Q2 2020 Earnings Call
[music].
Okay and welcome to the Q2 2020, ESCO Technologies Conference call.
Let's call it seems to be quite good with Citi, RV, Richey, Chairman and CEO Gory Monster, Vice President and yes I.
Now to present the forward looking statement I would like to turn the call over ticket lobby director of Investor Relations. Please go ahead.
Thank you.
The press released earlier today well be referenced during his prepared remarks on this call you can find a copy of our press release in our Safe Harbor statement regarding forward looking statements made during this call in the Investor Center of Escos website at Www Dot ESCO technologies Dotcom. During this call. The company May make forward looking statements, which are inherently subject to.
Risk and uncertainties, particularly given the unknown impact at the current coping 19 pandemic and the company's response to these evolving circumstances.
Actual results may differ materially from those projected forward looking statements and the company does not assume any duty to update forward looking statements.
They prefer to the company's press release for risk factors, which may impact any forward looking statements and for a reconciliation of any non-GAAP financial measures to their most comparable GAAP measures.
Now I'll turn the call over to Vic.
Thanks, Kate before I hand, it over to Jerry discussed and second quarter financials I'll make a few comments are current state of the company as well as our outlook for the future in light of the colder than they keep prices given how much the world's changed since our last earnings call three months ago. I think this important share through the details of how we're managing the business.
Through this.
Two times.
As a pandemic spread across the globe during February and March as economic impacts. It started again itself in some of our businesses. We did what we do best and took decisive action.
The actions, we've taken have a clear and precise focus which is protect our strong financial condition to secure the financial well being of the company and to support business continuity.
Measures will allow us to weather the storm or continue to support our long term strategy for profitable growth.
The past, we've shown our operational excellence and our ability to effectively manage cost to meet challenging market demands. The challenging time will be no different as we're actively addressing today's business pressures are using all the tools at our disposal.
The beauty of these current cost reduction initiatives has there been done and implemented with minimal cost to achieve thereby maintaining our flexibility to ramp up quickly should demand increases customers communities and countries reopening their economies bottom line, we're controlling what is within our control.
Focusing on the near term without losing our vision for the future.
I hope our comments today, we'll leave investors with three clear messages about ESCO going forward.
Our diverse portfolio of strong durable businesses, serving a wide range of Nondiscretionary end markets provides us with the strength and resilience continue to support our long term growth outlook.
Number two our strong balance sheet and significant financial liquidity will allow us to effectively manage through this crisis and maintain the companys financial health and wellbeing.
And finally, our deep and experienced leadership team has managed through and overcome many challenges in our 30 year history.
Confident it will emerge from this extraordinary time is an even stronger company.
Today, we have very clearly defined priorities first and foremost is a health and safety of our employees and their families. All of our commitment to meet the needs of our customers and suppliers. Both of these will help support the business today and secure our future during this uncertain.
As Google benefit from the fact that we have developed and leading positions in various niche markets with a set of unique and highly technical products and solutions, specifically designed to meet our customers' needs, which makes it difficult to be replaced by alternative sources are continuing investment in new products across all three.
These segments and our staff of highly skilled engineering talent will continue to create new opportunities provide value to our customers, which will drive our long term growth.
I firmly believe that ARPU usual rises our customers communities recover and spending and return to more normal levels.
Those are my comments before I hand, it over Gary as we faced the immediate and ensuing economic fall out of covered my team I believe we're well positioned to navigate the short term challenges in front of us I'm confident that our fundamental approach to operating our business are solid liquidity will be the cornerstone of our continued long term.
Success.
Employees, our most important asset and I want to say, thank you to our manufacturing employees leadership teams and staff around the world for their hard work and dedication during the trial.
As you have all demonstrated an extraordinary commitment to assess success invesco.
I'll turn it over here.
Thank you Vic.
I will briefly cover the Q2 in year to date operating results, which we've laid out in the press release and I'll share some comments on the guidance for the balance of the year and Vic will close out today's call with his current view related to our future and our end markets.
As Rick noted in his comments and liquidity position as of the utmost importance to importance to us during this challenging time and extremely pleased with where we stand today by having nearly $700 million of dry powder at our disposal between cash on hand, and available credit capacity, while carrying a mob.
This leverage ratio point 92.
I wish I could tell you that we saw this economic prices coming late in 2019, we extended our five year credit facility out to the year 2024, and we increased our debt capacity Pan additional $50 million at lower rates or when we sold a technical packaging business in January.
