Q1 2021 ESCO Technologies Inc Earnings Call
[music].
Good day and welcome to day Q1, 'twenty 'twenty, one ESCO earnings conference call today, and another 39th call is being recorded.
With us today are Vic Richey, chairman and CEO Gary Monster.
<unk> President and CFO.
And now 2% the forward looking statements I would like to turn the call over to Kate Lowrey Director of Investor Relations. Please go ahead.
Thank you statements made during this call regarding the amounts and timing of 'twenty 'twenty, one and beyond revenues COVID-19 impacts on recovery expected as a result of Covid vaccines EPS adjusted EPS EBITDA adjusted EBITDA, new products margins cash shareholder value the timing of 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 of 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 exist on the company's opera.
<unk> and business environment, including but not limited to the risk factors referenced in the company's press release issued today, which will be included as an exhibit to the company's form 8-K to be filed we undertake no duty to update or revise any forward looking statements whether as a relative results of new information future events or otherwise. In addition during this call.
The company May discuss some non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to the most comparable GAAP measures can be found on the press release issued today and found on the company's website at Www Dot ESCO technologies Dot com under the link Investor Relations now I'll turn the call over to Vic Thanks, Kate before.
We get into the financials I'll provide a brief update on today's Covid environment. We continue monitoring the situation of a regular basis and our primary goals remain to say stay ahead of the curve provide a safe working environment and protect the health of our employees.
Rice of actions, we've taken and the operating protocols, we have implemented since the start of the pandemic. We're done with a clear focus which was to protect our strong financial condition to deliver products and services in support of our customers all while keeping our employees safe and healthy.
Solid operating results in Q1, coupled with our strong liquidity position demonstrates that the measures. We've taken will allow us to successfully navigate through this challenge our actions will benefit us going forward as they continue to move toward a more normal state and I'm confident that our disciplined approach to operating the business will reach.
Our continued success throughout the balance of fiscal 'twenty one.
While Gary will provide the financial details on.
For a top level comments by noting that while our Q1.
A&D sales were lower than prior year due to the COVID-19 impact on commercial aerospace.
Our portfolio diversity allowed us to overcome this headwind as we substantially increased our adjusted EPS from prior year due to the strong performance from our other operating units are.
Our Navy business remained strong and well funded.
<unk> business continues to outperform with increased margins in our U S cheese business saw some meaningful calendar year end spending across the utility customer base.
With the cost reduction actions, we recently implemented USG delivered an adjusted EBITDA margin of <unk> 25 per cent up from approximately 19% in the prior year's Q1.
We're fortunate to have strong and experienced leadership teams across the company, who continues to demonstrate their ability to effectively manage costs to meet margin.
Meet changing market demands our teams are actively addressing the challenges of today, while continuing to focus on being even stronger tomorrow.
So we will continue to benefit from our leadership positions in several niche markets, where we deliver a set of unique and highly technical products and solutions, specifically designed to meet our customer needs.
This makes it difficult for our solution for your replacement alternative sources the fundamentals of our portfolio remains strong and our goal remains the same to create long term shareholder value now I'll turn it over to Gary.
Thanks, Bob.
I'll briefly touch on the financial results as laid out on the press release.
Navigating today's Covid world, our number one financial priority remains the same maintaining our substantial liquidity as I said from the start of the pandemic when challenging times pop up unexpectedly cash is king.
Extremely pleased with the significant cash flow we generated in Q1 is normally our first quarter is the weakest quarter of the year when it comes to cash generation.
Following up on the strong cash flow performance over the past year, we kicked off fiscal 'twenty, one with a record amount of cash flow, resulting in a free cash flow conversion ratio of 127% of net earnings.
Clearly our working capital initiatives are taking hold across the company and while impressive today, we have set larger goals for the future.
Today, we have approximately $740 million of liquidity on our disposal between cash on hand, and available credit capacity, while carrying a modest leverage ratio of <unk> 38.
In the release, we called out a couple of discrete items, which are described in detail and are excluded from the calculation of adjusted EBITDA and adjusted EPS in both Q1 periods.
I'll briefly touch on a few comparative highlights.
We reported adjusted EPS of <unk>, 55, a share, which increased 12 or 28% from <unk> 43.
We reported in prior year Q1 to 55 also exceeded the consensus estimate of 45.
Given the backdrop of today's Covid operating environment I am pleased to report that we delivered Q1 adjusted EBITDA of over $29 million.
Which is approximately four 5% higher than Q1 of last year. Despite the noted sales decline in A&D that Vic mentioned related to softness within commercial aerospace, which historically is one of our most profitable operating units.
Total sales in Q1 decreased $9 million compared to Q1 of last year, but Navy and space sales were up $4 million in A&D, which helped to mitigate the decline in commercial aerospace.
And test in USG sales were up a combined $2 million.
Despite the noted increase in Usg's Q1 sales, resulting from the release of some pent up demand.
Total continues to expect some near term deferrals on project deliverables and maintenance work as many utility customers, both domestic and international.
Continuing their COVID-19 protocols, reflecting the various mandates restricting on site personnel at customer locations.
