Esco Technologies Inc (ESE) Q3 2021 Earnings Call Transcript

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Esco Technologies Inc (ESE -0.06%)
Q3 2021 Earnings Call
Aug 9, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the ESCO Q3 Conference Call. [Operator Instructions] With us today are Vic Richey, Chairman and CEO; Chris Tucker, Vice President and CFO.

And now to present the forward-looking statement, I would like to turn the call over to Kate Lowrey, Director of Investor Relations. Please go ahead.

Kate Lowrey -- Director of Investor Relations

Thank you. Statements made during this call regarding the timing of recovery and growth of our end markets, the amounts and timing of 2021 and beyond revenues, impacts of COVID and COVID variants and recovery expected as a result of COVID vaccines, recovery in commercial aerospace, adjusted EPS, adjusted EBITDA, cash, shareholder value, the timing of Block V deliveries, success in completing additional acquisitions, success in integrating acquired businesses, the results of cost reduction efforts, the correction of production and inventory issues and other statements which are not strictly historical are forward-looking statements within the meaning of the safe harbor provisions of the federal securities laws.

These statements are based on current expectations and assumptions and actual results 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 referenced in the Company's press release issued today, which will be included as an exhibit to the Company's Form 8-K to be filed. We undertake no duty to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. In addition, during this call, the Company may discuss some non-GAAP financial measures in describing the Company's operating results. A reconciliation of these measures to their most comparable GAAP measures can be found in the press release issued today and found on the Company's website at www.esco.technologies.com under the link, Investor Relations.

Now I'll turn the call over to Vic.

Vic Richey -- Chairman, Chief Executive Officer and President

Thanks, Kate and thanks everyone for joining today's call. Before we jump into the details of the quarter, I'd just like to thank our employees across the Company for their ongoing efforts to run the business. With the ongoing challenges from COVID, we continue to see great efforts and contributions from everyone across the Company, and for that, I'm very appreciative. Since the beginning of the pandemic, our primary goals remain the same, provide a safe working environment and protect the health of our employees and today we continue to encourage our staff to get fully vaccinated for the benefit of everyone. There were a few challenges in the third quarter, but overall, the Company continues to perform well.

Cash generation year-to-date has been excellent. We have teams focused on the working capital initiatives around the Company and there is still room for improvements as we move forward. This will be a long-term value creation tool for ESCO. Our previous cost reduction actions, along with our enhanced focus on operational efficiency will benefit ESCO going forward as our end markets continue moving toward a more normalized level of activity and I'm confident that our disciplined approach to operating the business will result in continued success as we move into fiscal 2022.

While Chris will provide the financial details, I'll offer some top level commentary to set the tone. While our year-to-date A&D sales continue to be lower than prior year due to COVID's impacts on commercial aerospace, our portfolio diversity allowed us to mitigate this headwind as our year-to-date consolidated adjusted EBITDA margins are only down slightly compared to prior year-to-date margins. This performance was driven by solid contribution from our other operating units as a result of a favorable sales mix and meaningful cost reductions across the Company. From a segment level, there are several positives to report. Within A&D, we're seeing signs of recovery in the commercial aerospace as passenger boardings continue to increase and more airlines are adding idle aircraft back in the service.

Sales from our commercial aerospace customers were still down in the third quarter as a recovery in the sectors have been a bit slower than we anticipated. US domestic travel has picked up but it's still slightly below 2019 levels. Those of you who've been to an airport lately are probably surprised, but this is what the TSA statistics show. It's important to understand that the business travel remains soft and air travel in Europe and overall international travel are still well below 2019 levels. The good news is that we're starting to see order activity increase in the third quarter and our overall A&D segment orders increased by more than 40% compared to last year's third quarter. Additionally, our navy and space businesses remain strong and well-funded and our outlook for near-term growth opportunities continue to materialize in both of these areas.

Our test business continues to be steady. We have a good order input on a global basis and we're actively managing material inflation and transportation issues as they arise. We expect test outlook to remain positive driven by the strength of the served markets, including 5G, medical and automotive. Our USG business continues to outperform from a profitability perspective with year-to-date adjusted EBIT margins of 19.4% compared to 15.1% last year.

