to allowed us to add to our.
Existing portfolio.
In summary, we delivered a strong first quarter the balance of the year looks solid we're working hard for some M&A upside I'll now turn it over here.
Thanks, Nick.
Briefly mentioned you accounting for discontinued operations as noted in the financial statements related to the packaging sale, where we recognized a 100 million dollar pretax gain on sale and we receive gross proceeds of approximately $191 million at closing.
We expect to pay approximately $26 million in cash taxes on the gain plus some other fees and expenses related to the transaction, thereby netting us approximately $161 $161 million. After all this.
Since the Q1 results in both periods presented were impacted by several unique non operating items noted in the release such as the gain on the sale the packaging business. This year the gain on the Doble building sale last year, coupled with specific identified cost reduction actions that we've undertaken I'll focus my prepared remarks on the.
Adjusted numbers as these in more relevant measures of our operating performance.
Also using adjusted numbers is consistent with previous financial statements presentations and related management commentary.
As noted in the release, we reported Q1 adjusted EPS of 43 cents, a share which as Victor mentioned was three cents above the top of our guidance range of 35 to 40 cents a share and was also above the analyst consensus consensus estimate of 40 cents.
Comparing Q1 of 22 Q1 of last year on adjusted basis, we increased our sales 5% to $172 million led by Andy with glow contributing nicely to that growth together with Pts.
Chris There and vacco.
We also increased our adjusted EBITDA by 5% led by test and Andy which increased 30% and 18% respectively.
With the proceeds from the divestiture, we paid down our net debt to $53 million and lowered our leverage ratio to point 92.
This level of debt is well below where we believe in ideal capital structure should be and we're working hard to utilize our low cost liquidity to grow our portfolio through additional M&A.
Our cash flow from operating activities was below expectations, primarily due to the timing of several large cash receipts on a few of our major contracts, where the cash came in shortly after quarter end.
We continue to focus on this area and I remain comfortable.
That our current initiatives are showing progress, which will be reflected in enhanced cash conversion ratio for the year in total.
Since the earnings release lays out other key points and highlights for the quarter I'll dispense with repeating them here. So we can get to the Q and eight so from my final comment on the quarter I remain confident with our fiscal year outlook and our ability to generate cash flow from operating activities to fund our future.
Given our significant liquidity from the divestiture along with our recently expanded credit facility, we are well positioned to effectively execute our M&A strategy and support further growth.
All of this while remaining focused on ROI see an increasing shareholder value so with that I'll turn it over the operator to begin the Q and a.
Thank you, ladies and gentlemen to ask the question you wouldn't if you press Star then one on your telephone.
To withdraw your question press the pound cake.
Again that stall wanted to ask a question.
Sam Bob while we compile the Q and a roster.
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Our first question comes from the line of Jon Tanwanteng with CJS Securities. Your line is open.
Good afternoon, gentlemen, thank you for taking my questions and nice quarter.
Thank you.
Just wanted to start with the quarter itself and that kind of the outlook that you've given for Q2.
Both of which were above consensus you didn't raise your annual guidance. Just wondering if there was any shift from the second after the first half in terms of profit fill expectations or if you're just being conservative relative to the full year.
Yes, I'll start out with the on the numbers John and OLED is his overview on on the thinking kind of in the in the aggregate.
I think.
What we started out with a little better expectations. In Q1, we think we're going to have that same kind of treatment across the balance of year, but sitting here. This early in only three months. After we put the years guidance that we just felt it'd be a little premature we didn't want to get out ahead of ourselves for the year, but as we alluded to.
And we pick out the one.
Pretty decent size headwind of of the Max that we can overcome that with some other things I think just the balance of the portfolio our risk in total is balanced but with the 10 months left in the year I just think it's more prudent to kind of hold our position until we get.
Till we get further through the year, So thats my view of the numbers.
Barry you.
I am very consistent with that and again.
We have our best guess it what's going to happen.
Borrowing shades conveyed a fluid situation. So we are there.
Always as potential for additional downside there and so I just think it's prudent to kind of stay were at at this point, but certainly we're working.
To improve on that.
Okay, great. Thank Ken just remind us what the.
The content per plane is on the Max and if you have any other risks that you see in front of you whether its client of ours or anything that that might be on horizon or radar.
On the Max on the OEM side, obviously, it's not in in the aftermarket yet it's about $15000 per plane and.
What we feel comfortable about is obviously, they're not producing and putting those into service. So what that really means for the airlines that are flying other 737.
They are trying to cover their routes with.
Stretching the planes a little longer so what we're seeing is a little bit of uptick in the aftermarket, but not by the by the airlines not having the fleet fully staffed with the Mac. So we are seeing a little bit of benefit but 15000 per plane is why we called it modest.
As the revenue contribution and that's why I think regardless of the they can't go below zero. So it's really as big said, it's a time or duration thing and so I think we've captured in our risk profile, we have enough other identifiable opportunities and I don't know as any other significant risk if we did we'd be talking.
Bottom I did talk to our.
However, test segment today, and asking specific with Thats krona buyers and he said you know as long as it gets resolved in the next 60 days or so it isn't they go be any impact.
