ESCO Technologies Inc. — FY2020 Form 10-K
Business context and reporting period. Fiscal year ended September 30, 2020. ESCO supplies engineered products and services through Aerospace & Defense, Utility Solutions Group (USG), and RF Shielding and Test (Test). The former Technical Packaging segment was sold in December 2019 and is presented as discontinued operations.
Key financial results
| Metric | FY2020 | FY2019 | Change / context |
|---|---|---|---|
| Net sales, continuing operations | $732.9 million | $726.0 million | Up 1.0% |
| Net earnings, continuing operations | $25.5 million | $77.5 million | Diluted EPS: $0.97 vs. $2.97 |
| Total net earnings | $102.0 million | $81.0 million | Includes $76.5 million from discontinued operations, principally the divestiture gain |
| EBIT and EBIT margin | $46.5 million; 6.3% | $106.0 million; 14.6% | EBIT is a non-GAAP measure |
| Operating cash flow, continuing operations | $108.5 million | $100.6 million | Increased $7.9 million |
| Cash and debt at year-end | $52.6 million cash; $62.4 million debt | $61.8 million cash; $285.0 million debt | Net debt was approximately $9.8 million |
| Working capital, continuing operations | $190.6 million | $229.8 million | Decreased $39.2 million |
Segment sales: Aerospace & Defense rose 8.8% to $354.3 million, including Globe acquisition contributions; USG fell 9.5% to $191.7 million; and Test fell 0.8% to $186.9 million. Segment EBIT was $73.2 million for Aerospace & Defense, $24.4 million for USG, and $27.2 million for Test; corporate charges were $78.3 million.
Orders and capital allocation: Orders were $798.7 million, a 1.09x book-to-bill ratio. Backlog increased 15% to $517.4 million, with approximately 73% expected to convert to revenue in FY2021. Capital expenditures were $32.1 million, plus $9.0 million of capitalized software costs. Dividends remained $0.32 per share for the year.
Material changes and unusual items
- Continuing-operations earnings declined substantially, despite slightly higher sales. Results included a $40.6 million non-cash pension plan termination charge; management reported adjusted continuing-operations diluted EPS of $2.76, versus $2.95 in FY2019. Adjusted EPS is non-GAAP.
- ESCO sold Technical Packaging for net proceeds of approximately $184 million and recorded an after-tax gain of approximately $76.5 million. Proceeds were used in part to reduce debt and terminate the defined benefit pension plan.
- The pension settlement included a $25.7 million company contribution and settlement of plan liabilities through lump-sum payments and annuity purchases.
- COVID-19 reduced FY2020 sales by approximately $20 million in Aerospace & Defense and approximately $20 million in USG, according to management. Commercial aerospace weakness, deferred utility orders and delayed on-site services were key pressures. Test was affected by a temporary China shutdown and delayed customer-site installations.
- Quarterly results show a fourth-quarter continuing-operations loss of $21.8 million, including the effect of the pension charge; fourth-quarter sales were $208.0 million.
Liquidity, outlook and risks
Management described liquidity as strong and reported approximately $725 million of liquidity, including credit availability and cash. The $500 million revolving credit facility matures in September 2024; approximately $430 million was available to borrow at year-end, plus a lender-consent option to increase commitments by $250 million. The company was in compliance with its credit covenants. Management stated there were no contractual debt repayment obligations due in the next twelve months, although it intended to repay $20 million classified as current.
ESCO suspended specific full-year guidance because of COVID-19 uncertainty. Management expected FY2021 sales, Adjusted EBITDA and Adjusted EPS to grow versus FY2020, with Adjusted EBITDA and Adjusted EPS reasonably consistent with FY2019. It anticipated a softer first half and a more favorable second half, while noting recovery timing remained uncertain. Commercial aerospace and utility spending were expected to remain pressured in the near term; defense activity and Test backlog were described as more resilient.
Principal risks include the duration and effects of COVID-19; government funding, contract delays or terminations; commercial aerospace demand; reliance on limited or sole-source suppliers; raw-material availability and cost; international, currency and trade-policy exposure; execution and integration of acquisitions; long-term contract cost estimates; and potential impairment of goodwill or intangible assets. Management reported no impairment in FY2020, but Mayday’s fair value exceeded carrying value by only 10%, and NRG’s by 15%. Litigation and environmental matters were described as not expected to have a material adverse effect, though outcomes remain uncertain.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified contract cost-to-complete estimates, audit evidence over revenue, and valuations of goodwill and indefinite-lived intangible assets as critical audit matters.
Important facts for investors to verify
- Separate recurring operating performance from the divestiture gain and the pension termination charge; review the reconciliation of non-GAAP adjusted EPS to GAAP results.
- Track whether commercial aerospace and utility customers recover as anticipated, and whether backlog converts to sales on schedule.
- Assess the quality and estimation sensitivity of long-term contract revenue and cost-to-complete assumptions.
- Monitor impairment headroom at Mayday and NRG, particularly if forecasts or discount-rate assumptions weaken.
- Confirm debt reduction, available revolver capacity, and the timing of the intended $20 million repayment against actual cash generation.