Got it over 190 million of gross proceeds to significantly improve our cash and debt positions that we didnt see accounting, we did not anticipate a pandemic as we executed both of these liquidity enhancements as these were part of our normal financial strategy.
I am sure glad we did these things and save bolstered our current financial position.
I will touch on a few Q2 highlights from the release.
Sales increased 5% led by our aerospace and defense segment growing $16 million or 20% driven by the additional glows submarine businesses.
Coupled with strong aerospace sales at Pts and Chris there and higher space sales at vacuum.
Q2, Andy sales came in approximately $3 million ahead of plan.
Test sales were relatively flat as a result, a three week shutdown of our Chinese manufacturing facility in February coupled with the timing delays as several installation slides were personal access was restricted due to coded.
Domestic chamber sales were relatively strong and on plan during the quarter, which nearly offset the installation site issues.
You SG sales were down due the timing of various project deliverables as several large utility customers, both domestic and international realign their short term maintenance and spending protocols to focus on uninterrupted power delivery during the global crisis.
Entered orders clearly, we're a bright spot in both Q2 and year to date, where we booked $466 million of new business and ended March was a record backlog of $565 million, which is up 25% from the started the year.
Our DSD business led by our participation on the block five contract for additional Virginia class submarines was the clear winner.
During Q2, we generated $34 million of cash from continuing operations with free cash flow of $23 million, which is 127% free cash flow conversion to net earnings during the quarter.
Q2, and year to date adjusted EBITDA improved from prior year with Q2, reflecting a 17.4% margin. Despite the lower contribution from us G, which is our highest margin segment.
And finally Q2 adjusted EPS was 68 cents a share down slightly from the 71 cents a share delivered in Q2 2019, which resulted from the noted cobot impacts.
The set the table for the balance of 2020 to covert 19 global pandemic as introduce considerable uncertainty around the extent and duration of today's economic circumstances.
Which makes it difficult to predict our future operations will be affected using our normal forecasting methodology is.
And as a result of this uncertainty we're withdrawing our previously issued full year guidance will now provide guidance for Q3 at this time.
To add some color to dicks comments on our cost savings actions. We are clearly focused on the right things and we're pulling on all reasonable cost levers to maintain and optimize our cash flow and liquidity.
Our focus is to prudently cut or deferred costs in the short term and focused on those costs, which do not had a negative outcome impacting our ability to meet increasing demand our growth in the future.
Now I'll turn it back over to Vic Thanks, Gary I'll offer some qualitative comments about our end markets I'll emphasize in today's situation is very fluid and there are many unknowns. So my comments today may change materially in the future.
Recently completed a thorough review of our individual businesses as part of our April planning meetings to better frame, our expectations of the impact of colder 19 across and within our various operating units.
Starting with the aerospace and defense segment, we expect to see a slowdown in commercial aerospace deliveries over the balance of the year. There is too early in this cycle in the terminal sales and EBIT impact from the current industry downturn as it relates to future build rates and airline passenger miles.
We're working with all of our aerospace customers to get a better picture of their demand requirements over the coming quarters, but the situation continues to evolve Daley our.
Our defense contract within aerospace and defense, both military aerospace and maybe products is expected to remain strong given its current backlog and the urgency of expected platform deliveries, our aerospace supply chain partners continue to deliver necessary parts and services to us and in some cases, where we see some weak.
Yes, we're working on bringing some of these products and services back in house, such as machine and other capabilities, we can replicate as a safety dead.
We also this see this weakness in aerospace market as an opportunity for ASCO, two we find suppliers, our competitors experiencing financial or operational stress. During this crisis, we maybe able to provide assistance value or partnering our through an acquisition at a reasonable price.
Our test business is expected to remain relatively solid over the balance of the year, given the strength of backlog and the strength of serve markets, including medical shielding and Fiveg and its related communications technologies.
We expect us to use customer spending softness and to continue for the next few months as they come out of their summer testing protocols returned to their more normal buying patterns. When some of the social distancing guidelines gets sorted out and utility service personnel can return to their normal sites as it routines, we expect our search.
This business to return to normal as it as it has been essentially on hold for the past few months.
Filters have may spend and I'm certain that spending will return in the near future as maintenance spending cannot be delayed indefinitely without recoup without creating significant risks to grid safety efficiency a regulatory compliance.
The critical need to maintain repair and improve the utilities aging infrastructure is not reduced by this pandemic crisis on a positive note really pleased with US these pipeline of new products and solutions, especially related to cyber security and related asset hardening solutions.
