ESCO Technologies(US:ESE)2021-05-10 04:40Financial Data and Key Metrics Changes - The company reported Q2 adjusted EPS of $0.59, compared to $0.68 in the prior year Q2, reflecting the impact of the COVID operating environment [24] - Adjusted EBITDA for Q2 remained constant at $31 million, equal to the $31 million reported last year in Q2 pre-COVID, despite a 6% decrease in sales [25][15] - Year-to-date adjusted EBITDA increased over $60 million with an 18% margin, up from 17% in the prior year [26] Business Line Data and Key Metrics Changes - The AMD sales were significantly lower than the prior year due to COVID impact on commercial aerospace, but the portfolio diversity helped mitigate this headwind [14] - The test business outperformed expectations with sales growth in both Q2 and year-to-date, achieving an EBIT margin of 13% [37] - The USG business reported an adjusted EBITDA margin of 26% for the first six months of the year, up from approximately 22% in the prior year's first half [19] Market Data and Key Metrics Changes - There are signs of recovery in commercial aerospace, with airlines adding idle aircraft back into service [16] - The company booked $176 million in new business in Q2, ending the quarter with a backlog of $522 million and a book-to-bill ratio of 106% [29] - The commercial aerospace and utility end markets are showing customer stabilization, supporting a positive outlook for recovery in the second half of fiscal 2021 [31] Company Strategy and Development Direction - The company aims to maximize liquidity for future M&A growth and increased investment in new products and solutions [20] - The focus remains on creating long-term shareholder value while evaluating several M&A opportunities [39] - The company plans to leverage existing cost structures through M&A to create additional operating efficiencies [40] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating the challenges posed by COVID, highlighting solid operating results and increased liquidity [12] - The outlook for near-term growth opportunities in navy and space businesses remains strong, with expectations for continued recovery in commercial aerospace [16][31] - The increasing distribution of COVID-19 vaccines is anticipated to benefit and accelerate the recovery of commercial air travel and utility spending [31] Other Important Information - The company generated record cash flow during the first half of the year, with free cash flow conversion at 134% of net earnings [21] - The balance sheet is described as rock solid, with approximately $760 million of liquidity available [22] - Management noted that the amortization of intangibles and interest expense both decreased, while tax expense as a percent of pre-tax income increased [28] Q&A Session Summary Question: Insights on A&D performance and margin structure - Management noted that non-commercial aerospace segments performed better than expected, with non-recurring engineering contributing positively [43] - The cost structure has been reset, and management plans to be diligent about adding costs back as business grows [44] Question: Balance sheet optimization and M&A strategy - Management indicated comfort with leverage levels around 2.5 times, with a focus on acquisitions in the $20 million to $150 million range [46][50] - The pipeline for potential acquisitions is strong, with many opportunities being evaluated [47] Question: Impact of potential infrastructure bill - Management believes the infrastructure bill could positively impact renewable energy and defense budgets, particularly in naval programs [53][54] Question: Test business performance and order activity - The test business has shown solid performance with higher margins driven by project execution and a favorable sales mix [60] - Order activity is picking up as utility services return to normal operations post-COVID [62]