ESCO TECHNOLOGIES INC. The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto and refers to our results from continuing operations except where noted.
Selected financial information for each of our business segments is provided in the discussion below and in Note 12 to the Company's Consolidated Financial Statements.
This section includes comparisons of certain 2021 financial information to the
same information for 2020. Year-to-year comparisons of the 2020 financial
information to the same information for 2019 are contained in Item 7 of our Form
10-K for 2020 filed with the
Introduction
We classify our business operations into three segments for financial reporting
purposes, although for reporting certain financial information we treat
Corporate activities as a separate segment. Our three operating segments during
2021 were Aerospace & Defense (A&D),
A&D:
? (Crissair);
(Mayday),
(Globe).
USG:
? (Altanova) and
Inc. (NRG).
? Test:
A&D. PTI, VACCO and Crissair primarily design and manufacture specialty
filtration products, including hydraulic filter elements and fluid control
devices used in commercial aerospace applications, unique filter mechanisms used
in micro-propulsion devices for satellites and custom designed filters for
manned aircraft and submarines. Westland and Globe design, develop and
manufacture elastomeric-based signature reduction solutions for
USG. Doble develops, manufactures and delivers diagnostic testing solutions that enable electric power grid operators to assess the integrity of high-voltage power delivery equipment. NRG designs and manufactures decision support tools for the renewable energy industry, primarily wind and solar.
Test. ETS-Lindgren is an industry leader in providing its customers with the ability to identify, measure and contain magnetic, electromagnetic and acoustic energy.
We continue to operate with meaningful growth prospects in our primary served markets and with considerable financial flexibility. We continue to focus on new products that incorporate proprietary design and process technologies. Our Management is committed to delivering shareholder value through organic growth, ongoing performance improvement initiatives, and acquisitions.
In
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COVID-19 Trends and Uncertainties
The COVID-19 global pandemic has continued to create significant and unprecedented challenges, and during these highly uncertain times, our top priority remains the health and safety of our employees, customers and suppliers, thereby securing the financial well-being of the Company and supporting business continuity. Given our diverse portfolio of strong, durable businesses serving non-discretionary end-markets, the strength and resilience of our business model positions us to continue to support our long-term outlook.
A portion of our workforce has worked from home at times due to COVID-19, however we have not had to redesign or design new internal controls over financial reporting at this time. Depending on the duration of COVID-19, it may become necessary for us to redesign or design new internal controls over financial reporting in a future period. We do not believe such an event will have a material impact on our business.
The economic uncertainty, changes in the propensity for the general public to travel by air, and reductions in demand for commercial aircraft as a result of the COVID-19 pandemic have adversely impacted net sales and operating results in certain of our A&D reporting units. We continue to monitor the impacts of COVID-19 for events or changes in circumstances that indicate the carrying amount of our assets may be impaired.
Throughout 2021, our
The effects of the COVID-19 pandemic have adversely impacted our net sales and
operating results in certain of our A&D reporting units that have a higher
concentration of business serving the commercial aerospace industry. For the
year ended
See also Item 1A, "Risk Factors" in Part I above, and "Outlook" below for additional information.
Highlights of 2021
Diluted EPS - GAAP for 2021 was
? of
Sales, net earnings and diluted earnings per share from continuing operations
in 2021 were
? compared to sales, net earnings and diluted earnings per share from continuing
operations in 2020 of
respectively.
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Diluted EPS - Continuing Operations As Adjusted for 2021 was
one-time compensation and acquisition related costs at Corporate (
share); restructuring costs within the USG segment, primarily facility
consolidation charges (
related to the Phenix and Altanova acquisitions, primarily inventory step-up
charges (
? sale of the Doble Watertown facility (
Continuing Operations As Adjusted for 2020 was
plan termination charge of
primarily of facility consolidation charges for the Doble Manta facility
(including employee severance and compensation benefits), asset impairment
charges and the incremental costs associated with the COVID-19 pandemic. See
"Non-GAAP Financial Measures" below.
Fiscal year ended
(Dollars in millions) 2021 2020
Diluted EPS - Continuing Operations GAAP $ 2.42 0.88
One time compensation & acquisition related costs 0.12 -
Restructuring adjustments 0.08 0.24
Purchase accounting adjustments 0.03 -
Gain on building sale (0.06) -
Pension termination adjustment - 1.55
Diluted EPS - Continuing Operations As Adjusted
? Net cash provided by operating activities from continuing operations was
million in 2021 compared to
At
?
approximately
Entered orders for 2021 were
? backlog) resulting in a book-to-bill ratio of 1.11x. Backlog at
2021 was
? The Company declared dividends of
million in dividend payments.