We introduced several new solutions at the Doble conference in March and from customers customer feedback both during and after the show these products are being enthusiastically received.
Moving on to M&A protocol that we had a couple of actionable opportunities while down a path to completion and we'll continue to evaluate several other and and we're continuing to evaluate several other actionable deals in the pipeline when the time just right. We'll we'll take action on these opportunities to grow our business as we have the pass.
Our board is supportive of our M&A strategy and our current balance sheet provides us with plenty of liquidity to allow us to add to our existing portfolio.
In summary, we delivered a strong first half of the year and for the balance of the our plan is to hunker down while dust settles work hard to control our cost while maintaining our critical workforce.
Developed contingency plans for multiple scenarios and look for opportunities to leverage our infrastructure, we will survive and prosper.
I'll be glad to answer your questions you have.
Excuse me, Chris Hendricks are you ready to make and questions.
Yes.
Thank you and that this thing I would like to remind everyone in order to last question CP craft, our followed by the number one on your commissions to fight against our one and your telephone bank.
First question comes from the line Robert Mccarthy with Stephens. Your line is now open.
Good afternoon, everyone. How are you today.
Hey, Rob.
So the first thing is to talk about in the quarter strong cash conversion. You cited can you talk about some of the dynamics of that and how we should be thinking about that going forward.
Yes, I think Rob as we've talked in the past to clear focus of ours to get that that percentage up from where it's been historically so some of the initiatives are taking hold and it really is kind of across the board focus on doing the things that are that easy things to do which making sure you're you're paying your.
Vendors and that sort of thing on a on the appropriate kind of time scale and also working the receivable side and collecting some things. We're also doing some things within inventory, where we're not accepting inventory early and things like that so those are that kind of the basic things I'd say the other side with comes from on some of the contracting things we're doing yield across the.
The OTI world.
We're in when these contracts part of our negotiating strategy has asked for larger down payments upfront to try to keep our investment in those programs to a minimum and so we're successful with that.
Sure you've seen some the headlines out there where the DMP is increasing their progress payments flexibility in some cases, so we're starting to see some flow in coming in from that and so it's kind of across the board, but we're really pleased with I don't think it's just to add they don't think it is I know, it's not sustainable at 127% because.
As on a quarterly volatility you're going to have swings and roundabouts.
But I think you're going to fee for the year.
Depending on the back half of the year plays out relative to the order book and things like that you're going to be pretty decent cash conversion in the back half of the year as well again not at the 127% so what you're starting to see as some traction on the things that we've been working on as I said six months ago. This is we're trying to turnaround a battleship here.
With the some of our customers and that sort of thing and we're seeing some progress. So hopefully that's helpful.
No. It is and maybe we could talk a little bit about your commercial aerospace exposure as a whole and just amplify your comments around in terms of sizing the business and the exposure and then just giving us some level of comfort or dynamics, because I mean, we can start fighting third parties he gets pretty scary numbers.
Pretty quickly because your time, obviously ultimately to airline travel movement. So just help us how you're thinking about that not only in terms of near term dynamics, but also just how long do you think that we could be in.
Pat this kind of.
Choppy environment and what is the implication for you all because clearly didn't seat in the quarter, which we understand but it's important.
Sure. So overall, it's about 20% of our overall business. So that they gives me a lot of comfort in that 80% of our business is not associated with that you commercial aerospace is still going to be a good business longer term and if you look at what happened after 911 look what happened.
After 2008, there certainly was a downturn, but these things don't go to zero people are still going to fly.
People are so the travel. So these are things these businesses are going to be fine overtime.
And then if you look at it and pieces you know about 18% of our.
Overall business is.
16, 18% is to Oems and than the rest of it is aftermarket thats whats really driven by the flight miles I mean over obviously, the Oems will be impacted to some level as well, but I'll take this near term is dramatically as the aftermarket will.
As far as recovery May I think you. We said, it's gonna look at history and make some assumptions on that.
It looks like and everything I hear people I talk to their thinking it's going to be three to maybe five years to get back to 19 levels.
So this is this is not something is going to turnaround.
You know in the next 18 months.
But again I don't think it's going to go down as far as some people may think I mean, it's not like 95% the flight tracks down 95%. We're good at 95%. That's just just kind of to where it works. So what we're doing is looking for opportunities.
As I mentioned in my statements to do some insourcing.
To try to fill some of that void. So it will definitely have an impact in the near term, but I think longer terminals are still good solid businesses.
And then finally from me for now you SG could you just comment on some of the behavior. You you talked about this kind of.