Consistent with our earlier communications, we believe the back half of 'twenty, one will be stronger than the first half and as vaccine Rollouts continue to accelerate this should allow <unk> customers to return to a more normal operating environment.
We took several cost reduction actions recently and as a result, we increased our Q1 gross margin by 150 basis points to 39, 4% and reduced our SG&A spending by nearly 3%.
These favorable outcomes were achieved despite adding the recent ATM acquisition in October which is not fully up and not fully operating at capacity during its transitioned to Chris Air and despite our continued spending on R&D and new product development to benefit our future.
Amortization of intangibles interest expense and tax expense as a percent of pretax income also decreased in Q1, as we look at all costs and spending similarly.
Entered orders were solid as we booked $158 million, new business and ended the quarter with a backlog of $512 million.
Book to Bill of <unk>, 97%.
As we move forward throughout 'twenty, one I'll remind you that our Dod business led by our participation on the block five contract for additional Virginia class submarines.
Where we booked several large orders during fiscal 'twenty, we will be delivering products against these large multiyear programs, which will mathematically reduced the optics of our book to bill going forward.
As we work through the year Covid will continue to bring along some uncertainty which makes it difficult to predict our near term operations will be affected using our normal forecasting methodologies.
And as a result of this uncertainty we will continue our current protocol, but not providing finite EPS guidance for the balance of the year.
Consistent with our November communications from a directional perspective, we can point to several areas, where we see positive momentum.
Our commercial aerospace and our utility end markets are showing some degree of customer stabilization, which supports our current outlook, suggesting movement towards a recovery in the second half of 'twenty one.
Increasing distribution of the Covid vaccine is anticipated to benefit and accelerate the recovery of commercial air travel and utility spending with customers resuming more normal buying patterns.
While we solidly beat Q1, we still expect the first half of 'twenty, one to be slightly down compared to the first half of 'twenty.
Look for the second half of 'twenty, one is expected to be a favorable comparison to the second half of fiscal 'twenty given the various elements of recovery that were anticipating.
We expect to show growth in fiscal 'twenty, one adjusted EBITDA and adjusted EPS compared to fiscal 'twenty with adjusted EBITDA and adjusted EPS reasonably consistent with that reported in 2019.
If we complete any additional acquisitions during the year and as expected they would contribute to these expectations and with that I'll turn it back over to thanks.
Thanks, Gary I won't spend much time to GAAP in our first quarter commentary on our release captures from our perspective, but I will offer some qualitative comments about our end markets our expectations for the balance of the year, starting with our A&D segment, while we're seeing some signs of modest recovery in commercial aerospace, we expect continued softness over the net.
Three to six months, we are seeing some stabilization in OEM build rates an increase in airline passenger traffic and flight miles evidenced by the fact that quite a few air carriers are bringing more of their eye on fleet back into service and daily TSA passenger boarding numbers are moving in the right direction.
Just as we saw in Q1, the defense portion of our A&D business is and will continue to remain strong for the foreseeable future given our backlog on platform positions. We also see the current situation on aerospace market as an opportunity for ESCO.
Look at suppliers or competitors, where there may be.
It may be able to provide assistance by partnering or through an acquisition.
Our test business delivered a really solid Q1, thus significantly, beating our internal expectations and delivering on EBIT margin of nearly 13% versus 11% last Q1.
Cash outlook remind remained solid given the diversity of its served markets.
While <unk> had a really strong first quarter, coupled with favorable sales mix driving a solid EBIT margin with that.
Expect esg's.
Sales outlook to be we do expect it to be soft for Q2 before returning to more normal levels from the second half of the year.
It's COVID-19 vaccine gets more widely distributed throughout the utility service personnel, we expect USG market to come back on line. We're quickly as they can relax and with today's social distancing guidelines utility service personnel can return to their normal site visit routines, we continue to communicate with and support our utility customers.
Remotely and our client service engineers are doing a really good job capitalizing on their relationships with their utility counterparts to provide a real test solutions. This has been accomplished through a lot of creative means and positions global for success from the current site restrictions are eased.
I am pleased with the enthusiasm surrounding usg's pipeline of new products and solutions and we continue to see Nrg's embark is improving as new investments in renewable energy are increasing in both wind and solar are new solar product introductions have been growing for our better than anticipated and we expect that trend to continue.
Moving on to M&A, we continue to evaluate several opportunities and we'll continue taking a prudent and deliberate approach we expect to take action on these opportunities to grow our business as we have in the past.
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.
Regarding our recent acquisition of ATM I'm pleased to report the integration into our Chris share facility volume to California is on track and should be completed within the next two to three months, which will further improve Atms contribution margin.
Wrap up we delivered a solid first quarter from both cash flow and earnings standpoint, as we move through fiscal 'twenty. One our plan is to continue to focus on the fundamentals and look for opportunities to leverage our infrastructure through M&A to create additional operating efficiencies and ensure we are well positioned for long term success.
So with that I'd be glad to take any questions.
At this time I would like to remind everyone in order to ask a question on press star one on your telephone keypad.
To ask a question. Please press star one on your telephone.
Our first question comes from the line.
On the mall.
Kevin.
Sir your line is open.
Good afternoon, and thanks for taking my questions.
Sure.
I wanted to start off on the utility end market. It sounds like into calendar year end there was some good activity there.
