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Text: escotechnologies.com, under the link Investor Relations.
Before we get into the financials, I'll provide a brief update on today's COVID environment.
We continue monitoring the situation on a regular basis, and our primary goals remain the same; stay ahead of the curve, provide a safe working environment and protect the health of our employees.
The decisive actions we've taken and the operating protocols we've implemented since the start of the pandemic were done with a clear focus, which was to protect our strong financial condition, to deliver products and services and support of our customers, all while keeping our employees safe and healthy.
Our 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 we're going forward as things continue to move toward a more normal state.
And I'm confident that our disciplined approach to operating the business will result in our continued success throughout the balance of fiscal 2021.
While Gary will provide financial details, I'll offer top level comment by noting that while our Q1 A&D sales were lower than prior year due to COVID's impacts on commercial aerospace.
Our portfolio diversity allowed us to overcome this headwind as we substantially increased our adjusted earnings per share from prior year, due to the strong performance from our other operating units.
Our Navy business remained strong and well-funded.
Our test business continues to outperform with increased margins and our USG business saw some 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 nearly 25%, 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 changing market demands.
Our teams are actively addressing the challenges of today, while continuing to focus on being even stronger tomorrow.
ESCO will continue to benefit from our leadership positions in several niche markets, where we deliver set of unique and highly technical products and solutions, specifically designed to meet our customer needs.
This makes it difficult for our solutions to be replaced by alternative sources.
The fundamentals of our portfolio remain strong and our goal remains the same, to create long-term shareholder value.
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'm extremely pleased with the significant cash flow we generated in Q1, as 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 of the past year, we kicked-off fiscal 2021 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 at our disposal between cash on hand and available credit capacity while carrying a modest leverage ratio of 0.38.
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 earnings per share in both Q1 periods.
I'll briefly touch on a few comparative highlights.
We reported adjusted earnings per share of $0.55 a share, which increased $0.12 or 28% from the $0.43 we reported in prior year Q1.
The $0.55 also exceeded the consensus estimate of $0.45.
Given the backdrop of today's COVID operating environment, I'm pleased to report that we deliver Q1 adjusted EBITDA of over $29 million, which is approximately 4.5% 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 and 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, Doble continues to expect some near-term deferrals of project deliverables and maintenance work as many utility customers, both domestic and international are continuing their COVID protocols, reflecting the various mandates restricting onsite personnel at customer locations.
Consistent with their earlier communications, we believe the back half of 2021 will be stronger than the first half.
And as vaccine rollouts continue to accelerate, this should allow Doble's 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 operating at capacity during its transition to Crissair, 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 pre-tax income also decreased in Q1, as we look at all costs and spending similarly.
Entered orders were solid, as we booked $158 million in new business and ended the quarter with a backlog of $512 million with a book-to-bill of 97%.
As we move forward throughout 2021, I'll remind you that our DoD business, led by our participation on the Block V contract for additional Virginia class submarines, where we booked several large orders during fiscal 2020 will be delivering products against these large multi-year programs, which will mathematically reduce 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 how our near-term operations will be affected using our normal forecasting methodologies.
And as a result of this uncertainty, we'll continue our current protocol of not providing finite earnings per share 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 toward a recovery in the second half of 2021.
The 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 2021 to be slightly down compared to the first half of 2020 and the outlook for the second half of 2021 is expected to be a favorable comparison to the second half of fiscal 2020, given the various elements of recovery that we are anticipating.
We expect to show growth in fiscal 2021 adjusted EBITDA and adjusted earnings per share compared to fiscal 2020 with adjusted EBITDA and adjusted earnings per share reasonably consistent with that reported in 2019.
If we complete any additional acquisitions during the year, it is expected they would contribute to these expectations.
I won't spend much time recapping the first quarter.
The commentary and release captures my perspective, but I will offer some qualitative comments about our end markets and 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 and increase in airline passenger traffic, and flight miles evidenced by the fact that quite a few air carriers bringing more of their idle fleet back in the 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 and platform positions.
We also see the current situation in aerospace market as an opportunity for ESCO and we continue to look at suppliers, our competitors where we may be able to provide assistance by a partnering or through an acquisition.
Our Test business delivered a really solid Q1 by significantly beating our internal expectations and delivering an EBITDA margin of nearly 13% versus 11% last Q1.
Test outlook remains solid, given the diversity of its served markets.
While USG had a really strong first quarter coupled with favorable sales mix driving a solid EBIT margin, we now expect USG'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 utility service personnel, we expect USG market to come back on line more quickly as they can relax some of 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 of capitalizing on their relationships with their utility counterparts to provide real-time solutions.
This has been accomplished through a lot of creative means and positions Doble for success when the current site restrictions are eased.
I'm 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.
Our new solar product introductions have been growing far 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 am pleased to report the integration into our Crissair facility in Valencia, California is on track and should be completed within the next two to three months, which should further improve ATM's contribution margin.
So to wrap-up, we delivered a solid first quarter from both the cash flow and earnings standpoint.
As we move through the fiscal 2021, our plan is continue to focus on the fundamentals and look for opportunities to leverage our infrastructure through M&A, to create additional operating efficiencies, ensure we're well positioned for long-term success.
So with that, I'd be glad to take any questions.

user
current business outlook for 2021 is consistent with commentary included in company's previous earnings release.

assistant