Push out of some of the deployments into in terms of.
Switching resources to honor for a full power for for the utilities and then I do think there was a comment the press release about doble and kind of some of the struggles there or either in a quarter Expectance could you just amplify kind of your comments around that.
Sure so with utilities.
Utility pretty conservative and so the most important for them to thing for them to do right now is key powerful it right and so typically what we see in the spring is where you start taking a lot of such stations offline. It would be the testing them utilize our equipment our services that would kind of.
Remind than they do need to buy new equipment, and so what they've done is going to jump asset piece of it and that click as more summertime and so they really have not been taken.
Such stations out of service to do to do some of the work now one thing that's happened when they do that and they take more oil samples and so our oil apps have been running over time, but not enough to make up the difference in what we're doing from a product and service standpoint. This is something that's not sustainable.
In everything we're hearing and obviously, we're staying very close to their customers with GM visit them right. Now were spent a lot of common the phone with them and everything they are saying is hey, this is going to come back.
We think we'll start to see some good movement in the fourth quarter and certainly going into next year. So unlike the airlines, where it's a little more unclear. The utilities are going to have to do this type of of maintenance and testing and so we think is going to be a much shorter duration Deb.
With utility business, and what we might see an airline business.
Thanks for your Tom.
That.
Next question will be coming from the line ups on some one time Cts security your line now open.
Thank you guys for taking my questions and nice quarter and also carry to Echo your comments some.
Nice job NFL packaging that the ruffian, given the action on the pendulum as you mentioned in your press release to all of that very timely stuff.
Medical we're seeing.
My My first question I guess, you mentioned utilities business servicing not being an option right now how big was that business on a quarterly run rate and is actually going to zero at this point or is it still for minimum level service is going on.
With the service business itself I mean, it's not a huge piece of our business or another number right in front on me, but it's not going to zero I mean, there's some very critical areas like new clears that asked is still have to be service, but we're talking.
The year since like 20 $25 million to $30 million and certainly not going to zero and as you can see even with their performance in the in the last quarter, they were down but not to that kind of level. So I.
I think we've always had to be careful when we talk about businesses dipping I mean.
Day, not only will say never they're almost never go to zero unless you're in a retail business or something like that but with higher businesses. You know, they're impacted and so it's really relative but that business I mean, obviously their job into bed to get people back out the facilities, but there have been really restrictive about letting people enter probably just like everybody else.
We were not letting visitors coming in our facilities either so that service businesses certainly take dip it'll come back I think it'll be back in the fourth quarter. In fact, we hear from some of the the testing companies that.
Provide some the services to the third parties provides the utilities that there there's a lot of pent up demand for them as well.
Got it so if you're running at 25 to 39, maybe a year or how much the run rate.
April for example.
Yes, getting as Rick mentioned it the seasonality of when they are allowing people out it's not it's not ratable 112th across the platform. So it tends to be at this time of year Caitlin than normal cycle it'd be a couple the 4 million $3 million to $4 million a month and then like big So when they go in the summer mode. It's a little dip.
Print profile, because that's what we're living in today as it accelerated that so if you think of it is kind of in this two and a half the $3 million a month right now that's kind of where we're seeing.
Seeing the softness at that kind of level.
Today.
Got it Okay. That's really helpful. Thank you and then maybe just to get in question John It kind of I guess I get it done if I could add one thing too I mean, we had a call.
This morning, and one of things we've talked about was kind of the RFP level that we're seeing and thats really increased over the past two weeks. So I think thats indicative of those aren't orders, but those RFP. So people know that to needs. There in trying to get us to be ready to readied for a shot gun start if you will.
And when things start opening back up.
Right because they can put off from that makes sense.
Okay, and then just a.
Similar question on the aerospace what kind of run rate to seeing maybe split between the.
And sell side of the filtration side and through the end of March and April and May be the beginning of May.
What was there a buffer of inventory at the carriers or how should we think of.
Robert you're seeing today in those businesses.
Yes, let one thing we do John as you know you've been around US well, we paid a lot of attention the details as part of our planning process. So one of the things that we keep an eye on as what we called a week lead.
Shipping report so when we layout our plans.
There's some obviously volatility it might ship on a Friday versus the following Monday, but generally the weekly shipping plans are pretty tight and so obviously, we're monitoring that a lot.
More closely now so that it's looking like on a weekly basis is kind of in.
200000 to 500000 dollar.