The renewables business and energy has performed well in 2021, while the orders from billables utility customers have been a bit soft. We did see sales growth from delve over approximately 8% in the quarter, we have not yet seen demand return to pre-pandemic levels. We feel great about the long-term outlook for the USG business and are very excited about the announcements today regarding closing two acquisitions.

Our agreement to acquire Altanova had been announced back in May, and we were able to get the deal closed in July 29. This business brings exciting new product offerings to our USG business and also significantly increases our global footprint. Additionally, we announced today the purchase of Phenix Technologies. This is also an exciting business, it further enhances a product offering of our USG Group and provides greater access to the commercial and industrial markets.

We've had initial meetings with the teams for both of these businesses. I'm very encouraged by the quality of the people and their enthusiasm to join ESCO. We are confident these will be strong additions to ESCO and USG's portfolio that will drive future sales and earnings growth. So overall, the fundamentals of our portfolio remain strong. The second half sales outlook is a bit behind initial projections but orders have started to increase and we feel good about the growth outlook for 2022 and beyond.

Now, I'll turn it over to Chris.

Chris Tucker -- Senior Vice President and Chief Financial Officer

Thanks, Vic. I'll start by briefly touching on a few comparative highlights. Sales in the third quarter grew by 5% with A&D up 1.8%, USG up 12% and Test growing 4.6%. This has been the first quarter in 2021 where we saw sales growth from all three segments.

Adjusted EBIT margins were 12.7% in the quarter compared to 14.2% in the prior year quarter. The margin decline was driven primarily by the operational efficiencies and inventory write-offs at Westland. We had some commentary in the press release regarding Westland and we wanted to mention that here as well. In the quarter we did become aware of some issues at Westland. They've experienced several challenges related to new product development programs, which led to increased production cost and product quality issues. No bad product were sent or billed to customers, but we did have charges recorded in the quarter of $2.1 million and year-to-date charges of $4.4 million. The first and second quarter charges represent corrections to our previously reported financials and going forward, our 2021 year-to-date numbers will be updated to reflect these amounts.

We have started work immediately to get the production issues fixed into address cost issues within the business. There are strong synergies between Westland and our Global subsidiary and we have already begun the work to bring these businesses together under one leadership structure. We have a strong outlook for this business and are committed to driving significant improvements as we move forward.

Adjusted EPS came in at $0.67 per share in the quarter below prior year $0.76 per share. Adjusted pre-tax dollars were down 2.5% compared to prior year Q3 and we had an exceptionally low tax rate in prior year Q3 which further reduced EPS. Segment highlights in the quarter are as follows, A&D did see a return to sales growth in the quarter. The Navy business grew by over 20%, which more than offset declines in the commercial aerospace sales of approximately 10%. While the commercial aerospace sales were down, we did see the rate of decline improve and we are seeing signs that the business is beginning to rebound. Margins for A&D were down driven by the issues at Westland.

USG saw growth of 12% in the quarter. The renewables business was very strong. The Utility business did grow in Q3, but it is not return to pre-pandemic levels adjusted EBIT margins were 18.3% in Q3 compared to 14.8% in the prior year Q3. The strong improvement is driven by leverage on the sales growth and benefits from prior cost reduction activities. The test business grew 4.6% in the quarter, continued steady performance from this group, margins were down in the quarter due to mix and timing issues. Year-to-date, operating cash flows of over 40%. We continue to see great results from our focus on driving balance sheet improvements, the teams across the Company continue to work multiple strategies for operating capital improvement and the results are very good. Some programs driving this performance include negotiating performance-based payments, in our A&D and test segments, this has had a significant impact as it oftentimes results in new orders being cash-positive throughout the life of the contract.

