Q2 2022 ESCO Technologies Inc Earnings Call
Good day and welcome to ESCO technologies second quarter earnings Conference call. Today's call is being recorded with US today are Vic Richey, Chairman and Chief Executive Officer, Chris Tucker, Vice President and Chief Financial Officer, and now to present the forward looking statements I will now turn the call over to <unk>.
Kate Lowrey, Vice President of Investor Relations. Please go ahead.
Thank you statements made during this call 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 in the company's operations and business.
This 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.
Undertake no duty to update or revise any forward looking statements, except as may be required by applicable laws or regulations.
In addition, during this call the company May discuss non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to the most comparable GAAP measures can be found in the press release issued today and found on the company's website at Www Dot ESCO technologies Dot com under the link Investor Relations.
During today's call, we will be referring to a slide presentation that is currently available on the Investor Relations section of our web site within the call. The charts are located in the download tab at the top right corner.
Now I'll turn the call over to Vic.
Thanks, Kate and thanks, everybody for joining today's call.
Let's start off with a welcomed our new board member John Hess. Just finished we just finished up our board made late last week, and we're really thrilled to be adding JNR board. She brings a very broad skill set with decades of experience in leadership roles at Teledyne, a diversified industrial company, we're focused on technology development to meet customer needs and drive.
Great Great perspectives our board.
She also has experience across many industries, including several of our core markets for knowledge and leadership will be a great asset for ESCO and we're happy to have her on the team licensing.
I'd like to thank the entire board for their ongoing support and commitment as escrow now, let's switch to a discussion of the second quarter overall.
Overall, we saw the business continue to build momentum all three businesses delivered organic growth sales.
<unk> sales growth in the quarter.
With consolidated revenue growth of over 23% in the quarter, it's clear that we have nice topline momentum.
We also had another great quarter of order growth with a 34% increase in orders compared to last year's second quarter. Our backlogs continue to grow with an increase of over $75 million Sensitives will year started.
The backlog at the end of March was a new record for us. So we feel good about the outlook for the balance of fiscal 'twenty, two and expect good momentum as we head into 'twenty three.
Chris will get into this some of the financial details in a few minutes, but I'll start off with some top level commentary about each of the business segments.
Starting with A&D, where the quarter was a bit mixed we continue to monitor the commercial aerospace business closely and were seeing some good growth from that market. So far in 2022.
It was another strong quarter for orders and revenue.
Increased 30% over the prior year to reach the highest level since before the start of the pandemic.
This is from an easy comparison, we had last year, but it's clear the travel is picking up and that is helping drive a recovery in our business. The Navy defense businesses had some declines in the quarter, we see that more as timing and feel good about the outlook there.
So there was revenue growth in the quarter, there is still margin and operational challenges in A&D.
Past past due backlog is something we're watching closely and supply chain challenges have not let up so all of the operations teams are highly focused on managing these issues to support our customers on the margin side. The bottom line is for A&D.
Bottom line for Andas, we expect margins to improve as the recovery continues and volume to build in the back half of the year.
Let's turn now to test business, where we had a really great quarter for <unk>.
Sales growth strength continued with nearly 28% increase compared to last year's second quarter.
We're seeing great growth in the Americas, and in Asia, where the growth coming from several key industries and product lines.
The other thing I'd like to highlight about the first quarter as our margin performance, we talked a bit last quarter about how important it was to see the margin improvement in this business and it really came through nicely.
Second quarter.
The team had to ask continued worst inflation challenges aggressively is definitely an ongoing battle, but nice to see the jump in margins and for all their hard work.
Similar to US we had a really solid quarter from the USG business as well the underlying sales growth came in at over 35% in Q2, just phenomenal growth.
And when you add in the acquisition impact the growth jobs to north of 60%.
Really great work by the teams there.
We had a pretty weak quarter for global a year ago. So the comparisons were bid easy, but I would say, we still saw the orders and sales momentum outpacing our expectations as the quarter closed out.
I did want to comment on the acquisition and integration status for Doble Ultra low and Phoenix, We just did a strategic review of these teams a few weeks ago and they've really done a great job of analyzing the product portfolio to determine which products should be offered in our markets around the world.