And then as we look at.
At the current quarter, maybe that there's some softness but then opportunity.
And I think that's the way you framed it up qualitatively. So any anecdotes you can give there on the puts and takes would be helpful.
Sure Jamie.
Got it exactly right so.
Fourth quarter, we often will get some of this kind of money that's going on.
For year end, and we set a little bit more of it this year than the day.
I guess, it's not surprising because the spirit of it has been somewhat restrained over the past six months or so our second quarter is always the softest quarter.
<unk>.
That's not going to be different this year, but I think it's about even with what we saw last year in the second quarter. So not really concerned that's what our expectations are and we do think going into the second half it should pick back up to more normal levels because as we've said before you can delay this testing, but you can't last forever and so my hope is.
As we sit on prepared statements is more and more utility folks get vaccinated adult allow more on site.
It's in support and that type of thing but.
<unk>.
The way you stated is very consistent with what we see.
Okay.
Thank you for for that and I guess for a follow up.
I'll hit on the directional outlook that you've given.
Really just to make sure were tracking correctly, what you've communicated on the first half.
Per in the second half compare.
Just want to make sure does that apply to both revenue and EBITDA.
And then any anything you want to call out maybe in terms of margin differences first quarter first fiscal quarter into the second fiscal quarter.
You want to make sure just to remind folks of would be helpful as well.
Okay.
Tom and I will take the last part of that question first because thats eases, we expect the margin in the back half of the year to be meaningfully higher than the first half of the year and Thats a combination if you look back at our last probably five years, it's that same that same correlation well before COVID-19 and it is a function of two things one.
Revenue in the back half of the year, it's been consistently more heavily weighted so because of the fixed cost coverage ratio. There. We tend to have very strong Q4 margin contributions and usually Q3 is the second strongest so that is going to continue.
You think of kind of a general correlation of how we're looking at this historically.
<unk> historical and talking about.
2019, and 18 going backwards is kind of in the ballpark from a 40%, 60% being 40% of the of the revenue and profit came in the first half from 60 in the back.
It's probably just a few points difference. So if you were putting it somewhere in the neighborhood of $35 65 somewhere in that range, you would get yourself from a weighting perspective, depending on how you've modeled out with the and what your goal is there. So then you can just kind of carry that up to the revenue side because again it.
We're looking at the same kind of relationship that 35% to 38% in the first half with the balance coming into the year. So hopefully that helps you directionally.
It does thank you and I'll turn it back.
Thank you again to ask a question. Please press star one on your telephone.
Question on the line.
Sean Penn Wang Peng of C. J S. Your line is now open.
Hi, Good afternoon, gentlemen, thank you for taking my questions on the nice quarter.
You mentioned that I think that your expectation is for the year were mostly unchanged, but just given the strength that you saw in Q1 is there maybe a slightly more positive bias to the year.
Just given what you've seen so far or is there maybe something coming out.
A little bit more negative than what you thought before.
Before you finished Q1.
Just given given the environment, we're in right now.
Four months into the year and I really would hesitate to make any big changes I mean, we did have a great first quarter and maybe take some of that was probably at the expense of the second quarter to be honest, but we.
If we can get something done on the acquisition front or if the market open markets open up a little bit quicker than obviously, there is a potential for upside, but I would hesitate to make any any bold statements.
Here in the middle of February.
Yes.
Thank you Victor.
Hey, John just that a step further just our commentary about what we're seeing signs pointing in the right direction, but those signs have been finalized themselves or put themselves on a finite bucket yet so where we started the year, we had a pretty.
<unk> planned based on the visibility that we had again not consistent with our past planning protocols and.
When you look at it today, yes, we're off to a good start but I think the visibility window. We have today kind of runs in three months cycles. Instead of nine month cycle. So we have pretty good clarity on the next quarter, we're sitting in.
Back half of the year, we're still taking a cautious approach.
Theres, probably enough balance there to protect the downside, but we don't want to commit this early in the year net and that's been our protocol for years not to come out in February and raised the guidance. What you still have as Victor at eight and a half from nine months.
Of time left so I would think of it as it's we're off to a really good start we have enough protection, but until we get more the year gets more mature, we're probably not going to comment on.
Other than Directionally on the recovery and the signs of recovery that we're seeing.
Okay fair enough. Thank you for that.
And I was just wanted to talk a little bit more about the commercial aerospace business are you getting any indication at this point that they are preparing to ramp up production just given the board and given that they are taking their.
Are there plans that are out of idle fleet.
Or are they still may be burning off inventory that they have on hand.
At the time.
Supply chain too.
Get ready for more comments.
They haven't yet.
We see some signs of it but nobody has caused it.
To make sure you're ready for a big ramp up.
We track the all the indicators are pretty closely and I would say that.
What things seem pretty solid we have not gotten any indication anybody's going to pull anything forward at this point.
Yes, Jonathan the only the only clarity we've.
Obtained since the last time, we spoke was if you look at the OEM side of it the build rate certainty was completely uncertain. We didn't know because the customer didn't know if they're going to build 10 planes or two planes 20 planes and I'd say, we're getting a little more clarity as you get through this stuff that we're getting a reasonable narrowing of that variability.