Other efforts include adjusting safety stock levels and extending payment terms. Year-to-date, our adjusted EBITDA was nearly $91 million with a 17.8% margin compared to 18% in the 2020 year-to-date. Over the past year, we took several cost reduction actions across the Company that have allowed us to hold margins during this down sales environment. Examples here include closure and consolidation of facilities, the move of manufacturing content to our Mexico facility and ongoing make/buy [Phonetic] programs. Amortization of intangibles and interest expense decreased while tax expense as a percent of pre-tax income increased in Q3 and year-to-date as we had several tax strategies implemented last year which benefited the 2020 competitive rates.

Orders were a good story in Q3 as entered orders were strong. We booked $203.8 million of new business in the quarter ended with a backlog of $539 million and a book to bill of 112%. This represents 29% growth compared to prior year Q3, strength in orders came from all three segments with A&D orders increasing 44%, USG increasing 10% and Test increasing 28%.

As we continue navigating through what we hope is the near end of COVID, our number 1 focus remains the same increasing and maximizing our liquidity to position us for future M&A growth and increased investment in new products and solutions. We have a strong balance sheet today and are excited about the recent acquisitions that Vic mentioned earlier. We still have ample capacity for further acquisitions and we obviously continue to invest in the core business to enhance our organic growth profile. Our significant cash generation this year is a testament to this focus on liquidity. We have delivered free cash flow conversion at 118% of net earnings for the first nine months. As mentioned above, we have clear momentum in our working capital initiatives.

I did want to talk for a minute about the Q4 guidance. In the release we did provide Q4 guidance. This is the first quarter that has included guidance since COVID began. The guidance for Q4 is a range of $0.73 to $0.78 per share. The sales levels in Q4 are key issue as we think about the guidance and this range is predicated on a sales level in the range of $190 million to $200 million. In the last three months, we have reduced the Q4 sales outlook for the commercial aerospace businesses and also for the utility businesses. The commercial aerospace backlogs are beginning to build that we see those more drivers for 2022 as opposed to Q4.

For the utility space, we are seeing some growth compared to prior year, but not to the levels we had previously anticipated. The long-term outlook for both of these markets continues to be positive and we feel good about our positioning as we look toward 2022. We also want to be clear that this outlook excludes any impact from the acquisitions that were announced today. We will have sales and earnings impacts from those transactions, but they are not yet quantified and are therefore not included in the guidance that is provided.

With that, I'll turn it back over to Vic.

Vic Richey -- Chairman, Chief Executive Officer and President

Thanks, Chris. Since I touched on quite a few of my thoughts earlier in my commentary, I'll just offer a few more comments before we move into Q&A. As Chris mentioned, we are a little softer than planned here in the back half of the year for the commercial aerospace and Doble's utility market. This doesn't change our long-term commitment to these markets. We feel great about our end market exposure and our diverse portfolio allows us to manage through periods like this. Outside these markets, we see a lot of growth opportunities in A&D for the military, aerospace, navy and space end markets.

Investments in renewable energy market continue to drive very strong performance for our NRG business and test business seeing a lot of opportunities for telecom, automotive, and medical markets. We just finished up a Board meeting in Boston last week and during those meetings, we took the time to visit the Doble and Globe operations. We had a great set of meetings and really exciting interactions with the teams at the operating units. At Doble, we did a full update of the USG segment. The team has made great progress updating the product line across the business from renewable focus products at NRG to the new F8 launch Doble. It's great to see the innovation happen inside that business as our customers start spending again and will be ready to support.

This also provided a chance to update our Board on Phenix and Altanova acquisitions. So you could first hand see the excitement around these transactions. After visiting the Doble headquarters, we took the Board to visit the Globe facility. This was another great visit. The team at Globe has done an exceptional job driving tremendous growth with the Navy Surface hull treatment product line. The team has worked very hard to master a difficult manufacturing process. They really roll and it's fun to see a winning team in action. We had full couple of days in Boston and accomplishing all of this, but it was time well spent. I'd like to thank our Board for their ongoing support and guidance.

So with that, and I think we're ready for some Q&A.

Questions and Answers:

Operator

[Operator Instructions] First question will be coming from the line of Cameron Lochridge from Stephens. Your line is open.