Results of Continuing Operations
Net Sales Change Fiscal year ended 2021 (Dollars in millions) 2021 2020 vs. 2020 A&D$ 314.8 351.9 (10.5) % USG 202.9 191.7 5.8 % Test 197.7 186.9 5.8 % Total$ 715.4 730.5 (2.1) %
Net sales decreased
A&D.
The
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USG.
The
Test.
The
Orders and Backlog
New orders received were
By operating segment, 2021 orders were
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses were
The increase in SG&A expenses in 2021 as compared to 2020 was mainly due to an increase at Doble due to the return of discretionary spending to more normal levels, the inclusion of SG&A from the Phenix and Altanova acquisitions, compensation expenses due to the transition of key executives, and an increase in acquisition related costs at Corporate.
Amortization of Intangible Assets
Amortization of intangible assets was
Other Expenses or Income, Net
Other income, net, was
Non-GAAP Financial Measures
The information reported herein includes the financial measures Diluted EPS - Continuing Operations As Adjusted, which we define as Diluted EPS - Continuing Operations excluding the per-share net impact of one-time compensation and acquisition related costs, facility consolidation charges within the USG segment, and purchase accounting charges related to the Company's recent acquisitions
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in 2021, partially offset by a gain on the final installment of the Double
EBIT
The reconciliation of EBIT to a GAAP financial measure is as follows:
(Dollars in millions) 2021 2020 Net earnings from continuing operations$ 63.5 22.9 Plus: Interest expense 2.2 6.7 Plus: Income tax expense 17.2 13.5 EBIT$ 82.9 43.1
EBIT by business segment is as follows:
Change
Fiscal year ended 2021
(Dollars in millions) 2021 2020 vs. 2020
A&D $ 56.5 69.9 (19.2) %
% of net sales 17.9 % 19.9 %
USG 40.9 24.4 67.6 %
% of net sales 20.2 % 12.7 %
Test 27.6 27.2 1.5 %
% of net sales 14.0 % 14.6 %
Corporate (42.1) (78.4) 46.3 %
Total $ 82.9 43.1 92.3 %
% of net sales 11.6 % 5.9 %
A&D
The
USG
The
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Test
The
Corporate
Corporate operating charges included in 2021 consolidated EBIT decreased to
The "Reconciliation to Consolidated Totals (Corporate)" in Note 12 to the Consolidated Financial Statements represents Corporate office operating charges.
Interest Expense, Net
Interest expense, net was
Income Tax Expense
The effective tax rates from continuing operations for 2021, 2020 and 2019 were
21.3%, 37.1% and 20.8%, respectively. The 2020 effective tax rate was
unfavorably impacted by a pension plan termination charge of
The 2017 Tax Cut and Jobs Act (TCJA) made comprehensive changes to
Acquisitions and Divestiture
Information regarding our acquisitions and divestiture during 2021, 2020 and 2019 is set forth in Notes 2 and 3 to the Consolidated Financial Statements, which Notes are incorporated by reference herein.
All of our acquisitions have been accounted for using the purchase method of accounting, and accordingly, the respective purchase prices were allocated to the assets (including intangible assets) acquired and liabilities assumed based on estimated fair values at the date of acquisition. The financial results from these acquisitions have been included in our financial statements from the date of acquisition.
Capital Resources and Liquidity
Our overall financial position and liquidity are strong. Working capital from
continuing operations (current assets less current liabilities) increased to
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Net cash provided by operating activities from continuing operations was
Net cash used in investing activities from continuing operations was
There were no commitments outstanding that were considered material for capital
expenditures at
Net cash provided by financing activities from continuing operations was
Bank Credit Facility
A description of our credit facility (the "Credit Facility") is set forth in Note 8 to the Consolidated Financial Statements, which Note is incorporated by reference herein.
Cash flow from operations and borrowings under the Credit Facility is expected to provide adequate resources to meet our capital requirements and operational needs both for the next 12 months and for the foreseeable future.
Dividends
Since 2010, we have paid a regular quarterly cash dividend at an annual rate of
Off-Balance-Sheet Arrangements
We had no off-balance-sheet arrangements outstanding at
Share Repurchases
Information about our common stock repurchases is provided in Note 9 to the Consolidated Financial Statements.