Gets much beyond that issue really have as installation as we do installations in different parts of China and so at some point for drags out for ever going to have some impact I don't think is anything major that's something we're going to track very closely.
Okay, great. Thanks for the color.
I wanted to talk a little bit more about globe.
You mentioned, the increasing content and your somebody's can you talk about what's your full content as per Virginia and per Colombia, and how many of those are expected each year for the next for the foreseeable future versus what is actually in your backlog.
Yes, I'll go with the content side of that question, John I'll give the overview of the build rates and all that sort of thing so on the on the Columbia class today and this is across the platforms. So its global obviously, it's also Westland excuse me in Banco So it's right around $29 million per per boat on Virginia and then.
Once the Columbia comes online, which current thinking on that is we stood should start getting orders in the back half of the year with some advanced deliveries in 2021, because thats when they're supposed to start whole construction on that and it's a little bit north of 41, the Columbia class and just as a reminder, they're going to do one of those every other.
Year so.
Calibrated as if you can use round numbers 30 on Virginia class and 40 on Colombia.
Yes, Theres any class the current plan as two year going forward, there's some talk of.
Increased to three but.
We certainly don't have it in our forecast and it's yet to be stated was going to happen in a couple of years go start to retrofit of so many existing.
Summaries are out there and again, we don't have that our forecast yet, but thats something we certainly think we're well positioned when they start that process to participate in.
Okay, great that just on the backlog question do you have a specific number of both in your backlog.
The answer is yes, but I don't have that readily available I know in the backlog. They haven't fully funded black five is nine boats with an option for a 10.
In the orders that we received so the way we treated kind of to be conservative is you get the contract for the full allotment, but we don't put them into backlog until we actually get the purchase order that bodes specific and so the the backlog today reflects the boat that we have peos for and normally.
But they do as a release the peos to us in a two or three both configuration. So big conceptual backlog relative to contract value is substantially larger and again our prudence in doing this is just booking the orders specific to appeal release, So I would say.
And again, let me just point on one more thing it's not just block five and we're still delivering product for block for okay. So there are several more boats in block for that are going to hit the water over the next few years. So.
The beauty of our positioning is we're well out ahead.
Our stuff is getting delivered to the to the boat builders electric boat in Huntington Ingalls and those folks well in advance of the both hitting the water. So you'll see the backlog coming in but what we're really shipping a lot of the stuff. What we're shipping is still for boats number not a block for.
Got it thanks with color.
I believe you've been tracking high number of M&A opportunities.
Can you give us an update on the number and size of targets out of their valuations I kind of relative closest to.
Transaction happening.
Yes, we probably are not probably a more track at about eight different potential acquisitions down there in various stages them everything from.
Pretty far down the road to started to take a look at some things.
It's something we just moved their board meeting last week or just a lot of time reviewing those with the board because obviously.
Operator, big opportunity for us going forward and it seems like more and more things are popping up so we feel really good about the pipelines out there now.
We are.
Being prudent as always on these things, but we do think we'll build to have some success this year.
Okay, Great and then.
Gary just one last question I think Youve completed the move for the global headquarters. Some other restructuring programs just remind us how much you're expecting to save on a year over year basis as a result.
Yes, I see we're trading dollars you, obviously when you own the building and that sort of thing you have a cost but some of it is depreciation on the facility versus now it's cash rent, but I think the net savings will be.
Upper hundreds of thousands maybe just a hair less than a million just on the facility aspect of it and then the intangible savings that come along which really it's too early to quantify just the efficiency of having everyone in one building and having a more state of the art building that has.
The work flow is a lot more efficient and that sort of thing plus the next intangibles retention of people plus hiring people those intangible values I think will benefit us in the future. We can assign a dollar value to that other than to say they are greater than zero.
Okay got it up to fits in.
Great appreciate the questions.
Correct.
Thank you.
Next question comes on the line of Robert Mccarthy Stephens. Your line is open.
Good afternoon, everyone. How are you today.
Right.
I guess first the U.S.G. could you just talk a little bit about the timing and I guess, presumably.
Revenues and do you expect kind of that the head into Q and that informs kind of the Twoq you guide or how do we think about that and some of the the volume and profitable and profitability shortfall and how that plays out.
Yes, obviously as we look at the cadence of the order in the conversion of that into revenue some of the stuff comes in and ships the same week, but for the most part when we get an order. It's it's in the 30 to 60 day kind of delivery window, unless it's a large project like an arms or.
Double prime or something like that and that's why the comment in VIX remarks about December being strong in the order profile gives us confidence that the Q2 revenue has a step function up from where we were here in the and again the disruption of moving you physically doing things back and forth. So theres little distraction aspect. So those two.
Things you set aside I think we have a pretty good profile for the year and again go back to the November guidance. When we talked about the relationship of this year versus last year on a quarterly profile, it's more steeply backend loaded that more closely resembles fiscal 18, if you remember where we hit a.
Pretty predominant greater than 60% relationship a back half as the front half, it's driven by the boats.
The Virginia class stuff, we just talked about so across Andy we got strength, there, but then dobles really strong in the back half of the year because there are several large projects that come across the.
The.
The piano, there and then the test business just.