Cameron Lochridge -- Stephens -- Analyst

Hey, good afternoon and thanks for taking my question.

Vic Richey -- Chairman, Chief Executive Officer and President

Good afternoon.

Cameron Lochridge -- Stephens -- Analyst

So, I wanted to start on the M&A front, great to see the two deals get closed Altanova and Phenix this quarter. Was just wondering if you could update us on, you called out the $700 million of liquidity in the press release. Maybe what are you seeing -- what are you looking at in terms of end-market exposure geographies and things like that, valuations, where there was much stand, any -- any update on the pipeline would be helpful.

Vic Richey -- Chairman, Chief Executive Officer and President

Sure. So as -- I'm sure you're hearing from a lot of other folks, the M&A market is pretty active right now. So we were able to get these two done well, there is a number of other things that we were looking at, to see the multiples, I think it settled down a little bit, still probably little higher than I would have anticipated in this environment, but we are seeing good opportunities there. I think we'll continue to focus on our utility segment and our A&D segment as far as geographical. The great thing about particularly Altanova and to a lesser extent, Phenix, those guys as well and both those have really good international content and so that really is an area, we've been working to improve for a number of years.

So, if you look at kind of the breakout Doble's current sales, we're probably 85% in the US and 15% outside of the US. If you look at Altanova, they're exactly the opposite. So they have some sales in US, but 85% of their sales are in Europe and then in Asia and so that's really going to give us an opportunity to have a much bigger footprint outside of the US and we will be able to sell some of their products here, we'll sell some of Doble products there. And so this is really a great acquisition for us. So Phenix is a little more 50-50, but the thing they bring is some international content, but really some new products. A lot of -- there is are more high-voltage products and more applicable in some cases, commercial and industrial markets versus in addition to the utility markets.

So those two -- those are the kinds of things we'll continue to look for, both on the utility side and on A&D. If you remember, I guess it was last quarter, maybe the quarter before, we had a small drop in acquisition in one of our A&D business and we'll continue to look for those kinds of opportunities as well.

Cameron Lochridge -- Stephens -- Analyst

That's great. Thank you. We'll look forward to more announcements to come. I guess as a follow-up, switching to USG, I guess I was a little surprised to see the demand was still weak there. I realized with the delta variant emerging that could -- it's probably be adding a little bit of uncertainty, but you did could just talk to what you're hearing from customers, maybe what's holding back that demand and any thought there, that would be helpful. Thank you.

Vic Richey -- Chairman, Chief Executive Officer and President

Sure. That's -- it's a hard thing to predict. I'd say one of the biggest issues that we're seeing is what, a couple of things, I mean the utilities is probably 90% of people are working from home and so the people that we will be dealing with in any case and so it's just much more difficult to do business when people aren't out there at work and to do the types of things that we're doing. So that's been a little bit of a surprise. The other thing is I'm more worried about delivering electricity right now than some of the other things. So a lot of the focus we see is on making sure that -- they were able to deliver electricity and pay attention to those type of things. They take a little bit of the focus off the testing and of the infrastructure.

We think that's a point in time is going to happen as we've talked about before, it's required that they do this type of testing is also good business to do this type of testing. So I think it's just a little bit of everybody has kind of pull their horns in a little bit. It's important to remember though, I mean it's not like we've started doing business there. I mean, our sales are down about 10% I think and so we've seen some impact. We think it's going to pick up, we thought it was -- honestly, it was going to pick up before now, but we think as we go into '22 coming off this slower base, we'll see some pretty good upside there.

Cameron Lochridge -- Stephens -- Analyst

Got it. Thank you very much, I'll turn it back thank you.

Vic Richey -- Chairman, Chief Executive Officer and President

Thanks.

Operator

Our next question will come from the line of John Franzreb with Sidoti. Your line is open.

John Franzreb -- Sidoti & Company -- Analyst

Good afternoon, guys. Thanks for taking the questions. Just to stick with USG, the backlog though is really up nicely in the quarter. Is it a timing issue that's going on there. Is it going to be recognized more than the end of this calendar year, is it to be pushed back into next year because just looking historically it's actually reasonably good backlog number for the business.