On the build rates. So we don't have to throw a dart at the wall and say hey, Boeing might be building 20, or they might be willing to now we're talking about deviation of two years or three planes a month, so that helps us.
Get comfortable with things, but it certainly doesn't explain it doesn't give us.
The visibility that says.
Let's let's re hire people and start spending money I'd say on the aftermarket.
Market side what.
What we track is as Victor said, the TSA boarding profile who's putting planes back in service and that sort of thing and I want to remind people that even if a plane is half full it's still flying and so TSA boardings are one indicator of whats driving the aftermarket, but it's really.
Combination of that and plain miles not just passenger miles so.
That has stabilized for us as well, it's still down significantly, but again, we're seeing signs directionally.
That looks like it's going to come back faster than the OEM side, yes.
It's very anecdotal, but if you look at the TSA numbers and so they've been tracking.
So, it's probably December and about 40%, 38% to 40% of the previous year. We did if you look at the three days after the first through the year. The first three days in 2021.
<unk> jumped up like 55%.
And the only thing I draw from that is people are ready to travel.
They really want to travel on a if you look at it.
Vacation bookings in cruise bookings and all of that I mean, those are a very strong et cetera, I don't think theres any doubt that there's a strong desire there from people that we get back.
Traveling and traveling by air, but it's and I think that the vaccine is going to make a huge difference one a lot more people are able to get access to that.
Got it okay. Thank you.
We don't talk about it too much but can you talk about the pipeline for test my.
Perhaps on what that there was some larger projects.
Deferred out of last year, just because of the Covid situation are those now close to releasing or are they still on a holding pattern just kind of talk about the environment. There on the demand that youre seeing.
Well I think.
The very large ones that I think we're still a bit of a holding pattern.
But we're seeing a lot of great activity it is from.
Waller Shavers and on here I'm talking one.
$5 billion of chambers, and so thats really been strong I mean, the pipeline that we see.
Day is as strong as it was when we were entering.
Last year, so and we're seeing a line, particularly in China has been a really great market for us.
Recently, but I would say that the test market.
I should say that the test end markets remain pretty strong so that's in areas.
Look at the results over the past.
Nine to 12 months I mean, that's held up very nicely and we've not seen anything that's going to change that and so my hope is that some near term some of these larger and we will start.
Freeing up but again, we don't need those to kind of make forecasts we have out there today.
Got it Okay. My last one on certain any update on the CFO.
Just on the Gary I know you hired out to folks on.
Yes.
Yeah actually I have been.
We will get any specifics that I have been very pleased with the quality of people that are shown on our interest in this we've been working as hard on really good and a lot of detail, but I think that will be.
Really good candidates that we have.
And so I think thats something that we will be able to get done here in the next quarter. So I think Gary will still be here for the next call for sure, but it'll be a very orderly transition he's committed to stay as long as he needs to to make sure that whoever does it replace them, we will be well schooled on what to do around here, but again I've been very impressed with the quality of the people.
We've been able to attract.
Great. Thank you very much.
You bet.
Thank you next question from the line of John Thanks, Brett.
Sir Your line is now open.
Yes, I thought you referred to in your commentary that might have been some borrowing from the second quarter into the first quarter two items.
Properly and if so what businesses did you borrow from.
Yes, I would say that.
What we saw particularly on their test commissary in the utility market I think has such a strong first quarter and my assumption is some of that probably got pulled out of the second quarter into the first quarter.
Okay. That's on the utility market got it.
Quick question regarding the.
The temple.
The billings in aerospace and defense, how does that second half and A&D followed at 40 60 model or is it.
Tilted more one way or the other.
Yes.
Well I think if you look at the A&D market youre going to see a little bit more low.
A little more tilting to the backend because again, if I just focus on the <unk>.
The large programs in that group large, meaning getting an order over $10 million is primarily around the submarines and the space business. So we're in negotiations on.
Next pool.
Pool, if you will on block five and so we would expect not many orders on block five in Q1 and Q2, because again, we've got $100 million last year. So we should pick up.
Another lot on the back end of this year and then within the space program at Boeing the space launch system. The Artemis program SLS were in negotiations as we have been if you get that it's a cadence so when they released the core stage numbers and I think.
That should give us.
On a nice book to Bill on the back half of the year. So we're burning off backlog in the first half on the large programs will replenish that and my guess our prediction for the order book to Bill for the year will be slight to tie which to me is a homerun when you're burning off a $100 million.
Running start from last year, so it looks pretty low profile looks pretty good and Thats why I wanted to emphasize the cadence of this the book to Bill is important but it's really the sustaining in the backlog number.
As it burns off and it gets replenished in different quarters. So it's really just a mathematical kind of.
Rejiggering of the quarterly profile the deal looks great.
Got it got it thank you.
Okay.
Thank you again, so thats a question. Please press star one on your telephone.
Again to ask a question. Please press star one on your kind of flow.
Okay. So I think I think we've got all the questions that are out there answered. So I appreciate everybody's interest and we'll talk to you again next quarter. Thank you.
Thank you and that concludes today's call. Thank you everyone for participating on this.
Disconnect.
Okay.
Sure.
[music].