We tried forever to try to figure out where the fourth quarters, what it always is but it is again this year.
Dominant player. So thats why the cadence of the profile is the way it is and our confidence level is supported us G. By the orders we booked so far yeah, I'd say just one more comment are you at GE specific because I think that's what we're focused on as we just had we had a soft month in November.
The doble products of years, they've turned pretty quick and so if you have a soft month it.
Yes.
Turning to an issue fairly quickly but.
But again, we had strong month in December and.
Solve month the January so things can be front I mean, it's hard to predict this exact timing.
With that business.
That makes sense in terms of the re segmentation or renaming of the segment aerospace and defense just remind blaming the room, namely me what is your relative mix now between.
Defense era, I guess commercial aerospace submarine defense aerospace rather terms of your relative mix for the overall segment do you have any kind of breakdown of that.
Certainly the the.
The Navy business knows about $100 million sales in specific and there was really a big driver on on this because it's kind of hard to talk about filtration and when we were not really sold or anything on those products.
If you look at broader sense.
You get some specific numbers are yet to about 35%.
That's correct.
Is it is there is military so what like 35% of that segment.
Terry So that's that's enable as well as some products. It BTI crissair that could also go on defense side.
Everything else is there based commercial aerospace commercial aerospace Okay. That's that's great and then do you think you are in terms of your your opportunity set in terms of those eight acquisitions are.
Are you kind of getting a word out or maybe this is this is.
The naive and my point from my standpoint, but.
Are you being started to see being seen as a strategic require certain size of choice and the submarine space.
Certainly I think we've made good top of a lot of People's list you know the certain size I would say so we've got more.
Attention from a couple of those folks and maybe would have in the past motto is just getting then with right.
Investment bank, so when things are going to come to market, whether it be on the navy side or the aerospace side to make sure that we get into the.
In the Q on those I think we've been more successful in cultivating those relationships to make sure that we do.
Fair enough and then I guess in terms of level setting your your from the cash proceeds that you have in the state of your balance sheet.
Your comfort level I mean, what would be your out are bound for M&A appetite in the aggregate how much how many deals could you reasonably do maybe over the next year or two without really issuing equity or taking making up at the company or or.
Have a debt laden type scenario.
I'll, let Gary talked about specific numbers, because we just went through this exercise again with our board and I'll talk little bit more about.
I mean, the numbers and those kind of things because it really are two different things and so.
Not to get into a math exercise, but the beauty of the the way the credit facility works is when you buy something you get to pull along their trailing EBITDA as part of the leverage ratio. So.
To help level set this with the board and again, we have no expectations to complete all eight of these things that we're looking at but if you just pick a random sample of those three and pick a large want to medium and small hypothetically, let's say, we spent $500 million to $600 million, we would pull along something in the neighborhood of six.
The million of EBITDA with that 10, multiple that would bring us up to a leverage ratio of about 2.6.
And Thats Lee that is not uncomfortable right. Our capacity can go up three and a half in and we get a holiday for a year should we find something extraordinary but the beauty of the math is for us to get ourselves north of three we would have to pay a pretty outsized multiples. So if you just kind of think of our history as we kind.
On a page eight to 10 times and if we did a small medium and large where we spent 500 million.
Right in the sweet spot of a capital structure that make sense for lever two and a half 2.6 times system and that would be over 12 month period right.
Yes.
Point in time hypothetical if youve three of them at the same time and.
And then obviously you would de lever off the cash flow those operations.
So as far as where we could do would do or different days at big it really depend so much on what businesses you buy as far as what you could do so if you're buying larger business with the good management team that you.
Our comfortably can run that would that a tremendous amount of oversight, we get them integrated and and Thats. One thing for bond smaller businesses that you really need to put systems in place, sometimes that can be more complicated than than a larger business. So.
It really depends M&A that answer, but its effect on what the businesses, where it is what size. It is what state its and.
We'd ever by Fixer Uppers, we always say, so we're not going about business, where we've got to drive the team and their end and go run it but some businesses are going to be easier to integrate and others are really depends on what those businesses are and where there and we're very fortunate that we've got.
People that can help us with integration that we've talked before we used to send the finance person in.
To help with the integration exists usually the most difficult part.
And then with the sell the taxi business, we've got a more senior person. They can help in that regard as well so I feel comfortable that we could integrate several businesses.
Same exact but probably the same time or very close to each other so it's really.
Depend on what business, we had to be successful moving forward with and Rob Let me add one more thing just to the math that you might need for your modeling again. This is theoretical an example that agave if were to spend 500 million or so.
With that we would be adding about $175 million of revenue if again with multiples again. This is all theoretical math right now right of course, no thats helpful.
Yes, and then just again I want to point, everyone to the focus within the U.S.G. and Andy those individual contribution margins are greater than some so what that would mean as if we're targeting those areas that would inherently raise the consolidated operating margins by buying companies that are at.
More consistent with our Andy multiple our handy margins in our U.S.G. mall margins as well so as you care that across your model that has a nice uplift to it on an EBITDA based EBIT and EBITDA basis.
Not to go back to the backlog Vogel back to the backlog of M&A.