Vic Richey -- Chairman, Chief Executive Officer and President

Yeah, John, it's a good catch. Some of their -- a decent chunk of their orders that happened in the quarter were kind of some of their service contracts in their annual lease type activity. So that boosted the order number and the backlog number quite a bit, but you'll see the revenue for that kind of stretch out over a year. So those are kind of book and share type product type orders that we see in the business a lot. So that's kind of the factor there that increased the backlog a little bit relative to kind of -- I was talking about the weaker sales.

Chris Tucker -- Senior Vice President and Chief Financial Officer

Yes. I just had add to that. If you look at Doble's business, you know they've got the instrument sales which is where we're seeing some softness. But if you look at services, that's been strong, our -- all labs have been strong, the leases has pretty been strong. So it's really just one area where it's equipment buys and so fortunately, I think, when it picks back up, it will make great spot, because as I mentioned in my commentary, they've spent a good bit of time and effort refreshing a lot of their products and so we think when we come out of this that we're going to be able to have a lot in the reality. I probably should have said this earlier, but we've not lost any business, it's just they haven't been buying the same levels they had historically.

John Franzreb -- Sidoti & Company -- Analyst

Okay, fair enough. And I guess similarly on the test side of the business, when I look at the revenues on a sequential basis, $48 million in June and $40 million in March. I was actually surprised that it was not an increased operating margin on that kind of a revenue growth. Is this something holding back the margin contribution there in test.

Vic Richey -- Chairman, Chief Executive Officer and President

No, I think we've talked about historically maybe before you started following us, but the thing we have to look at with the test business or I ask people look at, you can look at it on an annual basis, because there is so much variability from quarter-to-quarter that you can be led to believe if something is going on and maybe there is not, because it is a very much a project driven business and so the profitability from one quarter may be significantly different it is from another quarter.

That business has held up really nice this year. I mean very confident that if do it on an annual basis, you are going to do exactly what we expect them to, if not a little bit better. So it's -- there really is a lot of variability depending on mix and what projects are going through the backlog or through the sales channel in any given quarter.

John Franzreb -- Sidoti & Company -- Analyst

Okay, fair enough. And I guess on the aerospace side of the business, any thoughts about what your customers inventory looks like and how long will take them to work through that inventory to get to equilibrium.

Vic Richey -- Chairman, Chief Executive Officer and President

I can probably answer the first half of the question but I can't -- the second half. I think the inventory levels are coming down, certainly, I think everybody is kind of taking the opportunity to work their inventory down until they got more confidence in their build rates. I think that can only last for so long, and I think there's some if you read, what's going on in the industry in a broader base, I think there's some concern by some of the larger OEMs about the supply base being able to support the ramp. When it does happen that should not be a concern for us. I mean we've -- obviously with our financial capacity, we're in a position where we can ramp up quickly. We can support customers.

So, I don't think that's going to be an issue but you know the exact timing of that is one reason we're talking about the fourth quarter, like we talked about, because as we looked at it going in, the last time we talked and we thought it will receive a bit more pickup in the fourth quarter -- third and fourth quarter than we did, so still little hard to predict now. We've got a first look at '22 actually looks pretty good, but we're going to get an update on that in September, and so we'll be in a position to talk to you about that talk about the assumptions we have and our plan at that time. So, I think as -- in little more time in this and we'll get better insight and what their actual build rates are going to be. They provide those two -- they seem to be a swishy right now but hope it is going to firm up here in the next 60 days or so.

John Franzreb -- Sidoti & Company -- Analyst

Okay. And I guess just one last question from me, on Westland and the production issues can you just, I'm sorry -- can you give some better color what's going on there and it's behind you or not. I wasn't quite sure based on the prepared remarks.

Vic Richey -- Chairman, Chief Executive Officer and President

I'm sorry, I didn't hear -- I didn't hear the very last part of your question.

John Franzreb -- Sidoti & Company -- Analyst

The last part -- are the issues behind you, are they done yet, are they ongoing?

