Q3 2020 ESCO Technologies Inc Earnings Call
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Today's call is being recorded.
It does today are our Vic Richey, chairman and CEO, Gary Munster Vice President and CFO.
And now to present the forward looking statement I would now like to turn the call over to K Laurie director of Investor Relations. Please go ahead.
Thank you.
Issued a press released earlier today that will be reference during the prepared remarks on this call you can find a copy of our press release and our Safe Harbor statement regarding forward looking statements made during this call in the Investor Center of Escos website at Www Dot ESCO technology dotcom.
During this call the company May make forward looking statements, which are inherently subject to risks and uncertainty, particularly given the unknown impact of the current cobot 19 pandemic and the company response to these evolving circumstances actual results may differ materially from those projected in the forward looking statements in the company does not assume any duty to update forward looking statement.
Please refer to the company's press release for risk factors that may impact any forward looking statements and for the reconciliation of any non-GAAP financial measure to their most comparable GAAP measures.
Now I'll turn the call over that they scale before any of it over the very to discuss the third quarter results I'll provide a brief update on how we're managing the company in this covidien Barb.
The situation seems to change on daily basis. So what has changed since you I spoke.
I think it's important to share some of the details of how we're managing the business in real time, and how we're positioned ourselves for the future <unk>.
It appears to have a kit and we saw the first indication of potential economic impact on our business. We did what we did best we took the decisive action.
From the start and through today, we continue to take actions that have a clear and precise focus.
It is to protect our strong financial condition to deliver products and services and support our customers all while keeping our employee safe and healthy.
Measures, we've taken so far have allowed us to hold her own over the past few months and then as demonstrated by our third quarter results and our strong financial position.
We continue to redo review additional actions across the organization that will adjust our cost structure to fit our near term sales outlook to support our long term strategy for profitable growth by strength in our core.
We've demonstrated or operational efficiency in a proven our ability to effectively manage costs to be changing markets demands in the past in the current situation is no different.
We are actively addressing today's business pressures indirect or efforts to come out of this even stronger.
We are controlled west within our control and focusing on the near term situation without losing our vision for the future.
Our actions will have a near term benefit while maintaining our flexible flexibility to ramp up quickly when demand returns to more normal levels.
As we will continue to benefit from lead positions in various niche markets delivering the set of unique and highly technical products and solutions specifically designed to meet our customers' needs. This makes it difficult for solutions to be our solutions to be replaced about alternative sources.
We continue to focus on our future as demonstrated by continued investment in new products across all three segments, which will continue to create new opportunities and drive organic growth.
Our deeply experienced management team is providing leadership demand issue. This period of uncertainty our disciplined approach to operating the business will result in our continued success.
As always our most important asset.
Lets say, thank you to our manufacturing employees leadership teams and staff around the world for their hard work and dedication to be of all the as you have all demonstrated extraordinary commitment to the success of elsewhere.
I'll now turn it over here.
Thanks Victor.
Comment briefly on Q3 in the year to date operating results, which are laid out in the press release.
As Vic noted in his comments our liquidity position.
Most important to up importance to us during this challenging time.
Im extremely pleased with where we stand today, having nearly $700 million a dry powder at our disposal between cash on hand, and available credit capacity, while carrying a modest leverage ratio point 95.
I'll touch on a few comparative highlights from the release.
Given the backdrop of today's operating environment and most pleased to report that we were able to deliver Q3, adjusted EBITDA of $35 million consistent with the prior year. Despite the noted sales decline at doble and within commercial aerospace, which are our most profitable operating units historic.
Our Q3 sales decreased only 3% in the current quarter compared to Q3 of last year and our nine month year to date sales increased 2% year over year. Despite the private 19 impact.
Andy sales increased $1 million in the quarter and $28 million year to date, driven by the addition of globes submarine components sales, coupled with additional navy and space sales of back on the west loans, which were offset by softness in commercial aerospace.
Year to date aerospace sales at PTC, Crissair and made a decreased approximately $4 million, a 3% compared to prior year.
Test sales increased 9% in Q3 and 2% for the nine months.
Sales were impacted year to date by a three week shutdown of our Chinese manufacturing facility earlier this year, coupled with some delays at certain installation sites, where access was restricted.
Chamber project sales continued to be strong and installation cited availability has mostly return to normal.
You asked you sales were down due to continued deferrals of various project deliverables as several large utility customers domestic and international have realigning their short term maintenance and spending protocols to focus on corrupted power delivery.