Would you say that it's pretty level, we set between aerospace defense opportunities and utility opportunities or is it for skew to where the opportunity set as.
It's always a point in time and so the point in time today, there are more opportunities of utilities.
Interesting, Okay, and then in terms of if you'll indulge me for a couple of more in terms of.
OPTEMPO at association with maybe a conflict with Iran or a limited one can you just remind us from history and maybe what your new portfolio would be what what how stimulative that could be to your aftermarket within within filtration.
Yes, I don't think it would be a real near term issue there I mean, obviously the.
The outside of the Navy, which wouldn't be impacted at all.
As the Navy, you're really talking about replacement parts for aircraft and so it might accelerated some.
You, probably that something you'd see six months from that point, rather than the next quarter.
Right right and then last question.
Could you talk a little bit about where you are in terms of higher leader journey around cash and cash conversion, particularly with this.
Divestiture, and and kind of level setting for what we should be thinking about cash conversion going forward because the portfolio has changed a bit with the with the sale technical packaging and and some of these some of these M&A opportunities, how you're thinking about kind of free cash flow generation conversion going forward.
It certainly will improve and again this isn't disparaging to the packaging business, but it inherently had a lower cash conversion percentage than than the whole. So it will will move favorably just by the absence of that so thats. One second is the initiatives that we've undertaken have have very finite goals.
In very tangible processes that were implementing across again, it's not a digital thing it just overnight, we flip the switch and off it goes because this goes from.
From a sales cycle when the salespeople we have to write contracts better we have to get better terms and they're all the way to.
Paying attention to collections and payments, it's everything in between so you know I never want to say, we can't get to 100%, but it will be a challenge to get to 100, because within the test business we have.
Processes into contracts, where you get milestones along the way, where you might be recognizing revenue and profit faster than you're collecting cash against milestone so that that thats why reference it on a yearly basis, not a quarterly basis, because it is going to have peaks and valleys in the quarters and then kind of the same thing on the Virginia class, you'll get a big.
Cash down payment as we did in Q4, Ed Ed Bacal.
Last year, and then you burn that off when we're spending the money against that in.
In Q1 in Q2 and so.
You are going to have the earnings there for the percentage of completion stuff, but you're not going at the cash because you've already received the cash night to an outflow. So our goal has a lot of words around to say our goal is to get us into the.
Mid Ninetys I think last year, Kate we rent.
Our ATM and let's say 87, 88% and our goal is to get to 95% and I think we have a clear path to that but it's not going to be by Q2, it's a process that I think.
As we get to the end of fiscal 20 would be will be in a lot better shape.
21 will be an even better shape and their conversion and remind me of this one last housekeeping item just how much amortization or should we expect for full year 2020.
On the mill circuit.
Okay.
42 million or be a good run number okay great.
Isn't that really appreciate the time.
Hey, Rob just be clear thats, depreciation and amortization Oh that is okay, all right well.
Well the lodwrick at double suppress own figured out and then.
Yes, Mark.
All right.
Thank you.
As a reminder, ladies and gentlemen.
Asked the question.
Okay doesn't look like we have any further questions. So thank everybody for joining us look for talking to you in the next call. Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect everyone have a wonderful day.
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Good day and welcome to the Echo technologies to 120 20 earnings Conference call today's call is bad recorded.
With us today, our big Richey, Chairman and CEO.
Most vice President and CFO.
And now represent the forward looking statement I would like to turn the call overtake Laurie director.
If investor Relations. Please go ahead.
Thank you.
That's made during this call regarding the amounts or timing of 20 to 20 and beyond revenue ASCII P.S. adjusted he P.S. EBITDA adjusted EBITDA growth profitability ROI, she shareholder value future block five orders successfully completing additional acquisitions and other statements, which are not strictly to historical are forward looking statement.
Within the meaning of the safe Harbor provisions with the federal security laws.
Statements are based on current expectations and assumptions actual results may differ materially from those projected in the forward looking statement.
Due to risks and uncertainties that exist in the company's operation from business environment, including but not London skews the respective referencing the company's press release issued today, which will be included as an exhibit to the companys form 8-K to be filed we undertake no duty to update or revise any forward looking statements whether as a result of New York may actually future events or otherwise.
In addition, during this call the company May discuss some non-GAAP financial measures and describing the Companys operating results. A reconciliation of these measures are the most comparable GAAP measures can be found in the press release issued today and found in the company's website at Www Dot after technologies Dot com under the link Investor Relations now I'll turn the call over to Vic.
Okay before I hand, it over to Gary to discuss the first quarter financials I'll make a few comments clearly the highlight of Q1 was completed in the sell the packaging business and receiving $191 million and cash before the quarter at.
Jerry will discuss the gain from the sale as well as other county matters related to this is Chad discontinued operations, no doubt and financials and you saw in the release, we renamed our filtration fluid flow group Aerospace and defense, which we refer to as a and b going forward.
Well I wanted to go acquisition last July and in conjunction with the divestiture packaging segment, we decided to make this change.
Aerospace and defense better reflects the products and markets and customers in the segment.
Additionally, we believe this is a more direct comparison to some of our peers in these markets. We've not changed the group's legal and sees reporting structure or management relationships. What was previously presented as filtration.