Vic Richey -- Chairman, Chief Executive Officer and President

We've got our arms around those. I don't think there's going to be any additional issues. We've got -- we've been through this in a big level of detail, but I'd say a number of things happened. I mean we had some new product development that kind of -- once it got out of control -- get out of control with a couple of products that we were ramping up on, our new develops always an area where you can have some concerns. So we have some cost growth there, we had some inventory they got built up that got ahead of us as well. Part of the issue was, you know, it's a pretty new business for us, it's a relatively small business and in a fairly remote location. So, we probably didn't have as much focus on that as we should have and we had significant turnover in the financial group and so typically that would have been caught by the Group and that we had like a complete turnover in a fairly small finance group.

The good news is, as we mentioned before, we didn't see any bad product out, we didn't charge the customer for anything that we shouldn't have. We've got it under control now, and so this is the business, look, I mean it's a good business, the end customer is good. It's all Navy business, submarines and surface ships. So the end market is solid. We had some issues, we've got those fixed and I think we'll be fine going forward.

John Franzreb -- Sidoti & Company -- Analyst

Great, thanks for additional color, I appreciate that.

Vic Richey -- Chairman, Chief Executive Officer and President

You bet, thanks.

Operator

[Operator Instructions] Next question will be coming from the line of Jon Tanwanteng with CJS Securities. Your line is open.

Jon Tanwanteng -- CJS Securities -- Analyst

Hi, good afternoon guys and thank you for taking my questions. Vic, I just wanted to approach that USG and double question from a different perspective. I mean I think we were all pretty sure that business will come back, but I guess the question is, does it come back by the fall when the utility usually do the maintenance or is it more going to be a string of next year type recovery when they're going to be able to in the next cycle instead.

Vic Richey -- Chairman, Chief Executive Officer and President

Well, I think if you look at what happened last year and I hesitate to say this, that if you remember we had a pretty solid first quarter last year in Doble probably was -- certainly had best quarter, and so a lot of that was kind of bit of pent-up demand and then utilities had funds that they wanted to deploy and so we're in a position, certainly to provide that for them as well. But Jon, I'd be honest, it's really hard to predict right now, but we certainly think that given the low base we're coming off of in this quarter, we should start seeing some pickup if not in fourth quarter, certainly first part of next year.

Jon Tanwanteng -- CJS Securities -- Analyst

Okay, great. Thanks for that. And then just with regards to the two acquisitions. I was wondering if you could give us a sense of the growth potential across them. When you consider cross-selling and synergy and that also the synergies that you might be able to get of them and I understand that often overdone in Europe some, maybe not as much, but certainly from Phenix which is local.

Vic Richey -- Chairman, Chief Executive Officer and President

Sure. So we have a clear centered plans in place and we reviewed those before we made the acquisition, reviewed them as recently as last week, and I think they are real and I'd say the synergies really are probably more prevalent with Altanova because of the cross-selling opportunities that we have and we really think we're going to be able to -- they already got some decent growth projected now. We did not exactly believe everything they said in their SIM [Phonetic], but we do think there's some pretty good growth there and I think getting the Dole name in there and the cross-selling that we will be able to do with our reps and across the world and we've done this before, but it will be significant.

We did that with, when we acquired Vanguard and Morgan Schaffer and others and so they've done a good job historically of making sure that we get the best reps and are able to access those markets in the most effective way and I think that same thing will happen here, like, I think, as I mentioned earlier just because of their big footprint outside the US, I think this will be even more important to us.

Jon Tanwanteng -- CJS Securities -- Analyst

Okay, great. Thank you. And then just on inflation, I guess, logistics, I think you said you wouldn't be having less trouble supplying your customers but I'm wondering if there is any cost that you may need to pass through and if you are seeing some, how are you dealing with it. Are they being passed too quickly or does it take some time to do that?