Clearly the acquisitions have brought us some new capabilities and now we have good visibility on our product roadmaps globally.
It's a long process and it will be additional work as we move into execution mode, but we still see nice revenue synergies and we're really happy with how the businesses are coming together.
Overall through the first six months a year, we feel good about what we've achieved and continue to be on track with the expectations. We laid out back in November it does require a step in the EPS growth.
A step up in EPS growth in the second half of the year.
This is our plan was laid out from the beginning of the year.
<unk> been working hard with all subsidiary teams to make sure the plants are in place and deliver.
I'll note that the operating environment is very challenging right now, but we will continue pushing hard to deliver the year certainly the backlogs are supportive of the second half projections and we are committed to delivering for our customers and now I'll turn it over to Chris.
Thanks Vic.
So I'll go through the financial results now, we're going to do that with a slide deck. This time, we created a slide deck that you should be able to see on our webcast and you can also access from the Investor Relations section of our website as Kate mentioned earlier.
Starting first on chart number three you.
You can see on all of the significant measures, we had nice double digit growth.
First with orders up 34% increase this quarter versus the quarter a year ago. The book to Bill of one five times was very strong and driven really by broad strength across the business and we finished with a record backlog at $671 million as of the end of March.
Sales increased by 23, 5% that was built up with 16, 5% organic growth and then acquisitions, adding another seven points of growth.
So again, we saw nice sales growth and really good strength from utilities commercial and aerospace commercial aerospace and also the test group.
On the adjusted EBIT dollars, we were up 17%, we did see the margins dropped a little bit we'll go through that segment by segment.
But fundamentally we had.
A&D down a little bit and then good.
Improvements from tests and USG.
And then if you look at the GAAP EPS you can see we are at 59, a year ago in the quarter on an adjusted basis that came down to 56, Youll recall that a year ago, we had a gain as we resolve the Watertown building and so that gain was pulled out of the numbers a year ago. This.
This year, we had one for various different adjustments. So that gets you to 65 this year versus <unk> 56, a year ago or growth of 16%.
If we go to the next chart.
We will have a little look at cash flow here.
We are down in cash flow year to date, so through the first six months were at $23 million versus just over $57 million a year ago. A couple of key things to point out in the balance sheet changes that are driving that.
First is kind of our contract assets and liabilities that you see on the balance sheet, we have various milestone payments that we receive as our contracts are executed on last year, we had some pretty big payments come through this year, we haven't had those yet it's really just a timing factor.
Impact of timing, so we would expect that to level out as we move forward. The other big impact is inventory, that's certainly by about $18 million year over year, a couple of things going on with inventory.
First as you all are aware, we're managing a lot of supply chain issues as is everybody out there. These days what that means is sometimes to secure parts, where maybe buying quantities that are a little bigger than normal.
Other times, we might have most of the parts, we need to finish in order, but not all of them.
So we can end up with a little bit of stranded inventory and then the other big factor is just the increased backlog as I mentioned, we have record backlogs right now.
So we're bringing in a lot of inventory to get ready to kind of flush that backlog out as we move into the back half of the year. So those are the big drivers on the inventory impact to cash flow.
The other items on this page capital expenditures were up about $7 $5 million year to date.
That really is driven by the Q1 purchase of the NRG headquarters, which we discussed three.
Three months ago on the acquisition side, we've spent $15 $6 million. This year that was for the <unk> acquisition.
In the A&D group a year ago, we had done the ATM acquisition also in the A&D group for $6 7 million Lastly is share repurchase youll recall that back in November we were reauthorized to spend $200 million on the new program.
For the first time in several years, we started the buybacks again this year and we've spent approximately $18 million year to date.
If you go to the next page we will go through the segment performance starting first with A&D. So you can see that the orders here were up 7%. If you look at the bottom right of the chart you see the backlog almost $397 million, which is nearly a 14% increase from a year ago. So we still have very healthy.
Logs here.
Really across the business, but certainly the commercial aerospace with many of the different platforms inside of there has begun to recover nicely and Thats a key driver and the numbers you see here.