Moving on to our operations, we're pleased with our start to the year as we delivered a solid first quarter that'd be the expectation is art sales adjusted EBITDA and adjusted TPS, which beat the top of our guys right Theresa.
We did better than planned in a in the end test as both businesses delivered higher sales volumes, along with the favorable sales mix, which drove increased profits.
You asked you sales were impacted by the monthly timing of orders, which moved some of the expected Q1 sales every Q2.
Yes, you order since December were strong and we expect this trend to continue which supports your outlook for the balance of the year.
I think it's safe to assume that the disruption and inefficiencies drought surrounded the Q1 move the Doe will skew headquarters building also contributed to the shortfall.
Within a indeed the summary market continues its solid outlook and we expect to show meaningful growth over the balance of the year.
A significant amount block five orders have been received as reflected that you weren't orders with more expected over the balance of the year.
[noise] Vacco, Westland and global benefit from these orders as if it Virginia class continues to expand its build rate an archived salaries boats continues to expand.
We anticipate orders for the Carvey class subs in the back half the year on the headwind side, we called out the impact of 737, Max production issue and how it impacts us in total.
Certainly that good news given our role given our relatively modest dollar cocktail that platform, we can absorb the earnings impact what other well defined opportunities within a and b.
Our outlook for the year remains the same as communicated November it was good start here a little stronger than expected is that takes a little pressure off of our second half ramped up.
On the M&A front, we continue to evaluate several actionable deals and there's a lot of activity underway in this area.
The news to the packaging sell also brought US few new opportunities for investment bankers and we continue to pursue ideas that we've identified through our operating units. We continue to look for complimentary businesses to acquire in the aerospace and defense and you actually you SG segments.
Segment, where we can add to our global distribution network.
Additionally, we'll look to expand our U.S.G. solutions offerings into adjacent markets through a combination of internally developed products and software supplemented with acquisitions. Our board has very supportive of our M&A strategy and our current balance sheet provides us with plenty of liquidity to allowed us to add to our.
Existing portfolio.
In summary, we delivered a strong first quarter.
The balance of the year looks solid we're working hard for some M&A upside I'll now turn it over here.
Thanks, Rick.
Briefly mentioned the accounting for discontinued operations as noted in the financial statements related to the packaging sale, where we recognized a 100 million dollar pretax gain on sale and we received gross proceeds of approximately $191 million at closing, we expect to pay approximately $26 million and.
Cash taxes on the gain plus some other fees and expenses related to the transaction, thereby netting us approximately $161 a $161 million after all this.
Since the Q1 results in both periods presented were impacted by several unique non operating items noted in the release such as the gain on the sale the packaging business. This year the gain on the Doble building sale last year.
Coupled with specific identified cost reduction actions that we've undertaken I'll focus my prepared remarks on the adjusted numbers as these are more relevant measures of our operating performance.
Also using adjusted numbers is consistent with our previous financial statement presentations and related management commentary.
As noted in the release, we reported Q1 adjusted EPS of 43 cents, a share which as Vic mentioned was three cents above the top of our guidance range of 35 to 40 cents a share and has also been the analyst consensus consensus estimate of foreign subs.
Comparing Q1 of 22 Q1 of last year on adjusted basis, we increased our sales 5% to $172 million led by Andy with glow contributing nicely to that growth together with PGTI Crissair and vacco.
We also increased our adjusted EBITDA by 5% led by test and Andy which increased 30% and 18% respectively.
With the proceeds from the divestiture, we paid down our net debt to $53 million and lowered our leverage ratio to point 92.
This level of debt is well below where we believe in ideal capital structure should be and we're working hard to utilize our low cost liquidity to grow our portfolio through additional M&A.
Our cash flow from operating activities was below expectations, primarily due to the timing of several large cash receipts on a few of our major contracts, where the cash came in shortly after quarter end.
We continue to focus on this area and I remain comfortable.
At our current initiatives are showing progress, which will be reflected in enhanced cash conversion ratio for the year in total.
Since the earnings release lays out other key points and highlights for the quarter I'll dispense with repeating them here. So we can get to the today. So from my final comment on the quarter I remain confident with our fiscal year outlook in our ability to generate cash flow from operating activities to fund our future.
Given our significant liquidity from the divestiture along with our recently expanded credit facility, we're well positioned to effectively execute our M&A strategy and support further broke.
All of this while remaining focused on ROI see an increasing shareholder value so with that I'll turn it over the operator to begin the Q.
Thank you, ladies and gentlemen to ask the question you wouldn't if you press Star then one on your telephone.
To withdraw your question press the pound cake.
Again, it's still wanting to ask the question.
Sam Bob while we compile the Q and a roster.
[music].
Our first question comes from a lot of Jon Tanwanteng with CJS Securities.
Line is open.
Good afternoon, gentlemen, thank you for taking my questions and nice quarter.
Thank you.
Just wanted to start with the quarter itself and that kind of the outlook that you've given for Q2.
Both of which were up on the consensus you didn't raise your annual guidance. Just wondering if there was any shift from the second after the first half in terms of profit expectations or if you're just being conservative relative to the full year.