Maintenance deferrals also reflect various mandates restricting onsite personnel at sub stations large transformers and other customer locations.
You will see these recent order bookings reflect an increase of additional cyber security related orders, including Dobles Duck East solution.
We have seen strong renewals as well as new customer procurements.
As we noted earlier, we take decisive actions when we see downturns and our outlook and our Q3 SG in a reduction of $4 million or 10% is evidence of that agility.
Our year to date SDMA is flat compared to prior year and that was achieved despite having globe included in the current year and despite our continued spending on R&D and new product development.
Entered orders remained solid in Q3, and our strong year to date, where we booked $624 million and ended June with a backlog of $551 million up 22% from the start of the year.
Our DSD business led by our participation on the block five contract for additional Virginia class submarines drives the strength.
I'll remind you that as the year progresses, and as we move into fiscal 2001, we will be delivering products on these large multiyear programs, which will mathematically reduced the optics of are empty book to bill going forward.
On the liquidity side year to date, we generated $54 million a cash from continuing operations are $64 million ignoring the $10 million pension contribution contribution we made in Q3.
Which as I said resulted in a modest leverage ratio point 95, nearly 700 million of available liquidity.
Q3 and year to date adjusted EBITDA improved from prior year.
With Q3, reflecting a 20.3% margin despite the lower contributions from our highest margin operating units and finally Q3 adjusted EPS was 76 cents a share.
Up from 75 cents a share delivered in Q3 of 2019.
For the remainder of fiscal 20, the code of 19 backdrop continues to bring along considerable uncertainty around the extent and duration of today's economic circumstances, which makes it difficult to predict our Q4 operations will be affected using normal forecasting methodology is and as a result of this uncertainty we will not be provide.
In Q4 guidance at this time.
To supplement VIX comments on our cost savings actions, we are clearly focused on the right things and we're working diligently on maintaining and optimizing our cash flow and our liquidity.
Plan is to prudently manage spending in the short term and focus on those costs, which do not have a negative outcome, which would impact or ability to meet increasing demand our growth in the future now I'll turn it back over to Vic.
Thanks, Gary I will offer some qualitative comments about our end markets that will emphasize it situation continues to be very fluid as to the duration of the current end markets office.
Pretty give you a sense of our thinking and planning in July we completed a thorough review of our individual businesses to update our expectations for the near term impact of cobot 19 across it within our various operating areas. You saw US were shared with you. The earnings release commentary. So I will only touch on a few highlights for emphasis.
Starting with our Andy segment, we expect to see continued softness in the commercial aerospace deliveries over the balance of the year, resulting from reduced build rates and lower airline passenger miles.
Recently, we started seeing some signs of recovery emerging as several air carriers are bringing more of their idle fleet back into service and daily PS a passenger boarding numbers are increasing.
The defense portion of our Andy business is and will remain strong for the foreseeable future given our backlog and our platform positions. Our aerospace supply chain partners continue to be strong in some cases, we are seeing some weakness we're working to bring some of these products and services back in house, such as machining and.
Bill piece that we can replicate.
We also see the current weakness in aerospace market as an opportunity for ASCO, we continue to look at suppliers or competitors experienced financial or operational stress. During this crisis, where we might be able to provide assistance by partnering or through an acquisition at a reasonable price.
Our test business is expected to be strong over the balance of the year given a solid backlog has strength of served markets, including Fiveg and related communications technologies and the RF shielding in general.
We expect us to use customer spending softness to continue for the next few months as they come out of their summer testing protocols returns are more normal buying patterns.
When some of the social business you guidelines gets sorted out and utility service personnel can return to their normal site visit routines, we expect our service business to return to normal.
Utilities have money to spend and uncertain that spending will return in the near future as maintenance spend you cannot be delayed indefinitely without creating significant risks to good safety efficiency or regulatory compliance coated 19 does not change the fundamentals of its global utility industry as society needs.
Reliable safe and secure power the crude the critical need to maintain repair and improve the utilities aging infrastructure is not reduced by this pandemic crisis. When a positive note I'm really pleased with us use pipeline, if you products and solutions, especially related to the cyber security and related asset.
Harding solutions, we have several new solutions that have introduced recently and based on consumer feedback. These products are being enthusiastically received.
With regards to NRG in a renewal renewable offerings Im pleased to see NRG end markets recover recovering more quickly as investment in renewable energy has increased in both wind and solar.