Same with sales the sales growth was 3% overall commercial aerospace really led the growth in this quarter.
As Vic mentioned, we kind of had some easier comparisons right now because last year was very weak, but no doubt we're seeing those businesses start to come back a little bit.
Navy was actually we saw growth there from the globe and Westland businesses, both vacco had some pretty big declines in their navy business again kind of a timing as they execute against some of their contracts.
So they were overall the navy business was slightly down for us in the quarter.
And then if you look at the EBIT margins you can see at 17, 1% down from 27, a year ago I mentioned tobacco sales decline. So we did have some deleverage on that in a little bit of mix inside of the commercial aero businesses being the main drivers for the margin decrease.
If we go to the next page we have the utility solutions group.
Really just a great quarter across the board here, starting with orders the orders almost doubled so you can see 98% growth.
That was built up with about $27 million of growth from the core mobile business 12, six contributed from the acquisitions and then the renewable business grew by $3 2 million.
On the sales side, we were up 62%.
Global organically was up 39% Ultimate <unk> Phoenix added $10 million and then NRG was up 23%. So we continue to see good strength in the renewables market.
I would also point out here that year to date, if you exclude the acquisitions were up 9%.
So youll recall that in the first quarter were pretty weak organically, a big recovery this quarter and year to date, we're seeing solid growth there <unk>.
Adjusted EBIT margins were up almost four points, so 17, 7% compared to 13, 8% a year ago.
So obviously, we saw good leverage on the on the revenue flow through.
We are putting some price increases through here, which are helping to more than offset the wage and material inflation. We see we are slow. We're also starting to incur some expenses related to trade shows and customer events that were now doing in person. So that's bringing back a little more cost than we had in the prior year.
If we go to the next page.
The test business.
Over to USG, just really strong performance here across the board sales up 25 orders up 25% to $55 4 million, we're really seeing strength domestically and the medical shielding and then globally. We're seeing good order input across the test and measurement project business from.
From a sales perspective, we were up 28% to $55 9 million.
We've talked before about some of the power filter orders that had been coming in definitely starting to see those flow out of backlog and into the sales line and really seeing broad strength in the U S and in China and that business.
On the margin side were up over two points to 15, 2% again, it's a volume and price impact definitely still fighting inflation here as well on the materials side on the wage side, but.
But with the big growth in the price increases, we're able to drive the margin increase.
So if we go to the last page.
Just a quick discussion on our guidance.
Vik had mentioned this a little bit, but fundamentally we came out with guidance for the full year back in November of $3 $3 10 to $3 20 per share I would say in the first quarter, we probably came in a little light of expectations. During the second quarter, we outpaced our expectations a little bit so we're really pretty.
Much on track through the first half of the year and we feel like the full year range is still appropriate.
That leaves us for the third quarter, then with solid growth projection of 25% to 35% oil.
Or a range of 84 to <unk> 91.
So thats really all I had on the financials and ill turn it back over to Vic Thanks, Chris as soon as I touched on quite a few of my thoughts early in my commentary I'll just offer a few more comments.
Move into Q&A, we feel good about the start to 2022 and we're excited about the forecast we have out there a lot of growth coming as we move into the third quarter and beyond.
Currently all our planning meetings with all of the businesses. Although subsidiary teams have great product development programs that they are pursuing to deliver growth over the three year planning horizon.
The end markets, we serve continue to recover and exit of good growth characteristics over the short to medium term.
Our portfolio is well positioned as we move forward there continues to be uncertainty in the economy as the pandemic continues to evolve and as always we'll focus on serving customers well, we're managing our profitability and balance sheet to deliver higher returns for the shareholders to.
Closeout the opening commentary I, just like to thank all of our employees for the tremendous efforts so far this year.
We all know how challenging and operating environment is there are lots of challenges to running an efficient operation right now.
Supply chain continues to be unpredictable and getting certain operations fully staff is also challenging in spite of all that our teams are delivered.
With that I am very grateful I, just want to extend a big thank you to the entire escrow team.