Yes, I'll start out with the on the numbers, John and I'll, let.
His overview on the thinking kind of in.
In the aggregate.
I think.
What we started out with a little better expectations. In Q1, we think we're going to have that same kind of treatment across the balance of year, but.
Sitting here this early and only three months after we put the years guidance. We just felt it'd be a little premature we didn't want to get out ahead of ourselves.
The year, but as we alluded to.
We pick out the one.
Pretty decent size headwind, though of the Max that we can overcome that with some other things I think just the balance of the portfolio our risk in total is balance but with.
10 months left in the year I, just think it's more prudent to kind of hold our position until we get.
So we get further through the year, So thats my view of the numbers.
Very good.
Sam very consistent with that and again.
We have our best guess, it what's going to happen with Boeing shades conveyed a fluid situation. So we are there.
Always as potential for additional downside there and so I just think it's pretty big than they were at this point, but certainly we're working.
Group on that.
Okay, great. Thank you and just remind us what the.
The content per plane is on the Max and if you have any other risks that you see in front of you whether its corona virus or anything that that might be on horizon or radar.
Yes on the Max on the OEM side, obviously, it's not in the in the aftermarket yet it's about $15000 per plane and.
What we feel comfortable about is obviously, you're not producing and putting those into service. So what that really means for the airlines that are flying other 737, they're trying to cover their routes with.
Stretching the planes a little longer so what we're seeing is a little bit of uptick in the aftermarket, but not by the airlines not having the fleet and fully staffed with the Max. So we are seem a little bit of benefit but 15000 per plane is why we called it modest.
Is the revenue contribution and Thats why I think regardless of the they can't go below zero. So it's really as big said, it's a time or duration thing and so I think we've captured in our risk profile, we have enough other identifiable opportunities, yes, I don't know as any other significant risk if we get we'd be talking.
The bottom I did talk to our.
However, test segment today, and asking specifics so that's kind of ours and he said you know as long as we gets resolved in the next 60 days or so it doesn't make a big any impact.
Gets much beyond that issue really have as installations as we do.
Relations a different parts of China, and so at some point drags out for ever get estimate impact I don't think is anything major this after we're going to track very closely.
Okay, great. Thanks for the color.
I wanted to talk a little bit more about globe.
Mentioned, the increasing content in your Siamese can you talk about what's your full content as per Virginia and per Colombia, and how many of those are expected each year for the next for the foreseeable future versus what is actually in your backlog.
Yes, I'll go with the content side of that question John I'll, Let me give the overview.
Alright, thats sort of thing so on the on the Columbia class today and this is across the platforms. So its global obviously, it's also Westland excuse me and backfill. So it's right around $29 million per per boat on Virginia, and then once the Columbia comes online, which current thinking on that is.
We stood should start getting orders in the back half the year with some advance deliveries in 2021, because that's when they're supposed to start whole construction on that and it's a little bit north of 41, the Columbia class and just as a reminder, they're going to do one of those every other year. So.
Calibrated as if you can use round numbers 30 on Virginia class and 40 on Colombia.
Theres any class the current plan as two year going forward, there's some talk of.
Increased to three EBITDA.
We certainly don't have it in our forecast and it's yet to be say listen to happen in a couple of years go started to retrofit of some existing.
Summaries that are out there and again, we don't have that our forecast yet, but thats something we certainly think we're well positioned when they started that process to participate in.
Okay great.
Just on the backlog question do do you have a specific number of both in your backlog.
The answer is yes, but I don't have that readily available I know in the backlog. They havent fully funded black five is nine boats with an option for a 10.
In the orders that we received so the way we treated tended to be conservative is you get the contract for the full allotment, we don't put them into backlog until we actually get to purchase order that's boats specific and so the the backlog today reflects the boats that we have peos for and normally.
They do as a release the peos to us in a two or three both configuration. So the conceptual backlog relative to contract value of substantially larger and again our prudence in doing this is just booking the orders specific to appeal release, So I would say.
And again, let me just point out one more thing it's not just block five am we're still delivering product for blocked for okay. So theres several more boats in block for that are going to hit the water over the next few years. So.
The beauty of our positioning is we're well out of ahead.
Our stuff is getting delivered to the to the boat builders electric boat in Huntington Ingalls and those folks well in advance of the build hitting the water. So you'll see the backlog coming in but what we're really shipping a lot of the stuff. What we're shipping is still for boats number not a block for.
Got it thanks with color.
I believe you've been tracking at high number of M&A opportunities.
Can you give us an update on the number in size of targets out of their valuations I kind of relative close to a transaction happening.
Yes, so we probably are not probably a more track at about a different and potential acquisitions down there in various stages I am everything from.
Pretty far down the road.
To start to take a look at some things.
It's something we just moved their board meeting last week as to why time reviewing those are the board because obviously.
Yes.
Big opportunity for us going forward and it seems like more and more things are popping up so we feel really good about the pipelines out there now.
We are.
Being prudent as always on these things, but we do think we'll build.
To have some success this year.
Okay, Great and then.
Gary just one last question I think Youve completed the move for the double headquarters. Some other restructuring programs just remind us how much you're expecting to save on a year over year basis as a result of.