Better than we'd anticipated and we expect that growth to continue.
Moving on to M&A, we have several actionable deals under evaluation and our pipeline.
We're taking a prudent and deliberate approach and we expect to take action on certain opportunities to grow our business as we have in the past. It does appear that the current environment has brought valuation specs a more reasonable range.
Board is supportive of our M&A strategy and our current balance sheet provides plenty of liquidity to allow us to add to our existing portfolio.
In summary, we delivered a solid first nine months of the year. After the balance of the year. Our plan is continue to focus on the fundamentals in the look for opportunities to leverage our infrastructure through M&A to could create additional operating efficiencies and ensure we were well positioned for success for 2021.
Well, we were weather the storm and we will prosper glad to take any questions.
Ladies and gentlemen, as a reminder to ask a question you need to press star one on your telephone.
To address your question. Please press the pound keep.
Please standby, we can pop accuen a roster.
My first question comes from a lot of John Franzreb with Sidoti and company.
Your line is now.
Good afternoon, guys congratulations on a good quota.
Okay. Thanks, Sean.
I just want to start with the order trends and what you're seeing across all three segments in July versus June it sounds like marketing, so getting better, but just want to the kind of talk us through what you're saying that.
Yes, I would say that really across the board we started a little pickup.
So it was pretty good dip for a couple of months bid we have seen the pick up really across the board.
We've talked to you guys utilities segment today and they have a solid month. This past month and so it appears with fourth quarter was a trough and now we're starting to start to pull out of that.
So are your expectations.
At the service side rebounds in the first quarter 2021 moment long lines during normal turnaround season, or maybe better than normal turnaround season based on some of the deferred spending.
Yes, it's a little harder to predict I mean, you would think that are going to be some pent up demand.
There are certainly to work there to be done.
So our hope is it would be return to the other earlier levels and.
Potential for some upside, but this is such a kind of volatile markets kind of hard to pin that down to see absolutely. This is what's going to happen, but certainly we're close our customers.
And talking to service companies, who also provide services utilizing our equipment.
Utilities and.
There are already.
And ready to go.
I think as soon as picks up a bit we should see a solid pickup.
Got it and when we cards to test and Fiveg.
Could you quantify any inside of how the timing that role that's going to be from your perspective.
I've been hearing that things are being deferred.
Our telcos kind of working on their own back home versus Fiveg rollout what are you hearing.
So I think the Fiveg is going to go forward I think that most important they agree to understand from from our company's perspective.
To the timing of the actual rollout to the consumers is probably more in question that it was a year ago, but what I would say is all the testing if you remember for our business, we're doing that testing and development of the components of.
The handsets.
The the towers those type of thing so our testing early takes place in the early phase of this and I think thats continuing to go we've seen very strong.
Opportunities air in orders there both for standard products for some upgrades for subsystems, we had out there as well as new products. So.
I don't disagree that maybe the actual rollout is going to be delayed some but we were not really see any impact our business. As a result of that just because of where we kind of fall to continue above the development cycle.
And I guess, one last question, then I'll get back into queue.
Regarding the us in a warranty highlighted that was down $4 million a 10%.
Could you just.
Remind us what would the cost actions.
Our taking and how much is variable and how much is fix some of those actions.
Yes, I'd say, John what we do is when we when this thing first hit the fan few months ago, we were pretty good cost managers, what we did as we across the company we've pretty much still at an all discretionary spending such obviously travel and that was outside of our control. So we do a lot of travelling around this company with the doble going out to sites and.
That become zero, there isn't an immediate cost saving they're the same with the tests or travel is a big part of it we deferred some.
Compensation adjustments that might have been coming through in mid year, we deferred those to next year. So our goal is to try to control cost that didnt have a cost associated with them. So it wasn't like we shut a facility and that costs us $2 million that would save US 2 million. These were all costs that were trimmed.
That didnt have a associated costs with them. So as we go forward, you'll see some of that picked up some of these things reopened we'll get a correlated revenue stream with that when doble sites open up and when you Ts is able to travel again, you'll see the GE in a move off but you'll also see the sales and gross margin to go serve that move along with it.
So we're really pleased with how we were able to do that without taking draconian steps in cutting people's pay and doing some other things around that where there is.
Cost associated with that so.