Subsequent Event
On
Critical Accounting Policies
The preparation of financial statements in conformity with
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The following discussion of critical accounting policies is intended to bring to the attention of readers those accounting policies which Management believes are critical to the Consolidated Financial Statements and other financial disclosure. It is not intended to be a comprehensive list of all significant accounting policies that are more fully described in Note 1 to the Consolidated Financial Statements.
Revenue Recognition
We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. The unit of account in ASC Topic 606 is a performance obligation. The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration, as applicable, which are based on historical, current and forecasted information. The transaction price is allocated to each distinct performance obligation within the contract and recognized as revenue when, or as, the performance obligation is satisfied. Certain of our long-term contracts contain incentive fees that can increase the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. The estimated amounts are based on an assessment of our anticipated performance and all other information that is reasonably available to us.
Approximately 57% of the A&D segment's revenue (25% of consolidated revenue) is recognized over time as the products do not have an alternative use and either we have an enforceable right to payment for costs incurred plus a reasonable margin or the inventory is owned by the customer. Selecting the method to measure progress towards completion for our contracts requires judgment and is based on the nature of the products or services to be provided.
The A&D segment generally uses the cost-to-cost method to measure progress on our contracts, as the rate at which costs are incurred to fulfill a contract best depicts the transfer of control to the customer. Under this method, we measure the extent of progress towards completion based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and we record revenue proportionally as costs are incurred based on an estimated profit margin.
The Test segment generally uses the milestone output method to measure progress on our contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts. Under this method, we estimate profit as the difference between total revenue and total estimated costs at completion of a contract and recognize these revenues and costs based on milestones achieved.
Total contract cost estimates are based on current contract specifications and expected engineering requirements and require us to make estimates on expected profit. The estimates on profit are based on judgments we make to project the outcome of future events, and can often span more than one year and include labor productivity and availability, the complexity of the work to be performed, change orders issued by our customers, and other specialized engineering and production related activities. Our cost estimation process is based on historical results of contracts and historical actuals to original estimates, and the application of professional knowledge and experience of engineers and program managers along with finance professionals to these historical results. We review and update our estimates of costs quarterly or more frequently when circumstances significantly change, which can affect the profitability of our contracts.
For contracts where revenue is recognized over time, we recognize changes in estimated contract revenues, costs and profits using the cumulative catch-up method of accounting. This method recognizes the cumulative effect of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current period. We have net revenue recognized in the current year from performance obligations satisfied in the prior year due to changes in our estimated costs to complete the related performance obligations. We recognize anticipated losses on contracts in full in the period in which the losses become known.
The impact of adjustments in contract estimates on our operating earnings can be
reflected in either revenue or operating costs and expenses. The aggregate
impact of adjustments in contract estimates increased our earnings before income
tax and diluted earnings per share by
Income Taxes
We operate in numerous taxing jurisdictions and are subject to examination by
various
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the jurisdictions in which we do business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions, as well as the inherent uncertainty in estimating the final resolution of complex tax audit matters, Management's estimates of income tax liabilities may differ from actual payments or assessments.
We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We may reduce deferred tax assets by a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date. We regularly review our deferred tax assets for recoverability and establish a valuation allowance when Management believes it is more likely than not such assets will not be recovered, taking into consideration historical operating results, expectations of future earnings, tax planning strategies, and the expected timing of the reversals of existing temporary differences.
Our Management annually reviews goodwill and other long-lived assets for
impairment or whenever events or changes in circumstances indicate the carrying
amount may not be recoverable. If we determine that the carrying value of the
goodwill and other long-lived assets may not be recoverable, we record a
permanent impairment charge for the amount by which the carrying value of the
goodwill and other long-lived assets exceeds its fair value. We measure fair
value based on a discounted cash flow method using a discount rate determined by
Management to be commensurate with the risk inherent in each of our reporting
units' or asset groups' current business models. Our estimates of cash flows and
discount rate are subject to change due to the economic environment, including
such factors as interest rates, expected market returns and volatility of
markets served. We believe that Management's estimates of future cash flows and
fair value are reasonable; however, changes in estimates could result in
impairment charges. At
We amortize intangible assets with estimable useful lives over their respective estimated useful lives to their estimated residual values, and review them for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable.
Other Matters
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