[music].
Good day and welcome to the Q1 'twenty 'twenty, one ESCO earnings conference call today, and another 39th call is being recorded with US today are Vic Richey, Chairman and CEO Gary Master.
<unk>, President and CFO and now to present the forward looking statement I would like to turn the call over to Kate Lowrey Director of Investor Relations. Please go ahead.
Thank you statements made during this call regarding the amounts and timing of 'twenty 'twenty, one on and beyond revenue.
Covid impacts in recovery expected as a result of Covid vaccines EPS adjusted EPS EBITDA adjusted EBITDA, new products margins cash share holder value the timing of block five orders success in completing additional acquisitions and other statements, which are not strictly historical are forward looking statements within the meaning from safe Harbor.
So of 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 exist on the company's operations and business environment, including but not limited to the risk factors referenced in the company's press release issued today, which will be <unk>.
It is an exhibit to the company's form 8-K to be filed we undertake no duty to update or revise any forward looking statements whether as a relative results of new information future events or otherwise. In addition during this call. The company may discuss some non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to the most comparable.
Non-GAAP measures can be found on the press release issued today and found on the company's website at Www Dot ESCO technologies Dot com under the link Investor Relations now I'll turn the call over to Vic. Thanks, Kate before we get into the financials I'll provide a brief update on today's Covid environment, We continue monitoring the situation where a regular basis.
And our primary goals remain to say stay ahead of the curve provide a safe working environment and protect the health of our employees.
Price of actions, we've taken and the operating protocols, we have implemented since the start of the pandemic. We're done with a clear focus which was to protect our strong financial condition to deliver products and services in support of our customers all while keeping our employees safe and healthy.
Solid operating results in Q1, coupled with our strong liquidity position demonstrates that the measures. We've taken will allow us to successfully navigate through this challenge our actions will benefit as flow going forward as things continue to move toward a more normal state and I am confident that our disciplined approach to operating the business will re.
And our continued success throughout the balance of fiscal 'twenty one.
While Gary will provide the financial details I'll offer a top level comments by noting that while our Q1.
A&D sales were lower than prior year due to the COVID-19 impact on commercial aerospace.
Our portfolio diversity allowed us to overcome this headwind as we substantially increased our adjusted EPS from prior year due to the strong performance from our other operating units our Navy business remains strong and well funded our test business continues to outperform with increased margins in our USG.
Business is also meaningful calendar year end spending across the utility customer base.
Coupled with the cost reduction actions, we recently implemented USG delivered an adjusted EBITDA margin of <unk> 25 per set up from approximately 19% in the prior years Q1, we were fortunate to have strong and experienced leadership teams across the company who continues to demonstrate their ability to affect.
We managed costs to meet market meet.
Meet changing market demands our teams are actively addressing the challenges of today, while continuing to focus on being even stronger tomorrow.
<unk> will continue to benefit from our leadership positions in several niche markets, where we deliver a set of unique and highly technical products and solutions, specifically designed to meet our customer needs.
This makes it difficult for our solutions to replace to alternative sources. The fundamentals of our portfolio remains strong and our goal remains the same to create long term shareholder value now I'll turn it over to Gary.
Thanks, Bob.
I'll briefly touch on the financial results as laid out on the press release.
Navigating today's Covid world, our number one financial priority remains the same maintaining our substantial liquidity as I said from the start of the pandemic when challenging times pop up unexpectedly cash is king I am extremely pleased with the significant cash flow we generated in Q1 is normally.
Our first quarter is the weakest quarter of the year when it comes to cash generation.
Following up on the strong cash flow performance on the past year, we kicked off fiscal 'twenty, one with a record amount of cash flow, resulting in a free cash flow conversion ratio of 127% of net earnings.
Clearly our working capital initiatives are taking hold across the company and while impressive today, we have said larger goals for the future.
Today, we have approximately $740 million on liquidity on our disposal between cash on hand, and available credit capacity, while carrying a modest leverage ratio of <unk> 38.
In the release, we called out a couple of discrete items, which are described in detail and are excluded from the calculation of adjusted EBITDA and adjusted EPS in both Q1 periods.
I'll briefly touch on a few comparative highlights.
We reported adjusted EPS of <unk>, 55, a share which increased 12 or 28% from the 43, we reported in prior year Q1 to 55 also exceeded the consensus estimate of <unk> 45.
Given the backdrop on today's Covid operating environment I am pleased to report that we delivered Q1 adjusted EBITDA of over $29 million, which is approximately four 5% higher than Q1 of last year. Despite the noted sales decline in A&D that Vic mentioned related to softness within commercial aerospace.
Base, which historically is one of our most profitable operating units.
Total sales in Q1 decreased $9 million compared to Q1 of last year, but Navy and space sales were up $4 million on A&D, which helped to mitigate the decline in commercial aerospace.
And test in USG sales were up a combined $2 million.
Despite the noted increase in Usg's Q1 sales, resulting from the release of some pent up demand globally.
Mobile continues to expect some near term deferrals or project deliverables and maintenance work as many utility customers, both domestic and international.
<unk>, the COVID-19 protocols, reflecting the various mandates restricting on site personnel at customer locations.