This level that you see in Q3, I think it will be pretty comparable in Q4, Tom as we go forward and then as we get into 2000 income both size DSG in April wherever we see the forecasted revenue looking out as we can maintain that same percentage of sales as we go forward, Yes, I think.
David that I would add though I mean, as Jim days when piece of it but.
We have been sales have gone down some locations obviously, we have the.
Hi, sizable operations that are those typically fall then the not as DNA bucket those are direct direct cost.
So those are things that.
You are going to be going away.
Yeah.
And will not come back until such time.
The sales pick up so as soon as a big piece of it a lot of what we've done is really more.
Associated with direct costs.
Great. Thanks, guys I'll get back into queue.
Okay.
Thank you.
Again, ladies and gentlemen, as a reminder to ask a question you need to press star one phone to withdraw your question. Please press the pound key.
And last quick one Alex No next question comes from the line of Jon Tanwanteng with CJS Securities. Your line is now open.
Hey, good afternoon, guys very nice quarter.
My first question is on the commercial aerospace business I know you mentioned you are seeing confined to pickup.
I was wondering if you go into a little bit more detail on that delineate between the OEM side on the aftermarket side and do you think your past the trough in that business on maybe that another tend to come depending on the production rates our inventory level channel.
Well, we janitors tubing variables as you know and they're both very unpredictable I mean, we we have build rates for from the Oems now so that we're building too and so if those hold then I think we have clearly understood what that looks like.
You know Theres a.
Second burst of.
Vehicle bid or we have another spike and nave to change their build rates again that ups could have some impact on us we're not seeing that today and we're kind of plan for for what we've been informed.
And then the other pieces just to pick up of air travel and what we're saying well I'd say, what we saw last month and I haven't looked at it for a week or so but you know that.
Give a 25% of what we had pre cobot as far as people fly.
But we do see that starting to pick ups on two and obviously that drives our spares business or service business.
OEM business and again I think the big variable there as we have another spike and I would just I was just on a call that again. He said he was on a flight.
To Montana and it was totally for you, so which freak out a little bit, but I think it's been a bit of a mixed bag and so.
As you know the of flights are flying Fuller today, but theres still not nearly as many of them. So I think thats, a big issue, but it seems unless things turned south again in a big way that we've got a that mentioned earlier I think the fourth quarter is kind of the trough that we're experiencing.
And John just add to that I think we've talked in the past about we track weekly sales reports.
We've done that for a long time, but we could a lot more attention to it here over the last three or four month safety looked at the the profile of the last five weeks they are nominally.
Moving in the right direction is as big said in his comments with aircraft coming back in service and TSH passengers coming through but again, so I would say stabilization is probably the best thing. We're looking at right now if it does go down we're talking about <unk> percent or to not 10 or 15% because this feels pretty comfortable.
Based on the last five weeks of deliveries.
Got it Thats very helpful. And then just getting over to the double business.
We had record heat waves in the south blackout. The current these codes when we had that as don't come up here.
I am quite long any read through to the utility than their maintenance or maybe lack thereof, because it gives it the season.
And how that flows through to your business.
When the summer died down and their video service again.
On a bounce back we can see.
Yes, again, we're not planning and we're not assuming that there's going to be an upside. It is our current view is again. This next quarter from the kind of system consistent with what we've seen maybe up some in the fourth quarter and then next year, we're projecting to get back.
Better than they are doing this year, but I think you're still going to be a bit of a ramp.
But what it really is going to depend on when they get in there and start get out. Besides the we made some besides you're just not getting visited right now and so I think a lot of it depends on what happens when they do get back in the field.
You really and for us that really the only sites we've been authorized to go to or the nuclear sites and so lot of it is yet to be determined but certainly this is a.
An issue with a with a finite life is the question is how long is at finite life that they can that continue to ignore you know these types of tests.
Okay Fair.
Fair enough and then just last from me.
What's driving the strength that NRG I know you mentioned when energy coming back as a bit of solar product Thats being successful now just a little more color on the strength of seeing where it's coming from kind of how sustainable that it.
Some of it I would say his focus.
The people we have there are a little more focus and the solar side now and we had some products, but in that we were taken advantage of those as most is maybe we should have so I'd say the solar side of it didn't dramatically better. This year, what we anticipated part of that is just investment and part of it is a better focus on that to look at it in general.
Interest rates being as low as they are I think has helped a ton because you know for people worried about the tax credits and now that now that and there was a conservative when that went away that business is going to go away, but the reality is because interest rates are so low.