Shortfall and again thats coming off of numbers that are in multiples and millions. So we had a great first half were ahead of plan as I said by two or 3 million and now we're probably behind plant sitting here today for four weeks and our five weeks into the into Q3 were about two and a half million behind.
Where we thought we would be.
So as Big said, it's not going to go to zero in the beauty of our stuff as we get orders for finite products, we're not selling widgets and things that that they buy off the shelf and so as we sit here today that customers are taking the products that they had requested a little bit lighter theres been some push outs.
But the push outs are weeks or months not years.
So I would say for the first five weeks of of this period were about two and a half or so short of what our plan would be.
And we're not seeing a dramatic acceleration. So if we look at each of those those weeks we've always back.
To the started the year, we're not seeing millions and millions of dollars of shortfalls on a weekly basis. So one of beautiful spot because were seven months into year end. So for the next four or five months if that trend continues yes, it's going to be headwind, but it's not as VIX that it's not going to go to.
Year on they're just going to suspend held deliveries and again its validated by the by the cash flow that we've we've gotten some not only we delivering product we're getting paid for it so think of that kind of helps.
Make sense for you.
Yes, Doug and just to be clear is that is that just the aftermarket or is that the entire this business great in terms of that for sure we different.
Equally shipping the level that I look at is really dollars.
Customers were not I'm not getting the.
Split between OEM and aftermarket the VIX comments earlier.
Relative to the relationship when you look at our or contribution of OEM and aftermarket. It's about an 80 20 split 80 to the OEM side and so within a dollar sales and so that that helps us because they are still building planes are just not going to build as many of them and so the pro.
Product and the contracts, we have are still being executed at 80 or 90% of the.
Deliverables that were in plan, that's not going to continue obviously, we think build rates are going to slow down. We just don't know to wear and again I think not ordering for that and support remember that the only place you're seeing that type of impact is on the commercial aerospace and so our defense sales are still strong Navy sales are still strong and.
Especially strong space sales have been strong. So it's yes, we've got a focus on one area and obviously as where we spent a lot of time to to look for ways to.
To bolster that business.
Understood just one last one if I may the Virginia or do they receive the block five Burke.
When do those liquidity, what's the schedule and timing for those flowing through to the to the piano out of backlog.
Yes, I would say the.
Multi year.
So relative to block five there will not be a whole lot of sales. This year, because obviously there are still producing the front end to block for on the calendar build and so we'll have some long lead material.
Purchases this year, which again are part of the contracts and we get some revenue.
So if you think of it as we booked about a 105 to 110 million of block five and we'll probably deliver somewhere in the neighborhood of $3 million to $5 million of that over the back half of the year and the rest of it will carry over until when you look at that backlog number of 565 in 68, just 70% of that backlog.
We'll ship over the next 12 months, so obviously that equates about 385 million. So on the Virginia class reason that it's 68% are historically has been around 80 or 82 is because the Virginia class a globe in particular, it's it goes out about three years.
Going back to the whole stability when we purchased globe, which we mentioned back then one of the most attractive features of being in the Navy business is long term visibility in the long term duration. These contracts. This is this is where we're sitting today with that so it's really really good set of.
Great. Thank you very much guys. Good luck.
And again, if you would like to ask a question. Please go ahead.
The.
Next question comes from the line as John Franzreb Sidoti and company. Your line is now open.
Good afternoon, guys and thanks for taking my questions.
Okay.
So to test segment.
I'm getting.
Different different feedback as far as spending in that marketplace and parts press R&D is a discretionary spend some.
Hey, John weeks region, we can't hear you I mean, you're really breaking out bad.
Okay I'll try again.
In the test segment I'm getting some people are telling me that does discretionary spend and they're not getting.
Great orders, others that our thoughts jobs actually continuing go through you seem to be saying that business is doing well can you kind of talk to has why that's the case.
Okay, I still couldn't quite understandable.
I know you said so.
Let me try to.
Trying to ask the question you asked can you tell me if I got it right or not I think I think what you were saying was some people are telling you that orders are really soft right down. The test segment. Other people are sand to pretty strong and kind of where are we saying that is that what you said.
That's a good summation yes.
Okay. Okay, yes.
Maybe I need to be translator, but first for static.
Yes.
So we're really our test this really is pretty solid we've seen good orders and.
And.
And.
In our test business. It really comes down there if you look at our business.
Theres a lot of different areas. So we have the medical we've got the components Weve got the.
Absorber, we've got we've got our.
Our of auditory boots, and so theres a lot of it it's pretty.
Straightforward and very dependable and it's really not discretionary and so then Cindy you got probably 80 plus percent of the business.