So with that I think we're ready for Q&A.
Thank you.
To ask a question you will need to press star one on your telephone.
Your question. Please press the pound key please standby, while we compile the Q&A roster.
Our first question comes from John France ramp with Sidoti <unk> Company. Your line is now open.
Good afternoon, Chris Thanks for taking the questions.
I'd like to I'd.
I'd like to start the <unk>.
Supply chain issues that you had with the contractor in the previous quarter. Just curious you said those might linger into this quarter did they what kind of magnitude today's linger.
Yes, what I would say John is that we did see those past due backlogs continue to increase so we talked a little bit.
Last quarter about missing some sales as a result of that.
So that that overhang is still there and I think we were able to kind of power through that and.
Still obviously drive the earnings and sales commitments, we have made.
But.
I think from our perspective were watching the supply chain close and kind of expect.
Everybody is working to burn in the past dues down as quick as we can obviously that's important to keep our customers happy.
But we expect that.
Our challenge, we're going to have for probably the balance of the fiscal year and again everybody has got plans to get those past dues down, but we are we did see an increase in the quarter and will continue to working down from here.
I'd just add I mean, I think it's it's a cost advantage for sure because you don't know whats going to not show up from one day to the next and the other thing that.
In addition to just normal supply chain as you would think about it with piece parts and.
In our aerospace and defense group really challenged on outside processing.
And a lot of the products, we make there are lot of other send it out have some processing done it comes back.
Lead times on that outside processing.
Increased dramatically and that's something that we would.
Typically get back two weeks of May be taken 12 weeks. So it's just it's early days, but as Chris said I think the good news is we've kind of dealt with those challenges.
Workarounds pulled some things and so we really do need to get that worked off.
We'll get that done over time for sure and having that big backlog that we have that was really helpful. That you have a little more flexibility to pull things in if you need to do that.
Alright right.
Great and just to shift over to turnover in Phoenix I'm wondering if you've identified any additional revenue synergies or cost saving opportunities.
You've kind of got to know the business is a little bit better.
I think the biggest opportunities for us there are really doing some cross selling so as I talked about all the comments.
They've done really a lot of really good work to go through in each of the product areas locate products trying to figure out the best characteristics of each of those and then working to make sure that we're selling the right products in the right area.
When we made the acquisition part of our internal review was what type of revenue synergies other types of synergies synergies, we'll be able to get in.
And I would say we have a lot of confidence that we're going to be able to achieve those baseload of work has been done so far.
Okay, and just the legacy USG business can you talk a little bit about relative strength in the business and how much confidence you have in that persisting through the balance of the year. It seemed like a really good come back there.
At Doble and everything.
Yes, it was.
We were really disappointed going into the first quarter and so we've really seen a lot of strength here. So a lot of it is.
Anecdotal if you will because we do survey our customers to understand where they're at.
Getting back into the office.
There are people that are saying, yes, or no about test equipment is probably up 40% from where we last did that and so it does seem like I don't think its going to be linear if you will I mean, I think but I do think that the momentum there and we're going to see that throughout the year.
Again, the backlog in that business is probably as good as it's ever been and so I think just.
We just need to keep the momentum going I think thats there we.
Always do this big customer conference.
Every spring so we did that in person this year for the first time, obviously in a couple of years, let's say attendance was lower than it has been historically, but still pretty robust.
I would say that the people where there were very engaged and I think very excited about some of the things we're doing as we've talked about on some of the earlier calls.
We have introduced.
A number of new products and I think thats part of whats getting the momentum for us is that with some updated products, we're able to get to the customers.
And I would just add I mean I think.
As Vic said as we talked to the team there. They do feel like sentiment is starting to improve a little bit some of the external forecast they track as well on overall utility usage continue to increase so I think there's just seems to be a little bit better.
Kind of overall outlook for demand and we kind of see that in some of the customer activity and interactions right now so.
As you as you mentioned, John I mean its.
And as Vic said, it's maybe not going to be perfectly linear, but we are hopeful to get to a kind of a more stable steady growth out output as opposed to kind of a lot of the up and down we've seen over really through the whole pandemic.
