ESCO Technologies(ESE) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Q1 2019, including key statements and notes, highlighting the adoption of ASC 606 Notes to Consolidated Financial Statements These notes detail accounting policies and financial data, covering ASC 606 implementation, segment performance, debt, income tax changes, and derivative instruments, including ASC 606 impact reconciliation - Revenue recognition policies have been updated under ASC 606, with revenue recognized over time for approximately 52% of Filtration, 75% of Test, 20% of USG, and 100% of Technical Packaging revenues, based on methods like cost-to-cost or milestones[25][35][40] Segment EBIT (Q1 2019 vs Q1 2018) | Segment | EBIT Q1 2019 (in thousands) | EBIT Q1 2018 (in thousands) | | :--- | :--- | :--- | | Filtration | $10,610 | $9,645 | | Test | $3,310 | $2,596 | | USG | $21,546 | $10,651 | | Technical Packaging | $106 | $965 | | Consolidated EBIT | $25,147 | $14,986 | - The Q1 2018 income tax was a $25.1 million net benefit due to the Tax Cuts and Jobs Act (TCJA), which significantly lowered the effective tax rate for that period compared to Q1 2019's 25.5% rate[68] - As of December 31, 2018, the company had $398.3 million in remaining performance obligations (backlog), with approximately 83% expected to be recognized as revenue in the next twelve months[86] Consolidated Statements of Operations Highlights (Q1 2019 vs Q1 2018) | Indicator | Three Months Ended Dec 31, 2018 | Three Months Ended Dec 31, 2017 | | :--- | :--- | :--- | | Net Sales | $182,597 thousand | $173,495 thousand | | Earnings before income taxes | $23,257 thousand | $12,801 thousand | | Net Earnings | $17,317 thousand | $34,671 thousand | | Diluted EPS | $0.66 | $1.33 | Consolidated Balance Sheet Highlights | Indicator | December 31, 2018 | September 30, 2018 | | :--- | :--- | :--- | | Total Current Assets | $411,919 thousand | $396,023 thousand | | Total Assets | $1,268,211 thousand | $1,265,122 thousand | | Total Liabilities | $491,419 thousand | $505,712 thousand | | Total Shareholders' Equity | $776,792 thousand | $759,410 thousand | Consolidated Statements of Cash Flows Highlights (Q1 2019 vs Q1 2018) | Indicator | Three Months Ended Dec 31, 2018 | Three Months Ended Dec 31, 2017 | | :--- | :--- | :--- | | Net cash provided by operating activities | $8,102 thousand | $17,797 thousand | | Net cash provided (used) by investing activities | $6,256 thousand | $(5,922) thousand | | Net cash (used) by financing activities | $(6,959) thousand | $(17,050) thousand | | Net increase (decrease) in cash | $6,153 thousand | $(3,916) thousand | - The company adopted the new revenue recognition standard ASC 606 on October 1, 2018, using the modified retrospective method, resulting in a $5.5 million increase to retained earnings, primarily affecting the Filtration and Technical Packaging segments[20] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q1 2019 financial performance, highlighting 5.2% net sales growth, a net earnings decrease due to prior-year tax benefits, and a fiscal 2019 Adjusted EPS outlook of $2.95 to $3.05 Results of Operations This section details segment operational performance, noting strong sales growth in Filtration and Test, a USG EBIT surge from a property sale, Technical Packaging decline, and reduced SG&A as a percentage of sales Net Sales Change by Segment (Q1 2019 vs Q1 2018) | Segment | Q1 2019 Sales (in millions) | Q1 2018 Sales (in millions) | YoY Change (%) | | :--- | :--- | :--- | :--- | | Filtration | $66.2 | $60.0 | +10.3% | | Test | $41.3 | $37.5 | +10.0% | | USG | $55.9 | $55.8 | +0.2% | | Technical Packaging | $19.2 | $20.2 | -4.7% | - The company's backlog increased to $398.3 million at December 31, 2018, from $382.8 million at September 30, 2018[102] - SG&A expenses decreased to $41.0 million (22.4% of sales) from $42.2 million (24.3% of sales) in the prior-year quarter, mainly due to cost reduction actions in the USG segment[103] - USG segment EBIT increased from $10.7 million to $21.5 million, primarily due to the gain on the sale of the Doble Watertown facility[113] Capital Resources and Liquidity The company maintains a strong financial position with increased working capital, despite decreased operating cash flow due to lower earnings and higher working capital needs, retaining significant liquidity - Working capital increased to $217.3 million at Dec 31, 2018, from $195.5 million at Sep 30, 2018, with contract assets increasing by $41.0 million mainly due to the adoption of ASC 606[122] - Net cash provided by operating activities was $8.1 million, a decrease from $17.8 million in Q1 2018, driven by lower earnings (excluding non-cash tax benefits in prior year) and higher working capital requirements[123] - As of December 31, 2018, the company had $215 million in outstanding borrowings, $209 million available under its credit facility, and $36.6 million in cash[125] - Q1 2019 net earnings and EPS were $17.3 million and $0.66, respectively, a decrease from $34.7 million and $1.33 in Q1 2018, primarily due to a $25.1 million net tax benefit recorded in Q1 2018 from the Tax Cuts and Jobs Act[95] - Net sales increased by $9.1 million (5.2%) YoY, driven by growth in the Filtration segment (+$6.2 million) and Test segment (+$3.8 million)[96] - Other income included an $8 million gain on the sale of the Doble Watertown, MA building and land, significantly boosting EBIT for the USG segment and the consolidated company[106] - Management expects 2019 Adjusted EPS to be in the range of $2.95 to $3.05 per share, excluding certain gains and restructuring costs[129] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's market risk exposure from interest rates and foreign currency, managed through derivatives, with no material changes reported since the last fiscal year - The company's primary market risks stem from changes in interest rates and foreign currency exchange rates[135] - To manage risk, the company uses derivative instruments, entering into interest rate swaps with a notional amount of $150 million in 2018 to hedge against variable rate debt interest payments[135] - There has been no material change to the Company's market risks since September 30, 2018[136] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2018, due to a material weakness in deferred revenue internal controls, with remediation efforts ongoing - The CEO and CFO concluded that the company's disclosure controls and procedures were ineffective as of December 31, 2018[138] - The ineffectiveness is due to a material weakness in internal control over financial reporting related to the deferred revenue general ledger account, as disclosed in the 2018 Form 10-K[139] - Remedial actions, including enhanced policies and training, are being implemented but have not been in place long enough to be considered fully remediated[139] PART II. OTHER INFORMATION Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, credit agreements, SOX certifications, and XBRL-formatted financial data - The report includes certifications from the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32)[143] - Financial information is also provided in XBRL (Extensible Business Reporting Language) format (Exhibit 101)[142]