ESCO Technologies Inc. — Fiscal 2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021. ESCO provides engineered products and services through Aerospace & Defense (A&D), Utility Solutions Group (USG), and RF Shielding and Test (Test). Comparisons below are with fiscal 2020 continuing operations unless noted.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $715.4 million | $730.5 million |
| Net earnings from continuing operations | $63.5 million | $22.9 million |
| Diluted EPS from continuing operations | $2.42 | $0.88 |
| Adjusted diluted EPS from continuing operations, non-GAAP | $2.59 | $2.67 |
| EBIT, non-GAAP | $82.9 million | $43.1 million |
| Operating cash flow from continuing operations | $123.1 million | $108.5 million |
| Cash at year-end | $56.2 million | $52.6 million |
| Total debt at year-end | $154.0 million | $62.4 million |
- Revenue declined 2.1%. Approximate gross margin, calculated from reported sales and cost of sales, was 37.8% versus 37.3%. EBIT margin was 11.6% versus 5.9%.
- Year-end net debt was approximately $97.8 million. Working capital was $188.4 million, compared with $187.8 million. The $500 million revolving credit facility matures September 2024; approximately $337 million was available to borrow, and the company reported compliance with its covenants.
- Investing cash outflow from continuing operations was $202.4 million, primarily reflecting approximately $162 million of Altanova and Phenix acquisitions. Capital expenditures were $26.7 million; capitalized software spending was $8.8 million.
- Orders were $796.3 million, with a 1.11x book-to-bill ratio. Backlog rose 15.8% to $592.0 million; about 75% was expected to be completed in fiscal 2022. The company paid $8.3 million in dividends, or $0.32 per share.
Material changes versus the prior period
- A&D sales fell 10.5% to $314.8 million, primarily due to COVID-related commercial aerospace weakness at Mayday, Crissair, and PTI, and product-development challenges at Westland. Segment EBIT declined to $56.5 million from $69.9 million.
- USG sales increased 5.8% to $202.9 million and EBIT rose to $40.9 million from $24.4 million, benefiting from higher volumes and mix, NRG growth, and a property-sale settlement. The results include Altanova and Phenix only from their acquisition dates.
- Test sales increased 5.8% to $197.7 million; EBIT was $27.6 million versus $27.2 million. Management attributed sales growth mainly to the timing of chamber projects.
- Interest expense declined to $2.2 million from $6.7 million, reflecting lower average borrowings and interest rates. SG&A increased to $167.5 million from $159.5 million, including acquisition and executive-transition costs.
- Fiscal 2020 results included a $40.6 million pension-plan termination charge and a $76.5 million after-tax gain from the sale of the former Technical Packaging segment. Thus, 2020 reported total net earnings of $99.4 million and diluted EPS of $3.81 are not directly comparable with 2021 continuing-operations results.
Outlook, risks, and unusual items
- Management said defense, Navy, space, and Test markets remained solid and reported encouraging orders in commercial aerospace, electric utilities, and renewable energy. It cited signs of commercial-air-travel and aircraft-order recovery, while noting uncertainty about the timing and pace of recovery. No specific fiscal 2022 revenue or earnings guidance is provided in the supplied filing text.
- COVID-19 continued to affect commercial aerospace demand and create operating, workforce, customer-site-access, and supply-chain uncertainty. The company also cited component shortages, inflation in raw material and transportation costs, and dependence on certain sole- or limited-source suppliers.
- Government and defense exposure is significant: U.S. Government and contractor sales were approximately 26% of 2021 revenue. Appropriations, program delays, and contract termination rights could affect sales and backlog conversion.
- Altanova was acquired for approximately $115 million, net of cash acquired, and Phenix assets for approximately $47.2 million. The filing also reports a November 2021 acquisition of NEco, with expected 2022 annual sales of approximately $7 million.
- ESCO reported material weaknesses in internal control over financial reporting at an A&D reporting unit, involving risk assessment and controls over revenue recognition and inventory costing and valuation. Management and KPMG concluded internal control was not effective at September 30, 2021; KPMG issued an adverse opinion on internal control, while its opinion on the financial statements was unqualified. Remediation was underway and not yet considered complete.
- The company corrected immaterial 2020 Westland errors, including overstated sales and contract assets; the correction reduced 2020 net earnings by $2.5 million and diluted EPS by $0.10, with no effect on total operating cash flow. The filing reported no 2021 goodwill or long-lived asset impairment.
- Management said environmental matters and pending claims were not expected to have a material adverse effect based on current information, while acknowledging uncertainty in estimating exposures. The company had $8.5 million of outstanding letters of credit and no reported off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the A&D control weaknesses are remediated and whether subsequent filings report further errors or control findings.
- Whether commercial aerospace demand and supply-chain conditions recover as management anticipated, and how these affect A&D margins and backlog conversion.
- Whether Altanova and Phenix integration delivers expected growth and returns, including the impact of acquisition-related goodwill and intangible assets.
- Debt, borrowing availability, cash generation, and covenant compliance following acquisitions and any further capital allocation or acquisitions.
- The comparability of reported earnings across periods, especially the 2020 pension charge and discontinued-operation sale gain and the company’s non-GAAP adjustments.