ESCO Technologies Inc : ESCO Announces Profit Improvement Plan to Protect and
Expand Future Operating Margins and EPS
ST. LOUIS, April 17, 2013 - ESCO Technologies Inc. (NYSE: ESE) today announced
it has initiated certain profit improvement and restructuring activities
within the Utility Solutions Group (USG). These actions are intended to
improve USG's future operating profit, while providing a lower cost structure
which lessens the impact of project related timing and volatility.
Management indicated in previous communications that it was analyzing the
operating cost structure across the Company to see where meaningful
improvements in operating efficiency could be achieved. The Company's Profit
Improvement Plan (PIP), which began with the Test segment, was established to
identify cost-saving opportunities which would protect and expand future
operating margins, as well as supplement future EPS growth.
In October 2012, the Company began the first phase of its PIP by announcing
the consolidation of the Test segment's four domestic manufacturing facilities
into three domestic locations. The Test segment restructure is nearing
completion and is on schedule and on budget with costs expected to be
approximately $3 million. As a result of these actions, the 2013 partial year
savings will be approximately $1 million (excluding restructuring costs), and
are expected to yield annual savings of approximately $3million in 2014 and
beyond. The net impact of this restructuring is expected to increase Test
segment EBIT margins to above 13 percent beginning in 2014, which is well
above its historical margin contribution.
The additional actions announced today are described below.
Lemke - Germany (Doble)
Doble Engineering continues to perform exceptionally well and has consistently
maintained EBIT margins greater than 20 percent annually. Over the next five
years, Management expects Doble's EBIT margin to expand as revenues increase,
with Doble expecting above-average sales growth driven by several new product
introductions and global expansion. Doble's international growth is expected
to come from several new sales, support and service centers recently opened in
China, Brazil, South Africa, and the Middle East.
Doble's PIP focused on its international growth strategy where the competitive
landscape is significantly different than in North America. Management
analyzed the various global geographies where Doble currently operates and
identified areas where it can most effectively gain market share while
lowering its operating costs. Doble has three European operating locations
currently based in Germany, Norway, and the United Kingdom.
Management has made the decision to close the manufacturing operation in
Germany (Doble-Lemke GmbH) and relocate its Partial Discharge (PD) products
and intellectual property to its existing lower cost locations in Europe.
Management expects approximately $4.0 million of non-operational costs to be
incurred over the balance of 2013 to complete this closure. These shut-down
costs, both cash and non-cash consist of personnel costs, asset impairment
charges, and move related costs. Once this shut-down is completed, along with
the projected increase in Doble's future revenues, Doble is expected to
realize a meaningful improvement in its EBIT margin over the next several
As a result of the Doble-Lemke shut-down, during the second quarter of 2013
the Company is required to write-off an additional $1.8 million of non-cash
deferred tax assets which will not be realized subsequent to the closure.
Aclara (Solon, Ohio Facility)
Throughout the past twelve months, Management has been analyzing Aclara's
manufacturing cost structure to determine the appropriate infrastructure
needed to maximize operating profit subsequent to the SoCalGas project's
initial launch. To avoid disruption and unnecessary complexity in advance of
the SoCalGas launch, Management postponed taking this action until the project
was up and running effectively as it is currently.
Management has decided to shut-down its manufacturing facility in Solon, Ohio
(Cleveland) and has elected to manufacture its RF AMI product offering on a
fully outsourced basis, consistent with Aclara's TWACS® products.
Aclara is working with its existing contract manufacturing partners to
replicate this capability, and we expect this transition to take approximately
9 to 12 months to fully implement.
Aclara will maintain its current engineering and administrative functions in
the Solon facility but in a much smaller footprint.
Management expects approximately $3 million of non-operational costs to be
incurred over the balance of 2013 and into the first half of 2014 to effect
this transition, and once completed, expects annual recurring operational cost
savings of approximately $4 million based on projected manufacturing levels.
Additionally, Aclara is writing off approximately $5.0 million of inventory,
primarily related to its Acendant Network product line. The Acendant inventory
was purchased from Firetide, Inc. in anticipation of its deployment at a major
gas customer who subsequently chose to deploy an alternative back-haul system.
The total impact of the Doble-Lemke and Aclara actions is expected to result
in a non-operational, net charge to earnings of approximately ($0.38) per
share, with the majority expensed in 2013.
Vic Richey, Chairman and Chief Executive Officer, commented, "The actions
outlined above resulted from a significant amount of analysis and evaluation.
While they are difficult decisions, I am convinced they are the right
decisions given the competitive dynamics we face day-to-day. We feel these
actions are in the best long-term interest of the Company and our shareholders
and are needed to protect and expand our operating margins, while better
positioning us for future challenges.
"Regarding the Doble-Lemke actions, I've been very pleased with Doble's
consolidated performance since the acquisition. Over the past few years, we've
made sizeable investments in new products and solutions, and I want to ensure
we protect our investment today and in the future as we expand our global
footprint. The German operation was not meeting our expectations, and we
determined we had too many facilities in Europe for the current revenue level.
We concluded that our best solution for cost efficiency and market share
growth was to move the products and know-how to an existing facility in that
region. Regarding our current outlook for international sales growth, I'm
pleased with the early results from the new markets we've entered recently,
and the next few years continue to look promising.
"The Aclara actions were also necessary to protect and expand future operating
margins as the overall AMI marketplace continues to get more competitive. I
remain positive about the AMI market in general, and Aclara's positioning
within that market. We have proven, capable products and solutions for
satisfying the utility industry's requirements for grid intelligence and
"The actions outlined here are intended to provide some earnings protection
around the volatility and project timing in the market, thereby allowing us to
maintain acceptable margins when projects are delayed. The past couple of
years, and the most recent three or four quarters have validated the
difficulties in predicting exactly when AMI customers will make their
decisions, launch their projects, and accept product deliveries against an
ever changing schedule.