Just on with our earlier communications, we believe the back half of 'twenty, one will be stronger than the first half and as vaccine Rollouts continue to accelerate this should allow <unk> customers to return to a more normal operating environment.
We took several cost reduction actions recently and as a result, we increased our Q1 gross margin by 150 basis points to 39, 4% and reduced our SG&A spending by nearly 3%. These.
These favorable outcomes were achieved despite adding the recent ATM acquisition in October which is not fully up and not fully operating at capacity during its transitioned to Chris there and despite our continued spending on R&D and new product development to benefit our future.
Amortization of intangibles interest expense and tax expense as a percent of pretax income also decreased in Q1, as we look at all costs and spending similarly.
<unk> orders were solid as we booked a $158 million new business and ended the quarter with a backlog of $512 million for the.
Book to Bill of <unk>, 97%.
As we move forward throughout 'twenty, one I'll remind you that our Dod business led by our participation on the block five contract for additional Virginia class submarines, where.
Where we booked several large orders during fiscal 'twenty, we'll be delivering products against these large multiyear programs, which will mathematically reduced the optics of our book to bill going forward.
As we work through the year Covid will continue to bring along some uncertainty which makes it difficult to predict our near term operations will be affected using our normal forecasting methodologies.
And as a result of this uncertainty we will continue our current protocol, but not providing finite EPS guidance for the balance of the year.
Consistent with our November communications from a directional perspective, we can point to several areas, where we see positive momentum on.
Our commercial aerospace and our utility.
And markets are showing some degree of customer stabilization, which supports our current outlook, suggesting movement towards a recovery in the second half of 'twenty one.
Interest increasing distributions of the Covid vaccine is anticipated to benefit and accelerate the recovery of commercial air travel and utility spending with customers resuming more normal buying patterns.
While we solidly beat Q1, we still expect the first half of 'twenty, one to be slightly down compared to the first half of 'twenty.
And the outlook for the second half of 'twenty, one is expected to be a favorable comparison to the second half of fiscal 'twenty given the various elements of recovery that were anticipating.
We expect it to show growth in fiscal 'twenty, one adjusted EBITDA and adjusted EPS compared to fiscal 'twenty with adjusted EBITDA and adjusted EPS reasonably consistent with that reported in 2019.
If we complete any additional acquisitions during the year and as expected they would contribute to these expectations and with that I'll turn it back over to Frank.
Gary I won't spend much time to GAAP in our first quarter commentary on our release captures my perspective, but I will offer some qualitative comments about our end markets our expectations for the balance of the year, starting with our A&D segment, while we're seeing some signs of modest recovery in commercial aerospace we expect continued softness over the next.
Three to six months, we are seeing some stabilization in OEM build rates an increase in airline passenger traffic and flight miles evidenced by the fact that quite a few air carriers.
Bringing more of their eye on fleet back into service and daily TSA passenger.
<unk> numbers are moving in the right direction.
Just as we saw in Q1, the defense portion of our A&D business is and will continue to remain strong for the foreseeable future given our backlog on platform positions. We also see the current situation on aerospace market as an opportunity for ESCO, we continue to look at suppliers or competitors, where they may be.
We may be able to provide assistance by partnering or through an acquisition.
Our test business delivered a really solid Q1 significantly, beating our internal expectations and delivering on EBIT margin of nearly 13% versus 11% last Q1.
Cash outlook remind remained solid given the diversity of it is served markets.
While USG had a really strong first quarter, coupled with a favorable sales mix driving a solid EBIT margin, we can expect esg's.
Sales outlook to be we do expect it to be soft for Q2 before returning to more normal levels in the second half of the year.
As Covid vaccine gets more widely distributed throughout the utility service per sale, we expect USG market to come back online more quickly because they can relax on with todays social distancing guidelines utility service personnel can return to their normal site visit routines, we continue to communicate with and support our utility customers.
Remotely and our client service engineers are doing a really good job capitalizing on their relationships with their utility counterparts to provide a real time solutions. This has been accomplished through a lot of creative means and positioning <unk> for success in a current site restrictions are eased.
I am pleased with the enthusiasm surrounding usg's pipeline of new products and solutions and we continue to see Nrg's end market is improving as new investments in renewable energy are increasing in both wind and solar are new solar product introductions have been growing for our better than anticipated and we expect that trend to continue.
Moving on to M&A, we continue to evaluate several opportunities and we'll continue taking a prudent and deliberate approach we expect to take action on these opportunities to grow our business as we have in the past.
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.
Regarding our recent acquisition of ATM.
Pleased to report the integration into our Chris share facility volume to California is on track and should be completed within the next two to three months, we should further improve Atms contribution margin. So it on.
Our app up we delivered a solid first quarter from both cash flow and earnings standpoint, and as we move through fiscal 'twenty. One our plan is to continue to focus on the fundamentals and look for opportunities to leverage our infrastructure through M&A to create additional operating efficiencies and share we're well positioned for long term success.
So with that I'll be glad to take any questions.
At this time I would like to remind everyone in order to ask a question on press star one on your telephone keypad.
Again to ask a question. Please press star one on your telephone.
Your first question.
From the line.
Tommy Moll.
Kevin.
Sir your line is open.