Is pretty rock solid in any given year. So then will you have is another piece that is over and above that it really depends on if thats discretionary purchase or not in so many of our customers.
These are long term projects that they have to have done they've already got the buildings built for so we put the test chambers in that and so we've really not seen that level of.
Variability as of yet in fact, as we said here today I think we're really great shape for this year, we've got a lot of backlog for next year, we've got good opportunities going into next year. So.
I think just the diversity of end markets that we have in our test businesses. What is really given us a lot of stability in that area now having said all that I mean it ends today. Some of it is capital equipment and that is a place where people will look to cut.
Now if they're not using our equipment in there probably would have put outside third party is testing and most of the customers would have a capability and flexibility built we'll do it themselves.
Okay fair enough and the commercial aerospace business, how much excess inventory do you think is in the channel for your products.
Is there.
Try that again, John if you would.
How much excess inventory and commercial aerospace you have to bring to in the channel.
Are you starting on our end or relative to the fleets that are part or things like that.
Relative to how much you've delivered that has been built yet.
Okay, Yes.
As such a thing is if we're going to deliver a product it's usually going to go on an airplane within 90 days. So it's not we're not delivering excuse me just in time. So we don't ship things on Monday to have to Boeing or Airbus and gets put on a plane on Tuesday, so what weve shipped so far.
It has been utilized so what we what we hear from.
Either the distributors that we go through or that the direct sales content is that they probably will have somewhere between 30 and 45 days of inventory sitting there for claims that have been built and that's where we're like I said earlier, we're starting to see this two and a half million dollar slowdown here in the last five weeks really as a function of.
Them slowing down there where expectations for delivery timings until they sort out their build rates. So hopefully that helps that.
We're not going to see this thing.
Earlier point this isn't going to be a cliff that we drop off of its going to be more of those sliding board kind of thing that goes down over time as opposed to stop all deliveries for the next 90 days Thats not what we're seeing relative to backlog, we have and expectations. We said in the prepared remarks.
We're talking to our customers every few days and we're not we have not received a formal notice to cease and desist deliveries from anybody.
No that's perfectly does look across.
I am utility service side of the business is that seasonal spring and fall kind of like turnaround season or not.
Yes.
There was a point I was trying to make earlier on as a lot of times they will.
I will.
Do testing in the spring, but this spring, they're not doing that because they once youve keeps a power. So they don't take anything off line. So typically we would see a little bit more this time of the year. So there are certain is some seasonality that businesses I think thats going to change. Some this year because they have some delays underway now, which I think we'll try to pick.
Either in the fourth quarter this year or the first quarter next year.
Perfect and I guess to list quick questions if I might.
Is there any change your capital spending plans for the year Basin Covet and can you just talk a little bit of that tax rate in the quarter in what we should think about going forward.
Okay, I'll talk about capital expenditure and then you're talking about the tax rate certainly we are taking a hard look at that we've asked people to go back very justify everything and then we're meeting with.
Each of the Cfos and subsidiary presence as each of the companies.
It to go through their capital plan, so they're going after we justify their.
These like really seasons management team. So they were already doing that but we'll we'll be going to do deals with them, but certainly I mean for instance, we were looking to add on to one of our plants.
Starting with the second half of this year, we put that on hold.
Vincent equipments buys that we put on hold so that is an easy kind of that we'll see painless, but fairly painless thing that we need to do and so we're doing everything we began to conserve cash.
And on the on the tax side, John but if you look at last year's kind of same profiles, the second quarter last year and unusually low rate because of some strategic things that are that are tax group works on that they basically come to fruition in the second quarter. We've had the same thing. This year. So if you look at on annual basis.
It will be in that kind of 24% range similar to our expectations were started the year and again.
To get the 24 for the year with this.
10% to 12% rate in Q2 again consistent with last year, we're going to probably have 25 or 26% rates in Q3, our Q4 to get to that blended rate over the over the average so that there is look the same and as seen in it as active as there was realized.
And if that have some strategies.
Okay, guys I'll get back its queuing step off any with this vessel for the phone.
And again, if you're asking question. Please press star one Thompson.
Next question will be coming from the line if Robert Mccarthy with Stifel. Your line now.
Yes, just a few follow ups if I may.
I guess first let me just looking here overall exposure and I understand the specs, obviously, given the dynamics situation that co of it it's very hard to.
Forecast. These things however, we do not have luxury.
So I guess the first question I would have is.
Obviously, a lot of your businesses are fairly.