Yes, I see you know we're trading dollars you, obviously when you own the building and that sort of thing you have a cost but some of it is depreciation on the facility versus now it's cash rent, but I think the net savings will be.
Upper hundreds of thousands maybe just a hair less than a million just on the facility aspect of it and then the intangible savings that come along which really it's too early to quantify just the efficiency of having everyone in one building and having a more state of the art building that has.
The work flow is a lot more efficient and that sort of thing plus the next intangibles retention of people plus hiring of people those intangible values I think will benefit us in the future. We can assign a dollar value to that other than to say they are greater than zero.
Okay got it have to fits and.
Great appreciate the questions.
Okay.
Thank you.
Our next question comes from a line of Robert Mccarthy Stephens. Your line is open.
Good afternoon, everyone. How are you today.
Right.
I guess first the U.S.G. could you just talk a little bit about the timing and I guess, presumably.
Of revenues and do you expect kind of that the head into Q and that that informs kind of the to guide or how do we think about that in some of the the volume and profitable and profitability shortfall and how that plays out.
Yes, obviously as we look at the cadence of the order in the conversion of that into revenue some of the stuff comes in and ships the same week, but for the most part when we get an order. It's it's in the 30 to 60 day kind of delivery window, unless it's a large project like an arms or.
Double prime or something like that and that's why the comment in VIX remarks about December being strong in the order profile gives us confidence that the Q2 revenue has a step function up from where we were here in and again the disruption of moving you physically doing things back and forth. So there is little distraction aspects. So those.
Two things you set aside I think we have a pretty good profile for the year and again if you go back to the November guidance. When we talked about the relationship of this year versus last year on a quarterly profile, it's more steeply backend loaded that more closely resembles fiscal 18, if you remember where we head.
Pretty predominant.
Greater than 60% relationship a back half as the front half, it's driven by the boats.
Virginia class stuff, we just talked about so across Andy we got strength, there, but then dobles really strong in the back half of the year because there are several large projects that come across the.
The.
The piano there and then the test business, just we tried forever to try to figure out where the fourth quarters. What it always is but it is again this year a dominant player so thats, where the cadence of the profile is the way it is and our confidence level is supported at U.S.G. by the orders we booked so far yes, I'd say just one more comment are you.
Specific to that and just what we're focused on as we just had we had a soft month in November.
And the doble pricing years, it turned pretty quick and so if you have a soft month it.
Yes.
Turning to that issue fairly quickly.
But again, we had strong month in December and.
Solve month in January so things can be found enemies, it's hard to predict what's the exact timing.
With that business.
That makes sense in terms of the re segmentation or renaming of the segment Aerospace and defense just remind you know blaming the room, namely me what is your relative mix now between.
Defense era, I guess commercial aerospace submarine defense aerospace rather terms of your relative mix for the overall segment do you have any kind of breakdown of that.
Certainly the the.
The Navy business knows about $100 million as sales.
And that was really a big driver on on this because it's kind of hard to talk about filtration and went over and I really see alternating on those products.
If you will get broader sense.
You get some specific numbers there yet about 35%.
That.
Is it is there is military so like 35% of that segment.
So.
Yes, that's the naval as well as some products. It PCIA crissair that that also go on defense side.
They also user base commercial aerospace commercial aerospace Okay. That's that's great and then do you think you are in terms of your your opportunity set in terms of as eight acquisitions Ari.
Are you kind of getting the word out or maybe this is this.
The naive my point from my standpoint, but.
Are you being started to see being seen as a strategic require certain size of choice and the submarine space.
Certainly I think we made at the top of alive People's list, you know the certain size I would say.
So we've got more.
Attention from a couple of those folks maybe would have in the past might I was just getting then with right.
Investment banks, so when things are going to come to the market whether it be on the navy side or the aerospace side to make sure that did we get into the.
In the Q on those I think we've been more successful in cultivating those relationships to make sure that we do.
Fair enough and then I guess in terms of level setting your your from the cash proceeds that you have in the state of your balance sheet.
Your comfort level I mean, what would be your out are bound for M&A appetite in the aggregate how much how many deals could you reasonably do maybe over the next year or two without really.
During equity or taking.
Making up at the company or or.
Of debt laden type scenario.
Yes.
Gary talked about specific numbers because we just go through this exercise again with our board and I'll talk little bit more about.
No timing the numbers in those kind of things there really are two different things and so.
Not to get into a math exercise, but the beauty of the way the credit facility works is when you buy some can you get to pull along their trailing EBITDA as part of the leverage ratio. So.
To help level set this with the board and again, we have no expectations to complete all eight of these things that we're looking at but if you just pick a random sample of those three and pick a large want to medium and small hypothetically, let's say, we spent 500 $600 million, we pull along something in the neighborhood of six.
The million of EBITDA with a 10 multiple that would bring us up to a leverage ratio of about 2.6.
And that's really that is not uncomfortable right. Our capacity can go up three and a half and then we get a holiday for a year should we find something extraordinary but the beauty of the math is for us to get ourselves north of three we would have to pay a pretty outsized multiples. So if you just kind of think of our history as we.
On a page eight to 10 times and if we did a small medium and large where we spent 500 million.