Good afternoon, and thanks for taking my questions on Europe.
Sure.
I wanted to start off on the utility end market. It sounds like into calendar year end there was some good activity there.
And then as we look at the current quarter, maybe that there is some softness but then opportunity.
Beyond.
That's the way you framed it up qualitatively so any anecdotes you can give there on the puts and takes would be helpful.
Sure, Jamie and you got it exactly right. So in the fourth quarter, we often will get some of this kind of money that.
For year end, and we set a little bit more of a few share then the day.
Typically I guess, it's not surprising because the spending has been somewhat restrained over the past six months or so our second quarter is always a soft this quarter.
For durable and so that's not going to be different this year, but I think it's about even with what we saw last year in the second quarter. So not really concerned that's what our expectations are and then what do you think going into the second half it should pick back up from more normal levels because as we've said before you can delay this testing, but you can't delay it forever.
And so on my hope is as we sit on prepared statements is more and more of the utility folks get vaccinated adult allow more on site.
It's in support and that type of thing, but it's the.
The way you stated is very consistent with what we see.
Okay.
Thank you for for that and I guess for a follow up.
I'll hit on the directional outlook that you've given.
Really just to make sure were tracking correctly, what what you've communicated on the first half compare in the second half compare.
Just want to make sure does that apply to both revenue and EBITDA.
And then any anything you want to call out maybe in terms of margin differences first quarter first fiscal quarter into the second fiscal quarter that you want to make sure just to remind folks of would be helpful as well.
Okay.
Tom and I will take the last part of that question first because thats easy as we expect the margin in the back half of the year to be meaningfully higher than the first half of the year and Thats a combination if you look back at our last probably five years. It's that same it said same correlation well before COVID-19 and it's a function of two things one the revenue.
In the back half of the year has been consistently more heavily weighted so because the fixed cost coverage ratio. There. We tend to have very strong Q4 margin contributions and usually Q3 is the second strongest so that is going to continue.
As you think of kind of general correlation of how we're looking at this historically and when I say historical Im talking about.
2019, and 18 going backwards is kind of in the ballpark from a 40%, 60%, meaning 40% of the of the revenue and profit came in the first half from 60 in the back.
It's probably just a few points difference so if you're putting it somewhere in the neighborhood of $35 65 somewhere in that range you would get yourself from a weighting perspective, depending on how you modeled out what the and what your goal is there. So then you can just kind of carry that up to the revenue side because again it.
We're looking at the same kind of relationship that 35% to 38% in the first half with the balance coming in the year. So hopefully that helps you directionally.
It does thank you and I'll turn it back.
Thank you.
Again to ask a question. Please press star one on your telephone.
Question from the line of John Penn Wang Peng of T. J S. Your line is now open.
Hi, Good afternoon, gentlemen, thank you for taking my questions on the next quarter.
You mentioned that I think that your expectation is for the year were mostly unchanged, but just given the strength that you saw in Q1 is there maybe a slightly more positive bias to the year.
Just given what you've seen so far or is there maybe something coming out that there's a little bit more negative than what you thought.
Before you finished Q1.
Well just given given the environment, we're in right now.
Four months into the year and I really would hesitate to make any big changes I mean, we did have a great first quarter I think some of that was probably at the expense of the second quarter to be honest, but we.
If we can get something done on the acquisition front or the market open markets open up a little bit quicker than obviously, there is a potential for upside, but I would hesitate to make any any bold statements.
Here in the middle of February being honest.
Thank you Victor.
Hey, John just that a step further just a commentary about what we're seeing signs pointing in the right direction, but those signs have been finalized themselves or put themselves on a finite bucket yet so where we started the year, we had a pretty.
Decent plan based on the visibility that we had again not consistent with our past planning protocols and.
When you look at it today, yes, we're off to a good start but I think the visibility window. We have today kind of runs in three months cycles. Instead of nine month cycle. So we have pretty good clarity on the next quarter, we're sitting in the back half of the year, we're still taking a cautious approach there is theres probably enough balance there to protect the downside.
But we don't want to commit this early in the Internet and that's been our protocol for years not to come out in February and raised the guidance, while you still have as VIX at eight five months.
Of time left so I would think of it as it's we're off to a really good start we have enough protection with until we get more the year gets more mature, we're probably not going to comment.
Other than Directionally on the recovery on the signs of recovery that we're seeing.
Okay fair enough. Thank you for that.
And I was just wanted to talk a little bit more about the commercial aerospace business are you getting any indication at this point that they are preparing to ramp up production just given the board and given that theyre taking their.
Are there plans that are out of idle fleet.
Or are they still may be burning off inventory that they have on hand.
On the time it.
Supply chain too.
Get ready for more common.
They haven't yet I mean, we see some signs of it but nobody's calls at AED.
To make sure you're ready for a big ramp up.
We track the all the indicators pretty closely.
I would say that.
What things seem pretty solid we have not gotten any indication anybody's going to pull anything forward at this point.
Yes, Jonathan the only the only clarity we've.
Obtained since the last time, we spoke was if you look at the OEM side of it the build rate certainty was completely uncertain. We didn't know because the customer didn't know if they're going to build 10 planes or two planes or 20 planes and I'd say that we're getting a little more clarity as you get through this stuff that we're getting a reasonable narrowing of that variability.