Cyclically resistant that's been talked kind of AD infinitum AD Nauseum and you could talk about obviously may or may be businesses space defense, just certain extent and then obviously.
Then obviously aerospace has more cyclical Tina.
And then utilities is fairly defensible.
But maybe you talk about testing testing really tied to kind of kind of capex. Among the corporations that are using them how cyclical could we expect there could we see some pretty dramatic cuts. There just any kind of color that you can provide so we can kind of ring fence, where we would see a little more volatility in kind of end market in your view.
Yes, I would say that the today and we spent a lot of time looking at this and as they today that business is very solid.
It really being could get to the end markets are serving.
Some of the primary end markets arrogant or medical both on Rytary testing and MRI shielding.
Industrial shielding and then you get in Fiveg piece of it.
So I'd say those are very extendable also there's in I think people, who say there is a good bit of say recurring kind of business there and that we have all types of instruments that we provide any of those are going to be sold are pretty ratable since every day.
Approach every year, so people are buying antennas or bond turntables rebound amplifiers or vinyls types of things.
So really we're I think you would see the volatility would been a large projects and Fortunately, we don't need a lot of large projects today to make the numbers that we have out there for this year and what we're looking for for next year I think those provide more protection an upside than anything else so you're right.
It absolutely as capital equipment.
But it's a different type of its not like somebody buying a machine from us they are buying a testing chamber and again for companies that are required to this type of testing and again anything that theres electronic content or like or electronic products have to do this type of testing.
Only have two options one is to do it in house.
Disinvest side to test house, and most people want to have control over that and so thats. The reason, we sell a lot of the chambers to.
Through the end customers again, and we look at what's some of the electronic manufacturers are doing they're moving forward I mean, they're developing products.
Well in the holiday season.
The year and there certainly moving forward with that because if they don't do that now they're not going be a position to meet demand. They have later in the year.
And Rob Lowe and although at a number around with Nick's comments, it's going to support kind of how we think about that one of the other metrics. We track is what's what's called Shippable, New orders are snow, which says okay. Here's the backlog position you have today at March 31st.
Backlog runs out the construction gets done to meet your second half sales commitment what do you have to book and ship in the same period and so that's a metric we track that that I would say this year.
Despite cobas being what it is we only have to book about $18 million to $19 million and ship. It this year relative to the commitments relative to your model in our model and that sort of thing and so with that what that means in English is.
We basically have 83% of the stuff we need to meet our commitments. This year are already in in our hands and so take that the VIX point of we sell antennas and things like that that are the more routine.
On a deliberate when you break that down into let's call. It three to three and half million dollars of month, that's kind of what our normal run rate is for antennas and some of them off the shelf products and services and things like that.
Back to the installation delays.
Again on these calls that we have every other day with with all the group leaders.
The customers as countries open up being a couple of projects in Europe, Italy in particular that have been shut down for two months and it's one of those things you can't be on site and also on the site opens up they say where the how are you guys are laid let's get on it and so whats great is we're going to see acceleration, there and again thats ready.
In backlog, so having a book to bill ratio that we have today in a shippable new order, so the only 17% or something like that.
$20 million. This is really comforting knowing that thats, where we have to do to meet our test business commitments.
Okay, and then just I guess as a follow up then go ahead.
I just mentioned.
I guess as a follow up.
In terms of the M&A opportunity set I mean, clearly you have.
With the with the favorable outcome of the divestiture and the strength for the balance sheet and the cash received during a very good position.
For capital deployment, maybe just level set what your expectations are for.
One of a bounded size or out are bound for doing deals I understand that mission bolt ons or kind of pointed out the realm and you're not going to do crazy Big deal, particularly in this environment I would thank but.
Talk a little bit about the bid ask out there obviously, presumably the consensus with suggests that.
This is very difficult time for M&A, just given buyer and seller expectations and on an overall inward focus on operations as opposed to.
Deals transacting, but I have heard up sonically like for instance.
Kind of middle market private equity or other places where.
Folks have assets that they wanted to point will turn capital and they might have other businesses that might be tougher workouts or problem children.
That there might be.
Some of some.
Some of these properties unlocking because people know they can get some certain and then focus on that part of the portfolio that might be more troublesome and then get some capital return to their limited. So I didn't know if any phenomenon like that was going on that would lead you to believe that perhaps this could be.
Counterintuitively decent M&A environment.
I think you'd think about the right way I mean, we think they're going to be really great opportunities coming out of this I think some people are going to be in a position where they need to sell their business. Some people are being positioned where they just wanted that they don't have the risk going through this again so.