"We are very well positioned to capitalize on these opportunities when they
occur, but predicting their timing has proven quite challenging recently.
"Some of these AMI project delays will have a nominal impact on our second
quarter operational earnings, but on the positive side, I'm pleased with our
performance on the SoCalGas project as it remains on track to meet its revenue
and profit projections for the year.
"Aclara is continuing to see some timing-related softness in the domestic AMI
market, and as a result, the second half of the year is becoming more
difficult to predict as several customers have indicated they may be extending
their project decisions and launch dates. These ongoing timing issues
contributed to our decision to accelerate our cost reduction initiatives.
"We are fortunate that all of our other business units continue to perform at
or above forecast, and we expect that to continue for the balance of the year.
We are currently reviewing Aclara's project timing for the balance of the
year, and will provide our assessment during the second quarter earnings call.
Our current view is that as a result of project delays in the water market and
slower than expected COOP deliveries, our earlier guidance will be lowered.
"We are taking an appropriate long-term view with these PIP initiatives, and
obviously, these cost reduction actions should have a positive impact on
future earnings when compared to our outlook had we not taken these actions.
But it is too early to comment on 2014 until we see how the current market
dynamics and project timing develop over the next few months.
"In closing, we've always touted our diligence and focus on costs as a
significant part of our heritage. We will continually monitor our costs and
make adjustments as needed to most effectively deliver on our commitment to
increase long-term shareholder value."
The Company will host a conference call today, April 17, at 4:00 p.m. Central
Time, to discuss this announcement. A live audio webcast will be available on
the Company's website at www.escotechnologies.com. Please access the website
at least 15 minutes prior to the call to register, download and install any
necessary audio software. A replay of the call will be available for seven
days on the Company's website noted above or by phone (dial 1-888-843-7419 and
enter pass code 34696387).
Statements in this press release regarding the costs, timing and success of
the Company's PIP and other cost reduction and restructuring initiatives, the
expected savings to be achieved from such PIP and other cost reduction and
restructuring initiatives, international sales growth, EBIT margins, revenues,
sales, second quarter and full year 2013 earnings, future revenue and profit
on the SoCalGas project, the long-term success of the Company, and any other
statements which are not strictly historical are "forward-looking" statements
within the meaning of the safe harbor provisions of the federal securities
laws. Investors are cautioned that such statements are only predictions and
speak only as of the date of this release, and the Company undertakes no duty
to update. The Company's actual results in the future 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 environment
including, but not limited to: the risk factors described in Item 1A of the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2012; and the following: changes in requirements or financial constraints
impacting SoCalGas; the success of the Company's competitors; changes in
federal or state energy laws; the Company's successful performance of its AMI
contracts; site readiness issues with Test segment customers; weakening of
economic conditions in served markets; changes in customer demands or customer
insolvencies; competition; intellectual property rights; technical
difficulties; unforeseen charges impacting corporate operating expenses; the
performance of the Company's international operations; material changes in the
costs and availability of certain raw materials; termination for convenience
of customer contracts; timing and content of future contract awards and
customer orders; containment of engineering and development costs; performance
issues with key customers, suppliers and subcontractors; labor disputes;
changes in laws and regulations, including but not limited to changes in
accounting standards and taxation requirements; the impacts of natural
disasters; costs relating to environmental matters arising from current or
former facilities; uncertainty regarding the ultimate resolution of current
disputes, claims, litigation or arbitration; the Company's successful
execution of internal operating and restructuring plans; and the Company's
ability to successfully integrate newly-acquired businesses.
Non-GAAP Financial Measures
The financial measures EBIT and EBIT margin are presented in this press
release. The Company defines EBIT as earnings before interest and taxes from
continuing operations, and EBIT margin as a percent of net sales. EBIT and
EBIT margin are not recognized in accordance with U.S. generally accepted
accounting principles (GAAP). However, management believes that EBIT and EBIT
margin are useful in assessing the operational profitability of the Company's
business segments because they exclude interest and taxes, which are generally
accounted for across the entire Company on a consolidated basis. EBIT is also
one of the measures used by Management in determining resource allocations
within the Company as well as incentive compensation. The Company believes
that the presentation of EBIT and EBIT margin provides important supplemental
information to investors by facilitating comparisons with other companies,
many of which use similar non-GAAP financial measures to supplement their GAAP
results. The use of non-GAAP financial measures is not intended to replace any
measures of performance determined in accordance with GAAP.
ESCO, headquartered in St. Louis, is a proven supplier of special purpose
utility solutions for electric, gas, and water utilities, including hardware
and software to support advanced metering applications and fully automated
intelligent instrumentation. In addition, the Company provides engineered
filtration products to the aviation, space, and process markets worldwide and
is the industry leader in RF shielding and EMC test products. Further
information regarding ESCO and its subsidiaries is available on the Company's
website at www.escotechnologies.com.
SOURCE ESCO Technologies Inc.
Kate Lowrey, Director, Investor Relations, ESCO Technologies Inc., (314)
213-7277; or Media, David P. Garino, (314) 982-0551
This announcement is distributed by Thomson Reuters on behalf of Thomson
The owner of this announcement warrants that:
(i) the releases contained herein are protected by copyright and other
applicable laws; and
(ii) they are solely responsible for the content, accuracy and originality of
information contained therein.
Source: ESCO Technologies Inc via Thomson Reuters ONE
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