Vic Richey -- Chairman, Chief Executive Officer and President

Yes, I think we're actually doing it in real time. So I know in all three of the segments we're actively working in price programs and we've got price kind of happening in real time almost. And I would also say that for some of the project type businesses, the way they think of it is they kind of roll these cost increases into their cost database. So as they're doing quotations and things like that, they've kind of got the latest look at what something is going to cost and so they're able to kind of price those projects and those programs, factoring in whatever increases we're seeing. So generally I think we feel like we're in pretty good shape there and certainly inflation is in the headlines and we're all seeing it and dealing with it, but we've been pretty proactive communicating around price from here out of the subsidiaries and quite frankly that will be a key thing we focus with everybody on next month when we go through our financial review processes and we set the '22 numbers we got to make sure that we continue to drive those price programs, but where we are today, we feel good about that.

Jon Tanwanteng -- CJS Securities -- Analyst

Got it. Thanks, Vic and just last one for me. On the cash flow you did a pretty good job converting to cash from earnings, I'm just wondering is there a reset or -- at some point that brings it back down or is this more of a onetime permanent gain in cash?

Vic Richey -- Chairman, Chief Executive Officer and President

Yes I mean. Listen, I think in my mind -- I think that is the balance sheet is a lever that we can kind of continue to work. I think we've got room to run with the working capital initiatives, I mean, I'm not sure will stay at 120% -- 130% forever, but certainly we can drive a nice -- we want to be in that 100% plus range as we move forward and we want to drive our turnover side and ROCE side and that's kind of the framework that I'll work with everybody on as we try to trying to drive this over the long term. So I'm really excited about the work that we've done already. But I think we've got, I still feel like we're kind of in the early innings there. We've got more to do.

Jon Tanwanteng -- CJS Securities -- Analyst

Got it. Thank you.

Kate Lowrey -- Director of Investor Relations

Thank you, Jon.

Operator

And we have a follow-up question comes from the line of John Franzreb with Sidoti. Your line is open.

John Franzreb -- Sidoti & Company -- Analyst

Yes, I guess just a follow-up on some of Jon's questions, what would your projected debt level be at the end of the fourth quarter.

Vic Richey -- Chairman, Chief Executive Officer and President

We're looking at leverage ratio still below 1.5 times from kind of the 0.43 that we're at today or whatever so.

John Franzreb -- Sidoti & Company -- Analyst

I was just curious how much drawdown of cash versus debt you were thinking about the acquisition, that's kind of what's going with that?

Chris Tucker -- Senior Vice President and Chief Financial Officer

Well, a lot of the cash we have a fair chunk of the cash on the balance sheet today that's international and not really easy to deploy toward the deal. So we work that separately to kind of get that cash back, but it's not available today as we close on those deals. So you'll see most of that going on the debt side.

John Franzreb -- Sidoti & Company -- Analyst

Okay, and I guess, again following on Jon again. I was wondering how much of unabsorbed cost or inflationary costs you're forced to take in the third quarter, if you could call that out or is the pricing increases will match that was immaterial?

Vic Richey -- Chairman, Chief Executive Officer and President

I would say immaterial. I mean we had a little bit of inflation called out by a few of the subs, but not enough to really move the needle. So overall that was kind of a wash.

John Franzreb -- Sidoti & Company -- Analyst

Great. [Indecipherable] Thanks for taking my follow-ups.

Vic Richey -- Chairman, Chief Executive Officer and President

You bet.

Operator

[Operator Instructions]

Vic Richey -- Chairman, Chief Executive Officer and President

Okay, well listen, I think we'll end the call now. Thanks everybody for dialing in. I look forward to talking to you in the next call. Thank you.

Chris Tucker -- Senior Vice President and Chief Financial Officer

Thanks, everyone.

Operator

[Operator Closing Remarks]

Duration: 35 minutes

Call participants:

Kate Lowrey -- Director of Investor Relations

Vic Richey -- Chairman, Chief Executive Officer and President

Chris Tucker -- Senior Vice President and Chief Financial Officer

Cameron Lochridge -- Stephens -- Analyst

John Franzreb -- Sidoti & Company -- Analyst

Jon Tanwanteng -- CJS Securities -- Analyst

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