Renewable energy is so much closer to.
You know traditional energy generation that those investments make lot more sense and they did even six eight months ago and so people are are jumping in plus or just an overriding demand obviously for renewable energy, but now the other economics are making more favorable than it had previously.
That makes sense. Thank you if I could ask one more you to kind of provide guidance for the fourth quarter.
Just wondering where the biggest sources of uncertainty on your and your revenue earnings projections at this point halfway through August.
Yes, I would say, it's really is we talked about which commercial aerospace and if there is going to be any further adjustment and it's really the recovery of the utility business typically have great insight on the rest of it we made assumptions on on those two pieces, but.
We just don't have enough clarity to really say this is exactly where they were going to we're going to do just because of those two markets are still.
A little fragile.
Got it fair enough. Thank you.
Thank you and we go up a follow question from the line of John Franzreb with Sidoti and company. Your line is now.
Just on the M&A pipeline.
It sounds like you're interested in picking off some companies are American dress in aerospace and defense side or the market.
Could you talk a little bit about your appetite for maybe a number companies you might be looking at on that side of business and maybe the size those businesses that you're looking at.
Yes so.
Do you think we're going after stress companies because it's not.
There's not really what we do you like people do that but we always say beyond about picture of that'll purpose anyway, but we want to buy good solid companies.
I'd say I would think more two things the companies that we're currently looking at are good solid companies.
But for whatever reason people aside there due to weather the storm a longer and so they do look for for an opportunity to exit I'm, not saying that we're not paying close attention to the other vendors and people that might have some some issues, but we're not really again looking for for troubled companies as far as the side.
As then.
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Number we're going to take a very cautious approach to make sure I mean were look we've always been.
May be very aggressive on our due diligence to make sure we understand what we're getting that's even more of the case now, particularly as we look at.
Forecasting because look we're having a little trouble forecast in our business right. Now this that was talking to John about amended to go. So forecast is somebody else's businesses is even more difficult I'd say the advantage in the aerospace business is a very platform driven industry. So if you could if you understand.
And exactly what part number somebody's producing what aircraft are going on what to build rate is.
What the repair cycle is I mean, there's a number of variables there where you can really get very good insight and into what's going on with those businesses. The other thing I would say is.
We're focused a bit more on.
Defense Aerospace the commercial aerospace because that's really doing exceptionally well and so if we can find a business. It is leading farther that way I would say that that would be a preference for us right now at least for the foreseeable future because.
There's a lot more stability in the next couple of years.
Size what product.
And one last question.
It sounded like there might have been some supply chain issues in the quarter.
Record case sound like what some production in house or bring some production in house and can you just kind of quantify maybe.
What impact that was in the corner as far as clear now.
Additional car be helpful. Thank you.
So we will really had not had.
Significant supply chain issues I think what we're trying to say as we pay close attention to that to make sure that we havent Bill what we have done and you talked a lot of at cost savings and.
People think that cost saves all the everything about is cutting people right and so we think about it a lot of different ways and one thing that we're looking at is bringing more stuff in house to insourcing. So ahead. All the businesses go look at everything that they subcontract done outside vendor and say is this something we can do in house because reality is.
To keep as many of our employees employed as possible and also it gives you more control over what's going on and so I've said to everybody look if we need to buy additional capital equipment. So we can bring work inside we should do that I mean, I think thats a good investment in our business because.
One thing we there's so many things we don't little back over the one thing we do know at some point, it's going to get under control and Theres going to get back to normal and I want to make sure that we're well positioned to take advantage of that and so the more we can do in house, where it makes sense the more I want to do that both for cost savings employee retention and.
And having control of our own destiny.
And one thing I'll add to that as the other thing John when you go out in that market with Vic strategy like that it also makes your supply chain, where you're willing to do that so in some cases theres been some immediate cost reductions because those suppliers didn't want to lose the business and we kind of have algorithm on we're aware that break point is and so in some cases that.
We're looking at bringing things in house were actually got better pricing from an existing vendor, where we'll get a lower cost structure going forward. So I think to VIX point, we're pulling on several levers on that side, which I think has been really effective.
Perfect Exxon Thanks for the clarification guys appreciate it.
Yes.
Thank you.
This concludes today's question and answer session I will now turn the call back.
Two Vic Richey for closing remarks.
Okay. So thanks to everybody look forward to talk to you in Mexico.
Thank you.
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect have a great day.
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