On the build rates. So we don't have to throw a dart at the wall and say hey, Boeing might be building 20, or they might be building to now we're talking about.
Deviation of two years or three planes a month, so that helps us gain.
<unk> comfortable with things, but it certainly doesn't have explain it doesn't give us the.
The visibility that says.
Let's let's re hire people and start spending money I'd say on the aftermarket side.
What we track is as Victor said, the TSA boarding profile who's putting planes back into service and that sort of thing and I want to remind people that even if a plane is half full it's still flying and so TSA boardings are one indicator of whats driving the aftermarket, but it's really.
Combination of that and claimed miles not just passenger miles so.
That has stabilized for us as well I mean, it's still down significantly, but again, we're seeing signs directionally that that that looks like it's going to come back faster than the OEM side, yes.
It's very anecdotal, but if you look at the TSA numbers and so they've been tracking.
So it's probably December net of about 40%, 38% to 40% of the previous year. We did if you look at the three days after the first of the year. The first three day 2021.
<unk> jumped up like 55%.
And the only thing I would draw from that is people are ready to travel Inc.
They really want to travel on if you look at it.
Vacation bookings in cruise bookings and all of that I mean, those are a very strong et cetera, I don't think theres any doubt that there's a strong desire there for people to get back.
Traveling and traveling by air, but it's and I think that the vaccine is going to make a huge difference one a lot more people are able to get access to that.
Got it okay. Thank you.
We don't talk about it too much but can you talk about the pipeline for cash my impression was that there were some larger projects.
<unk> out of last year's country, just because of the Covid situation are those now close to releasing or are they still on a holding pattern just kind of talk about the environment. There on the demand that youre seeing.
Well I think.
The very large ones that I think there is still a bit of a holding pattern.
But we're seeing a lot of great activity and a smaller chambers and I'm here I'm talking one.
$5 billion of Chambers, and so that's really been a strong I mean, the pipeline that we see today is as strong as it was when we were entering.
Last year, so and we're seeing a line, particularly in China has been a really great market for us.
Recently, but I would say that the test market.
I should say that the test end markets remain pretty strong so that's in areas.
If you look at the results over the past.
912 months I mean, that's held up very nicely and we've not seen anything that's going to change that and so my hope is that.
Some near term some of these large revenue will start.
Freeing up but again, we don't need those to kind of make forecasts we have out there today.
Got it Okay. My last one on certain any update on the CFO, replacing on Gary I know you hired on falling so.
Okay.
Yeah actually I have been.
We will get any specifics that I've been very pleased with the quality of people that are showing interest in this we've been working as hard on the units and a lot of detail, but I think that it will be.
Really good candidates that we have.
And so I think that's something that we'll be able to get done here in the next quarter. So I think Gary will still be here for the next call for sure, but it'll be a very orderly transition. He is committed to stay is obviously needs to to make sure that whoever does it replace him will be well schooled on what to do around here, but again I've been very impressed with the quality of the people who've been.
Able to track.
Great. Thank you very much.
You bet.
Thank you next question from the line of John <unk>.
Yeah.
Sir Your line is now open.
Yeah, I thought you referred to in your commentary.
Might have been some borrowing from the second quarter into the first quarter.
To do that properly and if so what businesses did you borrow from.
Yes, I'd say that.
What we saw particularly on their test on the sorry in the utility market I think.
Such a strong first quarter and my assumption is some of that probably got pulled out of the second quarter into the first quarter.
Okay. That's that's on the utility market got it.
Quick question regarding the.
The temple.
The billings in aerospace and defense, how does that second half and A&D followed at 40 60 model or is it.
Total more one way or the other.
Yes.
Well I think if you look at the A&D market youre going to see a little bit more a little more tilting to the backend because again, if I just focus on.
The large programs in that group large, meaning getting an order over $10 million is primarily around the submarines and the space business. So we're in negotiations on.
The next pool, if you will on block five and so we would expect non.
Many orders on block five in Q1, and Q2, because again, we've got $100 million last year. So we should pick up.
Another a lot on the back end of this year and then within the space program at Boeing need the space launch system. The Artemis program SLS were in negotiations as we have been if you get that it's a cadence so when they released the core stage numbers.
And I think so.
That should give us on.
Nice book to Bill on the back half of the year. So we're burning off backlog in the first half on the large programs will replenish that and my guess or prediction for the order book to Bill for the year will be slight to tie which to me is a homerun when you're burning off a $100 million of running start from last year. So it looks pretty profile look.
Pretty good and Thats why I wanted to emphasize the cadence of this the book to Bill is important but it's really the sustaining on the backlog number as it burns off and then gets replenished in different quarters. So it's really just a mathematical kind of rejiggering of the quarterly profile the deal looks great.
Got it got it thank you.
Thank you again, so thats a question. Please press star one on your telephone.
Again to ask a question press star one on your kind of flow.
Okay. So I think I think we've got all the questions that are out there answered. So I appreciate everybody's interest and we'll talk to you again next quarter. Thank you.
Thank you and that concludes today's call. Thank you everyone for participating.
Disconnect.