Right in the sweet spot of a capital structure that makes sense for lever two and half 2.6 times system and that would be over 12 month period right.
Yes.
Point in time hypothetical if you three of them at the same time then right.
And then obviously you would de lever off the cash flow those operations right. So as far as what we could do would do or different days at big It really depends so much on what businesses you buy as far as what you could do so if you're buying larger business looks good management team that.
Our comfortably can run that would that a tremendous amount of oversight, we get them integrated and and that's one of things through by on smaller businesses that you really need to put systems in place sometimes that can be more complicated than.
In a larger business so.
It really depends M&A that answer bid bids in fact on what the businesses, where it is what size it is what states and.
We never bought Fixer uppers, we always say, so we're not going about business, where we've got to drive the team in there and go run it but some businesses are going to be easier to integrate and others are really depends on what those businesses are and where there and we're very fortunate that we've got.
People that can help us with integration that we've talked before we use the Senate finance person then.
To help with the integration issues with the most difficult part and then with what to sell the packaging business. We've got a more senior person. They can help in that regard as well so I feel comfortable that we could integrate several businesses.
Maybe that same exact sounded probably the same time or very close to each other so it's really going to depend on what business. We had to be successful moving forward with and Rob Let me add one more thing just to the math that you might need for your modeling again. This is theoretical an example that I gave if were to spend 500 million.
And are so with that we would be adding about 175 million a revenue if again with multiple again. This is all theoretical math right now right of course now that's helpful and.
And then just again I want to point, everyone to the focus within the U.S.G. and Andy those individual contribution margins are greater than that some so what that would mean as if we're targeting those areas that would inherently raise the consolidated operating margins by buying companies.
Yep.
More consistent with our Andy multiple our handy margins and our U.S.G. mall margins as well so as you care that across your model. It has a nice uplift to it on an EBITDA based EBIT and EBITDA basis.
Not to go back to the backlog Vogel back to the backlog and of M&A.
Would you say that it's pretty level lease that between aerospace defense opportunities and utility opportunities or is there a skew to where the opportunity set us.
Well, it's always a point in time and so the point in time today, there are more opportunities of utilities.
Interesting, Okay, and then in terms of if you'll indulge me for a couple of more in terms of.
Op tempo in association with maybe a conflict with Iran or a limited one can you just remind us from history and maybe what your new portfolio would be what what how stimulative that could be to your aftermarket within the pit infiltration.
Yes, I don't think it would be a real near term issue there I mean, obviously the.
The outside of the Navy, which wouldn't be impacted at all.
As the Navy, you're really talking about replacement parts for aircraft and so it might accelerated some.
You, probably that something you'd see six months from that point, rather than the next quarter.
Right right and then last question.
Could you talk a little bit about where you are in terms of higher leader journey around cash and cash conversion, particularly with this.
Divestiture, and and kind of level setting for what we should be thinking about cash conversion going forward because the portfolio has changed a bit with the with the sale technical packaging and and some of these some of these M&A opportunities, how you're thinking about kind of free cash flow generation, then conversion going forward.
It certainly will improve and again this isn't disparaging to the packaging business, but it inherently had.
Lower cash conversion percentage than than the whole. So it will will move favourably just by the absence of that so thats. One second is the initiatives that we've undertaken have have very finite goals and very tangible processes that were implementing across again, it's not a digital thing it just overnight we flip this.
Switching off it goes because this goes from.
From a sales cycle when the salespeople we have to write contracts better we have to get better terms and they're all the way to.
Paying attention to collections and payments, it's everything in between so.
I never want to say, we can't get to 100%, but it'll be a challenge to get to 100, because within the test business we have.
Processes in the contracts, where you get milestones along the way, where you might be recognizing revenue and profit faster than you're collecting cash against milestone so that that thats why reference it on a yearly basis, not a quarterly basis, because it is going to have peaks and valleys in the quarters and then kind of the same thing on the Virginia class, you'll get a big.
Cash down payment as we did in Q4, Ed at Vacco.
Last year, and then you burn that off when we're spending the money against that in.
In Q1 in Q2 and so.
You are going to have the earnings there for the percentage of completion stuff, but you're not going at the cash because you've already received the cash night to an outflow so our goal.
Lot of words around to say our goal is to get us into the.
Mid Ninetys I think last year, Kate we rent.
Upper Eightys, and let's say 87, 88% and our goal is to get to 95% and I think we have a clear path to that but it's not going to be by Q2, it's a process that I think.
As we get to the end of fiscal 20 would be will be in a lot better shape.
And by 21 will be an even better shape and their conversion and remind me. This one last housekeeping item just how much amortization or should we expect for full year 2020.
On their with me cycle.
Okay.
42 million or be a good number.
Okay, great wasn't that really appreciate the time.
Hey, Rob just be clear thats, depreciation and amortization Oh that is okay, all right well.
Well lodwrick at double suppress own figured out and then.
Yes, Mark.
All right.
Thank you.
As a reminder, ladies and gentlemen.
Asked the question.
Okay doesn't look like we have any further questions. So thank everybody for joining us look for talking to you in the next call. Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect everyone have a wonderful day.