Great. Thanks, Chris Thanks, Craig I'll get back in queue.
Thank you as a reminder to ask a question Thats Star One our next question comes from John <unk>.
Dan one thing with.
Jason.
I'm, sorry, with CJS Securities. Your line is open.
Hi, Good afternoon, guys. Thank you for taking my questions and nice quarter.
My first one is on maybe just to dig a little deeper to doble.
I was wondering if the demand youre seeing so far has sustained into Q3 I think you suggested you might have number one and number two it.
Is it some of it.
That pent up demand, where they're just catching up to where they needed to be or is that more just a resumption of the of the demand you saw pre pandemic.
I didn't hear your first question, but I'll answer your second one.
I do think it's more just return to normal I'm not sure. There's a huge amount of pent up demand with the test equipment.
There is some discretionary in nature to it but it does seem like it's getting back to where it was prior to the pandemic. So I think it's more something.
Is it sustainable I mean, if.
Too much pent up demand I'd be concerned budgeted that would be kind of a bubble and we see this more as a recovery to the norm.
Got it in the first part was just have you seen that sustained through Q3, so far.
Yes.
Honestly, we don't even have our first month yet but.
So it's hard for us to comment kind of what we've seen in April so far.
I would point out.
John is that we.
We had we are seeing some pretty big orders right now too for some of our like lease renewals and we mentioned in the press release that we had.
One of the Big Duck orders, you know, which is the global security offering.
Those are those are great program for us, but those are also kind of like that can be multibillion dollar type orders that sit in backlog for a while youre going to execute those things over anywhere from a year to all the way up to five years.
So we did see some pretty big of those in the quarter, which helped drove the orders and again, that's a positive thing, but I just wanted to give you some of that color on on what happened in the quarter.
Got it no that's helpful.
My next question just on the ability to meet those orders I think you mentioned in the past quarter and then maybe even before that the total had some issues with.
Client electronic parts of China.
Lengthening Lockdown I'm, just wondering if you're able to actually meet that demand that you have now.
Yes, I think it will be I think we'll be okay.
Like I had mentioned earlier, we may be delivering slightly different mix of products than what we had anticipated.
But they are working through these issues, but they're not insignificant but.
They worked hard on finding things in a gray market.
Two reps and things like that so you can find it but its just a lot more work than they used to be.
Yeah, and I would say when we disclosed last quarter, John that I think we said $5 million to $8 million that we had missed because of some of the past two backlogs.
<unk> was part of that and their number inside of that buildup did get bigger here in the second quarter. So they still have and they are used to kind of having zero past due the typically they are stuff kind of comes in and goes out from an order perspective.
With a lot of their boxes. They sell so they are definitely still seeing some supplier issues.
With the chips and other things that they need.
But again a lot of other demand obviously that allowed them to have such a strong top line.
But no doubt the supply chain is still kind of holding us back there slightly.
Okay, great understood and then.
My last question just could you talk about your preference for share repurchases now versus.
Potentially more M&A at this point.
Well I mean, I think we're always.
I would prefer to make good acquisitions and we'll continue to look for things there we are.
A little more aggressive than we have historically on the on our stock because we didn't really even kind of clean up our dilution for a number of years and so we certainly want to do that.
So can we talk about every quarter.
And it really is kind of based on what we see from.
Opportunities for acquisitions, and so we review that on an ongoing basis. So.
Arent able to achieve some of those things and we'll look at being more aggressive on the on.
On buybacks.
Yes, I've been looking at.
Yes.
EMEA.
It seems like over the past few months has picked up a bit.
Some that you are seeing properties out there so.
Nothing is going to close this week, but.
There is a number of things that we're working on.
Okay, great. Thank you guys I'll jump back in queue.
Thanks Sarah.
Thank you.
Currently showing no further questions at this time I'd like to hand, the conference back over to Mr. Ritchie for any closing comments.
I appreciate everybody's participation and we will end the call and thanks for dialing in we look forward to talking to you in the next call.
Ladies and gentlemen, thank you for your participation you may now disconnect everyone have a wonderful day.
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