We've told all of our.
Management teams they need do.
Then if I was.
Where they think you best opportunities are they need to be having those conversations with people around the be closed two arm. So that when we start coming into this and people decide they want to do something maybe they call us first and we have a discussion and we move forward because you've got those relationships as just.
A lot easier to do I think the.
Multiple that can do they have to come down as a result of this certainly say that we will if we've always been very diligent in our due diligence, but I think the toughest thing.
On the other side of this.
So we will have to spend a lot of time on his verifying forecast because thats. This was really about every every every industry is going to be a little bit different but I think we are experts in areas, where we participate something you can't really understand them in build rates on the commercial aircraft are going to be.
Murky for a while I think we'll have a lot better sense in 60 days in 90 days and.
Vermont after that but Thats area, where we have to make sure that we don't buy into somebody's forecast is just.
Based on bad assumption, so we'll spend a lot of time doing that.
As a result, but one comment you made absolutely right, we're not going to will make a big acquisition. This is the wrong time to do that I think we'll be looking for.
Acquisitions or the size that we we've done over the past couple of years, because we can do that without putting ourselves in a.
Position from a liquidity perspective that we don't want to be in one reason, we're really happy with what we're add as we do have a good strong balance sheet, we want to maintain that but thank you also can't sell in your hands.
When they're good opportunities out there. So we're just going to be very diligent about identifying those.
Dose of them hard and then move forward, but it makes sense.
Thanks for your top.
Yep.
Okay.
Okay.
Okay are there any other questions.
Yes, I'll line. This is Jon Tanwanteng with CJS Securities Your line open.
John.
Clicked off.
Hi can you hear me now sorry about that.
Okay.
Yes.
I guess the first one for my follow up I was wondering can you quantify that the kind of cost reductions that you're looking at.
Maybe in aerospace business I don't know if you you mentioned the national amount and kind of what you seven year over year there.
We got quantified that entirely yet I mean, we're still there's some things we just.
But to stop to like travel and some compensation things, we have not add to have forced got reduction Jackman. Our hope is that we can.
Find ways to work around that but obviously, we're going to make this is as we had to make but.
No that we've got a for a number on on why the cost reductions are today.
Okay got it and then second this maybe a little bit out there but.
I know you guys are involved in the cabin air filtration.
And I'm wondering if there maybe some increased demand for that or new products just as it relates to the hygiene and then filtering air for buyers part of those and that kind of stuff when when these plans go back into business.
Yes, Thats really we've been asking the same question internally the real issue as I do think the.
Filtration of the air on airplanes is really as much issue as kind of this do you said in the four or five people around you so already.
You talked about these carbonite night or the one of those mass in anything in the in 95 mask. So that means they stop 95% or the particles certain size and already to help a filters that are on airplanes that are well above 99%.
So that's not where the issue is it's really going to be on proximity.
People I think there it could they may switch amount more frequently.
We have developed some things with some.
No bacterial on the on the material itself, but everything gets.
That was one of the first things we asked because weve doubled for maybe there's a great opportunity for us here, but the real issue as a person setting on each side have you.
John If you noticed some of the some of the press communications or even I thought on the TV commercial last night that airlines are touting that they are saying the other increasing there have been filtration elements and they're doing this in that and it's really just the marketing there is.
Comfort into the travelers.
Instead to be able to getting back on the plane, but the airlines you're thinking the same way and if they want to be overly cautious and replace those more than they need to world for it.
Got it okay. Thank you for that and then just last.
I know you are not quite as in a rush to close M&A, but I know before you were going into this with I think two acquisitions that were though within line of sight of closing and then maybe 10 more can you just an update on those specific opportunities and if closing may be anytime in near future.
Well one of those we decided to put a closed down on stop it because of market was and billing I'd be able to get a clear forecasts on it theres another one.
There were still working but we're working it.
A little slower to make sure we don't Miss anything because I don't think this is it does take a big risk and so we're going to make sure that no acquisitions risk free but I'd say in this environment you want to have a lower risk tolerance and you typically might.
Great. Thank you very much goes.
[music].
And again, if you would like to ask a question seems depressed honor followed by the number one on your telephone keypad.
We don't have any further questions Chris Anthony Please continue.
Okay, well appreciate everybody's enters today and hopefully we'll have a less eventful next 90 days before we talk again, so thank you very much things.
This concludes todays conference call. Thank you everyone for your participation you may now disconnect.
[music].
[music].
[music].
[music].