ESCO Technologies Inc. (NYSE:ESE) Q4 2022 Earnings Call Transcript

Jon Tanwanteng: Got it. Thanks for that color. And then just to maybe follow on a little bit with that. Just your general observations on the supply chain and how much better it’s getting and how much more room or how much more, I guess, you wanted to catch up before you feel comfortable with the supply and timing that’s out there?

Vic Richey: It’s a little spotty. I would say it’s better than it was last quarter. I’d say the place we’re probably still having some issues. We still have some issues on the component side. And then outside processing in a couple of businesses, the A&D business has still been a bit of a challenge because most of those outside processors are very small businesses. And I think some of them as particularly the commercial aerospace business has picked back up, a lot of them have had a hard time keeping up with that growth. And so I’d say there, but it certainly is getting better. I’d say the other challenge though right now that is not getting better is workforce availability. So that’s an area where I think everybody has continued to struggle a little bit.

Jon Tanwanteng: Got it. Thanks, Vic. I will just back in queue.

Vic Richey: Okay.

Operator: We have a follow-up question from Jon. One moment. Jon, your line is open. You can go ahead.

Jon Tanwanteng: Great. Thanks. I was wondering if you could talk about the unfavorable mix you saw in USG, kind of what went into that and what you are expecting out of that business as you go forward?

Chris Tucker: Yes. The main driver there was the security business that we have. We call it the DUCe business as an acronym there. But that’s a business where we sell hardware kind of upfront and then we get kind of a service revenue stream over multiple years on that. So, as that hardware goes out, that’s a little bit lower margin. I would say, a fair bit lower margin. This utility is a high gross margin business. So, it’s still kind of mid-30s, but well below the overall average there. So, that was really the main driver. We saw a lot of growth in that business with those hardware shipments in Q4 was a pretty big driver of the growth. And so that was the number one factor.

Vic Richey: Yes. The good news with that business, though, is you usually get the cash up front. So, one of the reasons our cash was as good as it was this year was largely driven by payments on those contracts.

Jon Tanwanteng: Got it. That makes sense. I was wondering also if you could talk a little bit more about your capital allocation priorities going forward. Obviously, rates are going higher. Help me think about the M&A pipeline versus repurchases or the use of cash as you are looking ahead?

Vic Richey: Yes. I think I would say pretty consistent framework that we are looking at as we head into €˜23, Jon. As we said, we did about $20 million of share repurchases in €˜22. We will probably target a similar amount for €˜23 as we kind of get that program going again. But obviously, the acquisitions is kind of the key piece there. If we see something bigger than we would maybe dial back. To me, I think the pipeline is okay. We are seeing some things come through a little bit right now on the deal side. Again, I wouldn’t characterize it as a totally stuff pipeline or anything, but we do have a little bit of activity there.

Jon Tanwanteng: Okay. Great. Just a question on the EPS guidance for next year, what’s the implied interest expense or interest rate that you are using to arrive at that?